Fixer-uppers

The Star-Ledger, July 31st, 2005

It seems everyone is making a fortune investing in real estate these days. Not everyone is doing it by flipping houses. Meet some who are taking a different path: profiting by cleaning up other people's messes

By SAM ALI STAR-LEDGER STAFF

If you really want to sneak a peek at the underground world of real estate investing, take a drive down to the Newark Sheraton on 128 Frontage Road on a Wednesday night and make a beeline for the Essex Ballroom.

That's where the Garden State Real Estate Investors Association meets once a month.

That's why 29-year-old James Choi and his wife, Claudia, 28, of Morristown are standing in the hallway, drinking bad coffee out of Styrofoam cups.

It's their first meeting. Everybody here has paid the $130 annual membership fee. A few have even quit their day jobs, determined to pursue the real estate practice full time. And all will spend the next three hours sitting in the stale conference room listening to a clutch of seasoned real estate investors who have spent their careers mining the dregs of the real estate market.

"We need to build up a network of good people who understand the business and also find people who have the same intentions and interests as we do," he said.

The housing market is sizzling. But the flip side of the boom may be even hotter.

Thousands of defaulting borrowers and foreclosed homes flood the market every month, and the numbers are sure to grow as interest rates rise more.

But those at the Sheraton meeting operate off the beaten path. Here, real estate investing is more about numbers than wallpaper.

The Star-Ledger interviewed three of these real estate investors who explained how they play this side of the real estate game.

THE PAPER PEDDLER Most folks think the only way to make money in real estate is to actually buy property.

Peter Andrews, 32, prefers buying paper -- as in mortgages.

At his office on 80 Broad St., in the heart of Manhattan's financial district, Andrews and a crew of six -- an assortment of friends and like-minded real estate investors -- scan pre-foreclosure lists in New Jersey, New York, Florida, Ohio, Indiana and Las Vegas.

They are looking for ideal candidates: property owners who are at least 90 days late on their mortgage payments and are in foreclosure, like a stockbroker in Hackettsown who hit a rough patch and is about to lose his $700,000 home.

He has a $443,000 first mortgage, a $100,000 second mortgage and $40,000 in credit-card debt.

"Welcome to America," said Andrews, a Rutgers graduate with a degree in mechanical engineering.

The number of properties in foreclosure increased 7 percent nationwide in June, to 67,024, from 63,432 in May, according to RealtyTrac, a Santa Barbara, Calif.-based company that tracks bank foreclosures, trustee sales, auctions and preforeclosure properties.

In New Jersey, the number rose to 3,055, from 2,832. Currently, one house in every 1,084 in New Jersey is in foreclosure.

Andrews, who founded his real estate firm Dreambuilder Investments in 2002, takes these types of problem loans off a bank's hands.

When he gets wind of the walking wounded, he zeros in on banks holding second mortgages and tries to strike a deal.

"This guy hasn't been making payments to you," Andrews says he tells the bank. "You are in New Jersey, where an uncontested foreclosure takes 12 to 14 months to complete, so now you're going to get stuck with a bad debt on your books for over a year. Why don't I just pay you a percentage of that debt right now – upfront – and take this problem off your hands?"

Andrews has learned when homeowners are in financial trouble, and foreclosure is imminent, the bank holding a second mortgage generally wants out.

In the event of a foreclosure, proceeds from the sale pay off loans in the order in which they were recorded: First mortgages take precedence.

Often, the holders of the second mortgage will accept staggering discounts to satisfy the note and release the lien.

For example: Let's say you have a house worth about $200,000, with a first mortgage in default of $130,000 and a second mortgage of $60,000.

On the $60,000 second mortgage, Andrews may offer something like $10,000.

A deep cut, no doubt. But the bank is glad to rid its books of the nonperforming loan since it stands little chance of recouping a single penny in the event of foreclosure.

This is called "shorting the bank."

If Andrews can take the bad loans and turn them into performing ones, he can stop the foreclosure clock from ticking – and the payoff can be enormous if the home is sold at fair market value.

