A customer wants to sell me the defaulted note he owner-financed. $55k.

The number that stopped me was $55,000 out of $60,000 with seasonal income. I run a small crew and the thing that nearly ended me in year two wasn't a bad job, it was three slow weeks with payroll due and nothing liquid. A defaulted note is the least liquid thing you can own. You can't sell it fast, you can't borrow against it easily, and the money goes out for a year or more before any comes back.

If you do this at all, do it with a number that leaves you a working cushion, and expect to spend more after closing on legal fees and taxes, not less.

Write the whole cost out, because $55,000 is the first line only. $3,100 back taxes, and taxes keep accruing. Insurance, because if the buyer stopped paying the mortgage he probably stopped paying the premium, and an uninsured house that burns is a total loss to you. Legal fees for foreclosure, which people in this room have quoted anywhere from $2,500 to $9,000 depending on the state and whether anyone contests. A servicer if you need one. Then a make-ready if you end up with the keys.

I'd add $15,000 to $20,000 on top of the purchase and see how the deal reads then.

I'll ask the dumb one so you don't have to. No, buying the note does not let you show up and take the house. You step into the lender's shoes, which means you can demand payment and then use whatever process that state gives lenders to take the collateral, and that process runs on court or trustee timelines that you don't control. In some states it's a few months through a trustee sale, in others it's judicial and over a year. Some states also give the borrower a redemption period after the sale. You'd need a lawyer in that state to tell you which track you're on.

Different angle. If this ends with you owning a tired 1,150 foot house, you're the guy who can do the mechanicals himself, and that's worth real money on a rural rehab. So the foreclosure outcome is less scary for you than for most first-time note buyers. What you don't have is the paperwork side, and that's the half of this deal that decides whether you ever get to the part you're good at.

What happens to the family living there while all this is going on? I'm asking because I genuinely don't know and it seems like it matters to how you'd plan.

@juniper they stay until the process ends, and that's part of why the condition question is so live. Solder, nine months of no payments on a house that was already tired two years ago. People who can't make a $760 payment are not replacing a water heater. I've walked into post-foreclosure houses where the number went from my guess of $12,000 to $41,000 once I got the drywall open and found a slow leak had been running behind a wall for a year!

You saw the furnace once, two years ago. Go back. If you can't get inside, at minimum walk the outside, look at the roof plane from the street, check the soffits and the grade around the foundation. And price your worst case rehab at a number that would embarrass you, then see if $55,000 still works.

Small town forty minutes out means I'd check three things at the county before anything else. Whether it's on well and septic, because a failed septic in some states has to be brought up to current code before a transfer and that's a five figure surprise. Whether the lot and the structure are legally conforming under the current zoning, since older rural houses sometimes aren't and that limits what you can do after a fire or a major rebuild. And whether there are any open code enforcement or utility liens, which get recorded differently state to state and can sit ahead of you.

Two years of delinquent taxes also means you should ask the treasurer when that parcel becomes eligible for a tax sale in that state. A tax sale can move faster than a foreclosure.

Buying paper from a customer who feeds you work is its own risk. If this goes sideways, do you lose the note and the client?

@lantern that cuts the other way too. Solder, your seller told you exactly what he wants when he said he doesn't want to deal with it. He isn't shopping this to note funds, he's handing it to the first person he trusts. That's leverage on price, and $55,000 on a $92,000 balance is him picking a round number, not a market.

Five years of buying out small operators taught me that the seller who says "I just want out" will usually take substantially less if you make it easy and fast and if you're the only one asking. I'd come in a lot lower and explain why: back taxes, unknown interior, legal cost, a year of waiting. Let him counter.

The version of this I'd want is the one where the buyer starts paying again and I collect $760 a month on a $40,000 basis. That's the outcome that looks like income. What I've read here and elsewhere says reperformance after nine months of silence is a real possibility but not the base case, and even then you'd want a servicer handling the collection and the notices rather than driving over yourself. So it isn't hands-off, which is what I actually want, which is why I read these threads and don't buy these.

I bought one defaulted second a couple of years ago thinking exactly what you wrote, that the collateral value made it safe. Borrower filed bankruptcy eleven weeks after I took assignment and the whole thing froze while the case ran. My money sat there doing nothing for a long stretch, I paid an attorney to file a claim and show up, and the eventual resolution was fine but the timeline was more than double what I'd modeled.

