Coastline Capital Fund Management

NPN Story: Nice Little Condo

Condominiums can be tricky things and require a knowledge of what makes them different from detached single-family homes. The condo backing this non-performing note had a few things against it that prevented us from selling it as REO as quickly as possible. It turned out to be a solid deal but took way longer to liquidate than we would have liked.

Forest Park, Illinois

The condo was located in a decent Chicago suburb. It was a ground floor unit next to a fairly busy street (negative) and across from a big, open space, which was a cemetery (good thing or a bad thing?). Our purchase price was good and this was part of a bigger deal. Due diligence came back clear.

Already Halfway through Judicial Foreclosure

This was the second time I ever dealt with a judicial foreclosure and we were lucky that it was already halfway to completion. (Here’s the story of the first judicial foreclosure.) The borrower didn’t put up much of a fight and the court hearings went smoothly. Man, this judicial foreclosure stuff was easy!

Judicial Foreclosure Sale

In Cook County, the foreclosure sales don’t take place at the courthouse steps or other public places like they do in other states and counties. Here, the courts have authorized one entity (Judicial Sales Corporation) to carry out all of the foreclosure sales and that’s where you’d go if you wanted to bid on a property going to judicial sale.

We set the opening bid to where we though it might sell but it didn’t. the property came back to us as REO. In most judicial foreclosures there is typically a Confirmation of Sale hearing about a month after the Sheriff’s or Judicial Sale. We waited a month and the judge issued the order confirming the sale. It usually takes another one to four weeks to get the Recorded Deed, which completes the foreclosure.

Eviction and Increased Motivation for Cash for Keys

In Cook County, the former owner gets an automatic stay from any eviction proceedings for 30 days after the confirmation order is entered. After that, there is no need for an unlawful detainer hearing and you can go straight to getting a lockout from the sheriff. Particular to Cook County, they don’t post the exact lockout date until 48 hours prior to the lockout.

This presents great uncertainty to both the previous owner and the lender since both need to be ready to respond very quickly. It also provides a big incentive for cash for keys so that both parties can have certainty and not have to worry about scrambling at the last minute.

We made contact with the borrower through our local real estate agent and she agreed to move out 30 days after the confirmation hearing for a reasonable cash for keys amount. She moved out when she was supposed to and we gave her the check.

Rehab

One of the nice things about condos is that you only have to worry about fixing the inside. The outside is the HOA’s responsibility. We knew from prior experience that our rehab costs would be low and only depended on what quality of rehab was appropriate for the situation.

The fair market value for this condo was in the $70k-$85k range. Our rehab costs would be driven by whether we wanted to make this “rent ready” for a buy and hold rental investor or upgraded to the “owner occupant” standard. For this price point, $5k would be a general average for a rental and $10k-$12k for the owner occupant.

Owner Occupied Only

As it happened, this decision had already been made for us. This HOA did not allow rentals, only owner occupants could purchase units. Some HOAs will do this with the intent to drive up property values over the long term. 

For our purposes, the restriction didn’t hurt us directly since all the values we used when purchasing the note were determined using only owner occupant values in the same building. If your business model relies on turning the REO into a rental, however, you absolutely need to find out ahead of time if the HOA will allow rentals. You would be forced to sell in this situation and have to take a loss if your margin wasn’t big enough.

The lower price point also indicated that there probably was no or little financing available to buyers. We were hit by a double whammy of owner occupant only and no or little financing availability. Our buyer pool would be small and consist of buyers that could barely afford these kinds of properties. That meant that our condo would probably sit on the market for a while until we found a willing buyer that could perform.

We went for the $12k owner occupied rehab, which took about a month.

Escrow Hell

Over the course of the next 10 months we went in and out of escrow 4 times and each transaction failed for a different reason. Some of the offers were financed, to my surprise, but for one reason or another, the financing fell through. As I suspected, the potential buyers that barely had the means to afford this price point were failing to qualify for their potential loans. 

(This was sad to me because the cost of owning was much less than the cost of renting but underwriting didn’t understand that. The fact that a buyer was paying more for renting in their current situation should be the biggest indicator that they’re going to be able to make things work with a substantially smaller P&I payment, in my opinion.)

Luckily, our fifth escrow was the last and we finally closed on our little, REO condo. Our Return on Investment sure looked good but the long time on market made our annualized ROI look not so good. Another solid little investment in the books!

Things to be Aware Of:

If your business model depends on converting an REO condo into a rental, it’s critical to find out if the HOA allows rentals in the association.

Time on the market will be longer when condos don’t readily qualify for bank financing. Lower price point condos typically fall in this category. Hopefully, the rule changes to FHA loans this year will change that.

Following a judicial sale in Cook County, cash for keys is preferable for the former borrower as well as the lender. The occupant doesn’t have to worry about moving out at any moment because of the shortened notice of the lockout date. The lender doesn’t have to ensure that their local agent and a locksmith are on standby for the same reason.

Final Numbers:

Purchase Price: $33,500

Total Cost Basis: $55,756

Net Sales Price: $63,584

Net Profit: $7,828

Days Held: 564

Return on Investment (ROI): 14.0%

Annualized ROI: 9.1%

Coastline Capital Fund Management LLC

27702 Crown Valley Pkwy D4 #268
Ladera Ranch, CA 92694

P: (949) 371-6749

andy@coastlinecapgrp.com

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