Andrews said he sometimes foots the bill for any moving expenses, closing fees or attorney fees the homeowners may incur.

"I've paid people's car loans. I've paid people's rent for a year. All their moving expenses, because it is in my best interest to do so," Andrews said.

Still, the process is full of risk and raw emotions.

Sometimes, the homeowners are uncooperative, or hostile. Other times, Andrews must foreclose.

The happiest ending, he said, is when the homeowner gets back on his feet and starts making mortgage payments. Andrews – as the guy holding that second mortgage – then ends up getting a check every month.

On that $60,000 mortgage, that could come to around $600 a month for the next 10, 15, 20 years, or however long the loan is active.

"I'll take that kind of return any day of the week," he said.

Over the past 2 1/2 years, Andrews has completed 143 such deals – 18 his first year, 110 last year and 20 so far this year.

Not bad for a street-smart Puerto Rican kid from Queens who didn't even know what a mortgage was a few years ago.

In fact, Andrews spent his first three years out of Rutgers working at a technology consulting firm. Real estate was his ticket to financial freedom, he said.

To help finance his stream of deals, Andrews relies on a clutch of private financiers. They loan Andrews the cash on a short-term basis to buy the discounted mortgages. He then pays them between 18 to 20 percent interest on their money for the privilege.

Although he won't talk specifics, Andrews says he's enjoyed 150 percent profit on an annualized basis since he started in 2002. That has bought a penthouse suite on West Street with a panoramic view of the New York Harbor, Battery Park and the Statue of Liberty, and a Nissan 350Z roadster.

Still, Andrews says this is not a get-rich-quick kind of business.

"Real estate investing is like any other business," he said. "If you don't treat it like a business, you will fail. It requires a lot of self-motivation, and there is no road map."

THE SECOND CAREER You've probably seen the signs.

"WE BUY HOUSES CASH" in bold black letters tacked onto telephone poles or stakes at congested intersections and street corners.

Donna Capilli, 40, and her fiancé, Frank Lang, 39, are two of the faces behind the ads.

Even their black pickup truck is a moving billboard, screaming at passing motorists "866- 52-WE-BUY!!!!"

Capilli and Lang met two years ago, when they attended their 1983 Glen Rock High School reunion, and plan to marry in August.

He quit his job as an environmental scientist 10 months ago – around the same time she left her job at a hair salon – and now, the two are focusing all their time scouring the bottom of the real estate market in search of preforeclosure bargains.

As she walks into Yetter's Diner one weekday morning in Lafayette, Capilli stops at the front desk to drop off a stack of "WE BUY" business cards.

The trick is to get your name out there, she said, so your phone keeps ringing.

Capilli said she has been called every name in the book: a bottom feeder, a shark circling in bloody waters, feeding on the financially wounded.

If anything, she said she feels more like the roadside cleanup crew.

Consumers are up to their eyeballs in debt. In 2004, consumers had $2.1 trillion in credit-card and auto debt. Add mortgages to the mix, and the figure jumps to nearly $10 trillion.

For many working-class homeowners, the road to financial ruin and foreclosure is one illness or missed paycheck away.

In June, New Jersey rang up 3,055 foreclosures in a single month, up from 2,832 in May. The state has the sixth-highest foreclosure rate in the country, said Rick Sharga, vice president of marketing at RealtyTrac.

If these homeowners are able to sell their property before the bank auctions their home at a Sheriff's sale, they avoid the stigma of a foreclosure on their credit and often walk away with some cash in their pocket, said Capilli, who focuses on Warren and Sussex counties.

Typically, she and Lang start by putting ads in the paper. They also rely on "bird dogs," – so called because their job is sniffing out homes in preforeclosure or vacant properties with unkempt yards or boarded-up windows and then point them out to investors, like Capilli, in return for a finder's fee.

Bird dogs can make roughly $500 to $2,000 a referral, depending on the size of the investment – and provided the investor actually seals a deal.

Once Capilli and Lang identify a good prospect, the next step is peppering the owners with letters – at a minimum, you must send out eight mailings, she said.

