Buying with cash at a judicial sale, do my numbers make sense?

[Nikki Kofkin]

Hey everyone, I posted this in the general forum but wanted some local expertise as well. I've been in an analysis paralysis for over a year, but I'm finally ready to make my first investment. The first of two questions I have is how does my investment strategy sounds to more experienced investors? Here's the lowdown on my situation:

I've acquired a private loan for 200k cash at 1% interest for 30 years. I don't think I could even qualify for any traditional financing, as I'm 23 years old and got my real estate license about seven months ago, and I've yet to generate a steady income, but on the plus side I do have an immaculate credit score...Anyway, I plan on buying a specific condo at a judicial sale for under market value in Chicago this month. Without going into too much detail, I hope to get at least $20k in equity because I won't bid any higher than that margin and that leaves some wiggle room for rehab costs (which appear to be minimal because I've seen interior photos). The market rent is about $1800 and all of this is based on my extensive analysis of similar units in the same building in the past year. HOA is around $200/mo and taxes around $3500/yr, not sure about other expenses though so I factored in 1% of the EMV. In my mind it's a good investment since I have no money down, and a gross annual ROI of $21600, with yearly expenses estimated around $8000 for a net profit of $13600. Do you agree?

The second question I have is more hypothetical and involves an explanation on leverage. Let's say I saved up $200k from a job and could qualify for traditional lending. Would my initial strategy still be a good idea to invest all $200k cash in one condo, or would it be better to allocate the $200k among several properties with 10-20% down leveraging "other people's money?" I keep seeing scenarios on leveraging money, but they don't always factor in expenses like PITI. Thanks for the advice in advance!

[Eric M.]

First of all, definitely go to the auction and check it out. But what I think you will find is that the Chicago Judicial auctions are EXTREMELY competitive and bargains are not found there.  The guys there know what they are doing more than any other county I have been to and they are very protective of their turf.  They do not like newbies coming in and buying properties in their area so they will bid higher and take losses just to keep new people out.

I have purchased more than 20 properties at auction. My first was in Cook. It was my only loser and it was a big loser. I was ecstatic to win, I thought it was a sure thing, but it wasn't. I got all my deals at suburban county auctions where the competition is a fraction of Cook.

The good news is you are not shooting for too much equity so it is possible.  They bad news is that since you can't see the inside (photos can be staged, old and deceiving....no one takes pictures of the mold damage or cracks or warped floors for a listing) and since you are shooting for so little equity your margin for error is VERY small.  If there is a problem inside, your 20K equity is gone. Sometimes people do damage after their home is auctioned. Sometimes it takes months after auction to get them out. Be prepared for hiccups.

Check the financials of the HOA also. Check taxes, do all the deed searching. Crazy stuff can happen. I guarantee the people you are bidding against will know more about the property than you do.

Also since you are targeting one single property don't get your hopes up. I generally went targeting at least 5 properties or maybe 10 at a single auction in hopes of getting 1.  Mostly I got zero. Auctions get cancelled or postponed all the time...and you get outbid or the bank starts the opening bid too high and they just take it back.

So go and get the experience, but to be very honest the odds of achieving your goal are not great.