Seth Martinez, co Owner of Peoples Capital Group, joins the Passive Cash Flow Podcast to explain how PCG purchased a million dollar home near their office in Berkeley Heights for only $50,000! This is not a very unusual situation that involves a little bit of skill, a little bit of cash and being in the right place at the right time.
*Berkeley Heights New Jersey
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Aaron Fragnito: It was a gamble. We knew that we could lose that $29,000; we knew it. We put up money like that, we’re not going to put up someone else’s money unless they want us to do that with it and they sign an agreement. For the most part, when we gamble like that, we invest a little more aggressively, a little more risky to make that reward, we’re normally going to use our own cash for that.
All right, ladies and gentlemen. Welcome back to another episode of the Passive Cash Flow podcast. I’m your host, Aaron Fragnito, and we have another awesome guest today. A repeat guest, the co-owner of Peoples Capital Group, Seth Martinez.
Seth Martinez: How’re you doing?
Aaron: Hey, Seth. How are you doing over there in Berkeley Heights today?
Aaron: Excellent. Seth is in Berkeley Heights running the New Jersey operations. We’re acquiring apartment buildings and income properties down there in North Jersey. I’m up here in southern Vermont acquiring some more short-term rental properties. In fact, I just put a five-unit under contract today that’ll continue the completion of a little hotel we’re buying up here. PCG is going to be the proud owner of a hotel. [clapping] Very exciting. Very exciting. Very big day for us. Excellent.
Ladies and gentlemen, we are not here to talk about that. We’re here to talk about how Peoples Capital Group, Seth and I, invested about $50,000 about two years ago by purchasing the second lien of a nearly million-dollar property about 10 minutes from our office in Berkeley Heights, New Jersey. They’re a really great neighborhood, and a beautiful home, great location. Needed some TLC for sure, but we bought it, we snagged it for $50,000 at an auction.
Seth’s going to break into this transaction, how we were able to triple our investment in about a two-year period. It’s a really incredible story, really incredible deal. Listen, they’re not all like this, okay? This was a really cool deal, very profitable, very good investment for us, and there was a lot of risk as well. We put our own capital up and we did quite well at the end of the day with this cool deal. Seth, without further ado, can you break in how did you find this deal? Let’s get the full details, let’s start at the beginning. How did you find this deal?
Seth: All right. At the time, this was 2019, we were doing a lot of auctions; all types of auctions including using the internet. This was an auction we had gone to, and that day we were not too prepared. We were very busy running around doing other real estate, but I got to the auction, I looked at the list of properties, and I noticed there was a house listed or going up for auction at $29,000.
I took a double look at it and made sure it was, it was, and did some research. Based on my understanding of the neighborhood I thought it might be a great deal because I knew it was a million-dollar neighborhood and a million-dollar street. Did some more research, and I took a step out of the auction and gave you a call to get your thoughts on it.
Aaron: [chuckles] I think I remember that. You were like, “This is a crazy deal. No one knows anything about it. It just popped up on the list, but based on the location, heck, even if it’s just land it’s a good deal.”
Seth: Right. You gave me your okay. I was good with it, I just wanted to get your okay, and we both agreed to go ahead with the deal. When I came back into the room there was a lot of chatter about the property. Basically, when it came time to make the bid, the property came up, the auctioneer read off the details of the sale including the fine print. They also included at the end of the fine print, “Subject to a first lien mortgage in the amount of $650,000.”
When he said that there was a lot of chatter in the room and some gasps, and most of them were disappointing gasps because that’s a pretty big lien for any property. When I heard that I get the sense nobody’s going to bid on this, so when the auctioneer asked for a starting bid I raised my hand, called out $29,000. The room kind of looked at me like I was crazy or brilliant, or that I knew something that they didn’t know, but quickly it went from there to going once, going twice, sold. At that point, the property was ours for now. Very exciting.
Aaron: Very cool. I love those auctions, they’re so exciting. Now, to explain exactly what that means, it’s subject to a $650,000 first mortgage. This means we bought a second lien, a second mortgage, and what we have to do now at this point is figure out how we’re going to negotiate down with this first lien holder and work with them because they actually have rights over the property over us if they foreclose on the property, but they would have to complete the foreclosure process and foreclose over us.
We had bought some time by purchasing this note, the second lien mortgage on the property. We knew we had to pay the $650,000 at some point or another to get clear title on the property. That’s why no one else was bidding on the property. That’s why everyone looked at Seth like he was an idiot because he just paid $30,000 to take on a $650,000 debt for a piece of real estate that had someone living in it. Go ahead, what happened next?
Seth: Exactly. Again, based on our experience we had been in business over five years even at that point. We had done hundreds of deals so we knew the ins and outs of foreclosures, auctions, and those neighborhoods. We had sort of an advantage in that sense, and we just had the confidence of doing a lot of deals.
Basically, upon winning the bid I drove up to the house and knocked on the front door. At that point, I had met the soon-to-be-former owner who wasn’t so thrilled to meet me, but I was there, I had about 10 to 15-minute dialogue. I introduced myself and told him we are real estate investors and we bought the foreclosure at the auction, and he was aware of what was going on. I also got the sense he wasn’t, again, so thrilled that I was there, so I made a quick exit after about 10, 15 minutes.
