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We bought our first foreclosure in Hempstead, New York. We partnered up with another investor we met at a real estate club in Manhattan and met several times to discuss our goals and strategies. Our strategies have changed over the years. In addition to wholesaling, we buy foreclosures to hold for passive income and possible appreciation, looking for a monthly cash flow of $400-$500, with a return on investment (ROI) of 10 percent or greater.
We agreed that we would each make an equal contribution of funds for the acquisition of each property, share the profits equally, share the responsibility for researching and analyzing the deals and all be available to bid at the courthouse.
We decided to bid for this property in Hempstead New York, because, very simply, it was a good deal. We knew the area well and the upset price was way below market value. The first mortgage was foreclosing and there were no outstanding liens. We would pay cash.
The research at the county clerk’s office was very important since it gave us information on which mortgage was foreclosing, if there were liens on the property and the Referee’s Computation of Sums Owed the Plaintiff, which would help us to calculate the upset price. If a first mortgage is foreclosing you don’t have to worry about the second or third mortgages. But if a second or third mortgage is foreclosing you still have to pay off the first mortgage. Investors who don’t do their research are shocked to find out the house has a much larger upset price — and they are totally unprepared at the auction.
After the research was done we analyzed the deal, and calculated the upset price (the amount that the bank must receive at the auction) which includes the principal owed on the mortgage, interest, legal costs, taxes and any other miscellaneous costs. We checked the paper for comps in the area as well as web sites to determine the market value. We used this formula to calculate our CAP. (This is the maximum amount we will bid up to at the auction).
Market value x 70% = Adjusted Market Value (AMV) with 30% equity.
$150,000 x 70% = $105,000.
AMV $105,000 minus Holding Costs: 3 months @ $3,000 minus Repairs and miscellaneous expenses of $27,000 = $75,000 (CAP).
The upset amount was low, the first mortgage was foreclosing. Therefore our cap of $75,000 allowed us to be a player in the bidding arena.
Before we bid on this property we attended a number of auctions, many of which were cancelled due to bankruptcies, forbearance agreements, etc. We bid on the above property for $53,000 and were the winning bidders. This was in 1995. The house was a high ranch on a corner lot on a busy street, in a not-so-great area. After 30 days we closed and then the real challenges began.
We knew the house was occupied but had no idea by whom. We found out the house was being rented by three single mothers and their children. We told them the house was foreclosed and we were the new owners. They didn’t seem surprised. This was a very touchy situation, since children were involved. We negotiated an agreement with them stipulating that if they moved within two weeks they would each get $750. They agreed to our offer. After they moved out we inspected the property and found that the previous owner had stolen the furnace. The house needed at least $18,000 in repairs. The walls had to be repaired and painted, the bathroom had to be gutted, new carpeting was needed, kitchen appliances had to be replaced and a new furnace installed. We also called in a trash removal company as well as an exterminator. The roof was in good condition and the property had a nice yard and a large parking area.
At first we decided to sell it as is. We advertised in the county newspaper for a selling price of $150,000. The phone rang off the hook. But after doing drive-bys no one called. The house was on a main street, had high taxes and was in a rough area. We finally decided to repair the house and did much of the work ourselves, keeping labor costs down. We found a man who worked for the town of Hempstead to live in the house – rent free. He maintained the lawn, did snow removal and kept away vandals.
When the house had been rehabbed we gave it over to Realtors®. They were able to sell it in a very short time. We drive by the house every once in a while and still remember how we made the deal fly.
After all our trials, tribulations and expenses we made a profit of $57,200.00.
NOT BAD FOR OUR FIRST DEAL!!
Sherry Renz and Elayne Wolf of Long Beach, New York, have been investing in real estate for the past 17 years. They have bought properties from tax liens, foreclosure auctions, bank owned REOs, from other investors and FSBOs. They find and wholesale properties to other investors. They researched and co-authored the Foreclosure Manual, How to Find, Research, Bid On and Sell Foreclosure Properties.
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