That can happen to you at any point in the process and you can't predict it. Only buy this if a two year dead stop is survivable, and $55,000 out of $60,000 with seasonal income doesn't sound survivable to me.

Assume for a second the best likely ending: you foreclose, you get the house, you fix the mechanicals yourself. Now you own a rural single family forty minutes out and you're a landlord or a seller in a thin market. Ask yourself whether you want that, because a lot of note math ends there and people act surprised. In a small town the buyer pool and the tenant pool are both shallow, and days on market for the fixed-up comps you found is a number worth pulling before you commit.

I'd pass and I don't think that's timid. This is a single defaulted loan, in an unknown condition, from a seller with homemade paperwork, funded with all of your savings, as your first transaction on the investing side. Every one of those five things individually is manageable. Stacked, they're a coin flip on six years of saving.

If notes interest you, people here buy performing paper in small pieces first and learn the servicing and document side while getting paid. That's slower and it's the version I'd want at your stage.

Long timelines don't bother me at all, I hold land for years. What bothers me is a long timeline funded with money you might need in March. Patience is only a strategy when you can afford to be patient, and concentration is what turns patience into panic.

Price the bad ending specifically instead of trusting the $110,000 to $120,000 range. Say the interior is worse than you think and it appraises as-is at $85,000. Say you're all in at $55,000 plus $3,100 taxes plus $6,000 legal plus a year of insurance and carry, call it $67,000, and then $25,000 of work you partly do yourself. That's $92,000 into a house that might sell at $115,000 fixed, less selling costs. Two years of your attention for a modest number, and that's the case where nothing goes badly wrong.

You've described yourself as a hands person and this is a paperwork business until the very last step. Chain of title, assignment, notices, court filings, servicer reporting. That doesn't mean you can't learn it, but be honest about which parts you'd be paying someone else to do and add that to the cost.

I ran your numbers at three purchase prices against three as-is values, assuming $10,000 of cost to resolve and a 15 month timeline. At $55,000 basis and an $85,000 as-is value you're barely above water after selling costs. At $40,000 basis and the same $85,000 value you have room. At $55,000 basis and a $115,000 value you do fine, which is why every reply here is really about how much confidence you have in the value.

So the whole deal reduces to getting inside that house. Everything else is arithmetic once you know the condition.

One thing on how to read the price. $55,000 on a $92,000 balance sounds like a discount, and $55,000 against a $115,000 house sounds better, but people who buy defaulted first liens tend to talk in percent of as-is collateral value, not percent of balance. Your ask is roughly 48 percent of a value you haven't verified, before $3,100 of taxes that sit ahead of you. The balance is close to irrelevant here because the borrower's ability to pay it is what's broken.

Basic question, since the buyer was supposed to pay taxes direct and hasn't for two years: does that debt follow the house or the person?

@rigging property tax attaches to the parcel and in most states sits ahead of a mortgage lien, so it follows the house and the note holder ends up dealing with it. Confirm the priority and the tax sale timeline for that specific state with a local attorney or title company.

Solder, one more item on my list from the licensing side. Whether an individual buying and then collecting on a residential mortgage loan needs a license or registration varies by state, and some states also regulate who may negotiate a modification with a homeowner. I'm working through licensing myself and the rules genuinely are state by state, so ask a lawyer in that state before you sign anything, not after.

I take a long time on decisions and this is one to take a long time on. Two structures that might let you learn without betting everything. Offer him a much lower cash number, say low thirties, and tell him honestly why. Or ask whether he'd sell you the note on payments, so you put twelve thousand down and pay him the rest over two years while the workout runs.

He wants out of the hassle more than he wants a lump sum, based on how you described the conversation. Whether a seller-financed note purchase can be structured that way and how it gets papered is a question for a lawyer, but it's worth asking him before you decide the price is fixed.

Go stand in front of that house this week. From the street I can usually tell roof age within five years, whether the gutters have been dumping against the foundation, and whether anybody has touched the exterior since the sale. If the occupant will talk to you, you learn more in ten minutes than in a month of county records, including whether they want to stay and whether they could pay something.

My construction background says the tired furnace you remember is now a dead furnace and the tank behind it is on borrowed time. Cheap for you to fix, real money to a normal buyer.

Reading this whole thread back, the price isn't the interesting part. You have a seller who wants out, a house you can partly fix yourself, and no verified value or condition. Get inside, pull a title search, get the recorded documents, and then decide. If the seller won't wait three weeks for that, the deal was never as friendly as it sounded.