I told him, “Listen, think about it. I will need you to move out at some point, but think about it. We’re better off working together than fighting each other. I’ll come back in a couple of weeks,” and so I did. I left. He thought about it and came back in a couple of weeks. At that point, he had already been on the phone with attorneys looking at his options, and basically started to try to fight back. He went to the local court and spoke to a judge, and the judge actually granted him some options; basically one option. The option the judge gave him was that he had one last opportunity to pay off his debts, and he gave him a whole month. I believe that was the month of February.
We were holding our breath there for the month of February to some extent. At the end of February, I came back. He had not paid it off, so we basically paid off the remaining part of the bid, the remaining part of the $29,000, and we were given the deed very shortly thereafter in a couple of days. We recorded the deed, and at that point, we were officially owners of the property, albeit with a lien on it, but we were the owners of the property.
Aaron: What you’re explaining there is you didn’t actually pay the $29,000 that day you raised your hand and bid. You put up 20% of $29,000, which is about $6,000, something like that. Then you put up the rest, the other $24,000/$23,000 once it was due. Once the title was clear and–
Seth: Exactly. All the auctions we go to, yes. I mean, each auction– like you said, we do many, many different types of auctions, some online, some in person, and each one’s a little different. Sometimes you have to put up 10%, 20%, sometimes the whole amount by the end of the day. This particular one was about 20%. Then we had a couple of weeks to pay off the balance, maybe 30 days to pay off the balance, which got extended as the borrower asked for more time.
Aaron: Yes, and of course, part of that process was having a title company run the title and find out if there were any more liens: taxes, water, sewer, contractor liens, additional IRS liens, whatever the issues could be. You can run into those as well when you’re buying properties with a history like this one. Definitely a lot of inherent risks there, but go ahead, Seth, what was the next step now? You’re trying to get more flies with honey at this point it sounds like.
Seth: Yes. Trying to maintain the relationship with the gentlemen. I was able to do that, although again, he wasn’t so thrilled. His main focus was not working out anything; he wanted to try to salvage the house. When we had the deed and the court basically gave him the last chance and he didn’t execute on that opportunity, he knew he basically was running out of choices. Nonetheless, he still didn’t move out. We had to go to court. We had to go to the special kind of court, not landlord-tenant court. This is a different type of court when you’re dealing with a homeowner, not a tenant. We went through that court, it’s called an ejectment order, and we got the order about three months later.
It took a long time but we got the order. I went back to the house and showed him the order; he was aware of it. Nonetheless, we actually gave him $2,500 cash for keys as part of the judge order. The judge wanted us to do that so we did. I gave him $2,500 check and he moved out and we changed the locks.
Aaron: All right. You went through the right process, the judicial system, exactly what that’s for when someone’s foreclosed on. There is a whole additional process. It’s not just a regular county eviction. It’s actually, from my understanding, the state has to approve the eviction first, and then it’s passed up to the county which then executes the actual service of the eviction or removal of a tenant. It’s really a whole nother step to do an ejectment over an eviction, and therefore it takes about twice as long and is also subject to not being successful as well.
All right. You went through the whole process, you paid the cash for keys, and the past owner now has moved out. Now you finally have a vacant property that still has a $650,000 mortgage on it.
Seth: Exactly, and that was our next priority. We had to deal with that mortgage and start a lengthy negotiation process with the purchasing bank. That took over a year, maybe a little over a year, and finally, we were able to that. Before we did that we did some cosmetic updates to the house, including some much-needed landscaping, and tried to immediately sell the house while we were trying to negotiate the mortgage.
At that point, the market was not as strong as it is now, so we didn’t have any strong buyers for what we were looking for. We ended up deciding to rent out the house. We got a tenant for about $4,000 a month, and in addition to that, we got a tenant who wanted to also have an opportunity to buy the house down the road later in the lease. We signed a six-month lease with him with an option to buy it. He was paying $4,000 a month, so that covered some of our costs, to make some profit as well.
Unfortunately, after six months he wasn’t able to buy the property because we didn’t have approvals yet from the bank and some other reasons as well, but that was the bigger one. We gave him a six-month extension on his lease and his option. After six months he still wasn’t able to buy the property. Even though we were getting close to bank approval, the buyer’s circumstance had changed and he wasn’t able to purchase the property. At that point, we actually terminated the lease and the option to buy it. I started looking for another buyer. At the same time, that’s when COVID started happening, this was last year, and it opened up a whole other set of variables.
Aaron: Wow. The eviction courts essentially closed down at that point as well, so you really had no control as a landlord. One of the greatest things about this property as well, when you own a property like this with the amount of investment we had, the holding costs were minute for the most part. The tenant paid the utilities and we were able to let the taxes roll knowing that they would be paid at the time we sold the property. We were really just focused on keeping the property properly maintained, which the tenant really did the whole time. It was a nice cash flow property for us as well. That was really one of the more profitable investments also. That’s interesting.
