Cheap paper in slow judicial states, or pay up for a state where you can move?

Question

I'm still costing out a first deal and this is the fork I can't get past.

The tapes I've been sent split roughly along foreclosure procedure. In the judicial states, where the lender has to go through a court case to foreclose, the same kind of file is priced meaningfully cheaper. I've seen 40 to 45 cents on collateral value where a comparable file in a non-judicial state, where the process runs through a trustee sale without a full court case, asks 55 to 60. Timelines in the slow judicial states can run past two years. Non-judicial can be a handful of months.

The case for the cheap slow paper: the discount is compensation for time, and if my capital has nowhere better to be, I'm getting paid to wait. Longer timelines also give the borrower more room to reinstate or agree to a mod, which is the outcome that pays best and keeps them housed. The extra 15 cents I'd pay in a fast state is permanent, while the delay is temporary.

The case for paying up: two years of taxes, insurance, and legal on a small balance can eat the entire discount. A file where I'm in at 45 cents and carry costs me 12 cents a year isn't cheap at month twenty six. Fast resolution also means I recycle the capital, so my annual return can be better on worse-priced paper. And the longer the case, the more chance of a filing, a title problem, or the house deteriorating.

Procedure and timelines vary state by state, and mediation requirements change the math further in some of them, so a lot of this is per-file. Still, most people I've read seem to pick a lane and stay in it. Which lane, and why?

bmoreno23 · Answer

I'm nowhere near buying, but the thing that jumps out is that your carry estimate of 12 cents a year is doing all the work. If it's really 12 and the discount is 15, the slow state loses in fourteen months and everything after that is pure bleed. If carry is 6 cents because the taxes are small and there's no insurance to force-place, the slow state holds up much longer. Have you actually built the carry number for a specific county, or is it a rule of thumb?

angela_burke · Answer

Running a small team taught me the answer isn't in the pricing at all, it's in whether you have people on the ground. In a slow judicial state you need an attorney who does these constantly and a local who can look at the house every few months. If you have both, the discount is real money. If you're managing it from a spreadsheet three states away, the delay becomes surprises and the 15 cents you saved goes to fixing them. So my lane is wherever I already have the two phone numbers, and I'd rather pay up than buy cheap paper I can't watch.

Cheap paper in slow judicial states, or pay up for a state where you can move?

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