"If you don't do eight, don't waste your time," she said. "It's a proven number, so you are in their memory," she said.

When homeowners do reach out and dial her number, the first question out of Capilli's mouth is always: "What do you need?"

"A lot of times, you have people saying, just get me out of here," she said. "Just pay my loan and I'm gone."

After negotiating a contract with the owner, Capilli has to shift gears and deal with lenders.

Her goal: to get the bank's loss mitigation department to agree to a "short sale," meaning to accept less than what they're owed on the defaulting mortgage to avoid a foreclosure and get the bad loan off their books.

Sometimes, she "wholesales" it to another investor. That means once she drafts a contract with the homeowner, she turns around and sells that contract for $5,000 to another buyer, who then closes the deal.

"That's the beauty of being in a real estate investing association because we all bounce properties back and forth between each other," she said.

Capilli still refers to herself as a beginner. In the past 11 months, she and Lang have only tackled four deals.

And they have gotten burned.

Capilli and Lang lost $40,000 in profit on their first deal because they overpaid on a home in Bergen County and got stuck holding it for almost a year.

"We all lose money," she said. "If you don't lose money, then you are an anomaly. That's how you learn. It's the cost of doing business."

THE REHABBERS Ask 30-year-old Bryndan Moore why he became a real estate investor and the Piscataway resident will tell you the hard-luck story of Nate McLeod.

When McLeod bought a two-family house for $220,000 in a rundown, crime-ridden neighborhood in Irvington with hopes of renting it out, everything that could go wrong, did.

For one thing, he paid $60,000 more than he should have for the property.

Then, the tenants on the first floor moved out without telling a soul, leaving the doors and windows ajar. Vandals broke into the house and tore off the aluminum siding, stole the copper pipes, ripped out the windows. When he put boards up to protect the house, they tore those down, too.

In less than one month, his home was transformed from a potential rental property into a menacing landmark that attracted squatters and drug dealers.

"In one month, these people took any dream I had away," said McLeod, 31, a sales consultant at Toyota in Morristown.

Moore says there are a lot of Nate McLeods in the world. And a large part of what he, his wife, Jaimi – both of them are civil engineers – and his partner, Christopher Dunston, 27, do revolves around helping people like McLeod.

Last year, the trio formed 7th Street Real Estate Group, a company that specializes in buying fixer-upper properties and rehabbing them, but also aims to assist people with other housing problems. They also operate a construction company in Piscataway called Clearview Certified Contractors.

Moore's company bought the home from McLeod, stopped the foreclosure and saved his credit. Because the house was so badly vandalized, they were able to convince the bank to discount the mortgage from $220,000 to $100,000 and, now, are currently rehabbing the property.

In an industry with a some- times-unsavory reputation, Moore wants to be different.

"If we focus on just the money, that's all we're going to be about," Moore said. "We have to be something bigger and something better.

McLeod calls Moore a "lifesaver."

"I would be going through foreclosure right now, if they didn't help me. My credit would be ruined and I would have gone into a heck of a lot more debt."

Moore's company also offers wanna-be real estate investors a chance to get their feet wet and learn some of the tricks.

He said people can sign on as "credit partners" and acquire income generating properties at bargain prices.

"We get more leads a month than we can handle, so we either have to farm them out or let them go," Moore said.

Under this program, 7th Street sets up its potential credit partners to buy homes – below market rates – and screen tenant/buyers to rent the properties, and ultimately purchase them in a couple of years.

The technique is known as "lease-to-own," which means a prospective tenant makes an agreement with you, the owner, that part of their rent money will go toward a down payment of the home.

PHOTO CAPTION: 1. Peter Andrews, a real estate investor, in his Lower Manhattan penthouse. Andrews makes his money buying distressed mortgages. 2. Christopher Dunston, left, and Bryndan Moore stand outside a house they are rehabbing on Ellis Avenue in Irvington. The pair also gives wanna-be investors a chance to get their feet wet by signing on with their company as credit partners. CREDIT: 1. NOAH ADDIS/THE STAR-LEDGER 2. JOHN O’BOYLE/THE STAR-LEDGER

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