Now COVID hits, so the eviction courts close down; all the courts close down. Obviously, the market pauses for a few months then pretty much lights back up on fire by the time summer and fall hits pretty much. What happens at that point?
Seth: With COVID everything, like you said, went on ice for a few months. We still had the same tenant. He was just no longer able to buy the property but he still wanted to be a tenant so we were still collecting rent. He fell behind. At the same time, we were negotiating final details with the lender and final amounts. That took about nine months, all the way through last year, to get a final settlement with the bank. Also, the tenant eventually caught up on most of the rent.
By January of this year, we had verbal approval from the bank that they were going to settle at a certain price that would work for us and work for them, but it took another three or four months to get written approval from the bank. They were going back a little bit on their word but we got this written approval. That was around April/May. Then we ended up selling the house in June, that’s this month, to a new buyer.
Aaron: That’s great. Through this process, it sounds like it really took about 18 months to get approval from the bank. We actually hired a short sale negotiating company at first to complete this short sale negotiation. They’re very good and very experienced and we’ve used them for dozens of transactions, and even they had trouble getting it done. We actually took back the file, contacted the attorneys directly who were completing the foreclosure process. We got a lot further, actually, by doing that than by contacting the loan service provider.
What most short sale negotiating companies do is contact the service provider of the loan, but if you contact the attorney company that directly is filing the foreclosure sometimes you get further with that. Short sales are confusing, they’re not all the same, but that was our strategy there and we did quite well with it over time. You were very persistent, Mr. Martinez, as well.
Seth: Yes, you got to be in this business. You got to fight to the end and make sure you win. [chuckles] No guarantee, but it’s usually possible if you never give up and keep persistent, stay professional, and try to make it a win-win for everybody.
Aaron: Absolutely. One of the greatest things about this transaction was that the tenant actually had fixed up the property while living there, so really any rent that he didn’t pay seemed to go back on the property in renovations in a lot of different ways. That helped us actually sell the property for a decent price, higher than where he was at, and also the market. The market boomed during this holding period. Let’s call it what it is: the market did quite well and helped us make a nice profit here. I think we would have done okay if the market didn’t boom, but we did far better because the market boomed.
Basically, at the end of the day, we were able to triple our $50,000 investment over about a two-year period. Being on the ground in this business day in and day out, not all our deals are like that. In fact, this is a rarity. That’s why we’re doing a podcast episode about it of course. Very cool opportunity we took advantage of. A lot of risk in there. We put up our own money. We did not put up investors’ money for this type of stuff because, quite frankly, it was a gamble. We knew that we could lose that $29,000; we knew it.
When we put up money like that, we’re not going to put up someone else’s money unless they want us to do that with it and they’ve signed an agreement. For the most part, when we gamble like that, when we invest a little more aggressively, a little more risky to make that reward, we’re normally going to use our own cash for that. Our investors generally invest in turnkey operation, turnkey properties that we’re repositioning, and different opportunities like that.
That’s how we structured this deal, that’s how the funds worked on the deal, that’s how the investment worked, and it was very good for us. There were certainly a couple of sleepless nights there, although at this point we don’t have any sleepless nights. You just roll over and go back to bed, right?
Seth: Exactly. It’s okay to worry a little bit.
Aaron: [laughs] Yes, maybe worry a little bit.
Seth: Just a little bit. [inaudible 00:17:48]
Aaron: Right. We’ll work on our meditation. I hear meditation is where it’s at, so let’s see. [chuckles]
Seth: Yes, that worked out all around, so go for it.
Aaron: Excellent stuff. Very cool transaction, very cool experience. One of hundreds for us and a successful one at that, so we learned a lot through the process. I think at the end of the day everyone got what they needed, everyone seemed to be happy, and the system worked.
Seth: On to the next one.
Aaron: On to the next one. Excellent. All right Mr. Martinez, any parting words for our listeners?
Seth: Well, I would just say if you’re interested in real estate investing and you want to partner with a company, I can promise you not all of our deals are like this one so the risk level should be lower, but I have to be careful what I say as well. I can’t really talk too much about risk but, again, this is a rarity like Aaron says. Normally our investors are more consistent, they have more historical trends and longer-term as well, things like that; apartment buildings and so forth and so on. This was fun. If you want to learn more you can just call and chat about maybe some future opportunities.
Aaron: Absolutely. Very cool story, very fun investment. Of course, most of the investments we do are more like the building you see behind me there, which have a lot less inherent risks than what we did here. At the end of the day, I think I’ll stick with these things behind me. It’s a nice apartment building. You can’t go wrong with apartment buildings, my friend. Absolutely. Very good.
All right. Thank you so much, listeners, for joining us on another episode of the Passive Cash Flow podcast. Of course, I’m your host, Aaron Fragnito, co-owner of Peoples Capital Group. If you want to learn more about the qualification process to become a qualified investor at Peoples Capital Group and get access to our private offerings, which are opportunities to invest in apartment buildings like the one you see behind me there, then go to peoplescapitalgroup.com and fill out an application, schedule a call with the managing member. Let’s connect and see if you’re qualified to start investing with our group. Aaron with Peoples Capital Group, have a good day.