Buying to reperform or buying to own the house: which one am I actually doing?

I'd write the foreclosure number, because it's the only one that doesn't require another human being to cooperate. A modification is a forecast about behavior. A collateral value is a forecast about a house, and houses are easier to forecast than people. I'm still preparing, though, so treat that as a preference rather than a track record.

You're framing it as two businesses. In practice the file tells you which one you're in about six weeks after you buy it, and your job before that is to make sure both endings are survivable at your price.

I hold land and long positions, so I default to the collateral side. The word I'd push back on in your post is bonus. If you priced to liquidation and the borrower reinstates, you didn't get a bonus, you got a shorter timeline, which is worth more than most people put on the sheet.

Dumb question but I want to understand the mechanics. When people say reperform, does the borrower have to agree to sign something new, or do they just start paying again? And can they stop again a month later?

@rigging both happen. Reinstatement is the borrower catching up the arrears and going back to the original terms, no new paper needed. A modification is a signed change to the terms, usually a lower payment, sometimes arrears rolled into the balance or deferred to the end. And yes, they can stop again a month later. Re-default on modified loans is common enough that anybody buying seasoned reperformers will price your file on payment history and not on your story about it.

Which is my answer to @vellum. I don't underwrite to a mod. I underwrite to the collateral and treat a mod as the fast exit if it happens.

Nobody has mentioned what the two paths cost to run. Boarding a file with a licensed servicer plus monthly fees, forced-place insurance if the borrower's policy lapsed, delinquent property taxes, and the legal spend if you file. The legal spend is where the state matters, and it matters more than most spreadsheets admit. A judicial state can be a multiple of a non-judicial one on both time and fees, so check with counsel licensed where the collateral is before you assume a number.

I budget the foreclosure cost on every file I look at even when I'm hoping for a mod, because I've never seen a hope reduce an invoice.

Your intent lasts exactly as long as the collateral file allows it. Before you decide which business you're in, find out whether you can even enforce.

Things I look for: the original note with an unbroken endorsement chain to your seller, every assignment of mortgage recorded in the correct order, and whether the last recorded assignment matches the entity that's actually selling you the paper. Recording practice and what a county will accept differ by state, and gaps get expensive to cure when you need them cured on a deadline.

I've walked from files where the collateral math was fine and the paper wasn't. A discount doesn't help you if you can't foreclose and the borrower's attorney figures that out before you do.

Numbers, and tell me what's wrong with them. $92k unpaid balance, house worth about $115k in a normal midwest suburb, ask $44k.

Mod path: payment resettles at $650, taxes and insurance escrowed, I'm collecting maybe $7,800 a year on $44k plus whatever I advanced. Sell at 12 clean payments to a reperformer buyer somewhere in the high 50s to low 60s percent of balance and I'm out around $53k to $56k.

Foreclosure path: 10 to 20 months depending on the state, $6k to $12k legal, arrears taxes, a house that needs $15k, sell at $105k, net maybe $75k on $44k plus carry.

The foreclosure path pays more in dollars and worse in IRR if it drags. The mod path pays less and pays sooner. So the answer swings entirely on the timeline assumption, which is the number I trust least.

@ledger the piece that moves your mod path is what document you actually sign. A forbearance agreement, a repayment plan, and a full modification are three different instruments with different consequences for lien priority and for whether you need to record anything, and recording requirements vary by state. Get it drafted by an attorney licensed where the property is, not from a template a note seller emailed you.

I care about this because a sloppy mod can hurt you twice. It can fail to bind the borrower the way you thought, and it can complicate the sale of the paper later when a buyer's diligence reads it.

I look at the lending side because I don't want to own houses, and that biases me hard toward the reperform answer. If the workout ends with me holding a vacant property in a market I've never visited, I've accidentally become an operator with a rehab budget.

So I'd only buy files where the collateral cushion is deep enough that I could dump the REO wholesale at a loss to the appraised value and still be whole. Which is basically @canton's underwriting with a different motive.

Is there really a live market for seasoned reperformers, or is that something people say to make the exit sound easy? @ledger quoted high 50s to low 60s like it's a screen price.

@sable there are buyers, and pricing moves with payment history, escrow status, the state, and whatever yield the buyer needs that quarter. It isn't a screen price. It's a bid you go get, and thin files with no verified income and a hand-written payment log get bid worse than clean ones.

@vellum, on the sheet I write liquidation value net of every cost I can name, then the price that leaves me a margin on that number alone. Every other path is faster money on the same collateral. I don't pay for outcomes that require the borrower's cooperation, because I've never found a way to underwrite cooperation that survives contact with a real file.

All of this assumes the collateral floor is real. In the rural markets I look at, a $38k house in a town of 2,600 has three comps in eighteen months and one of them was a family transfer. The liquidation number is a guess with a decimal point on it.

So out here the reperform path isn't the softer option, it's the one that actually works, because the borrower's willingness to stay is worth more than a resale I can't price. Different answer from @sextant's, same reasoning applied to a worse market.