One non-performing note carved out of a pool, $61k ask on a $118k balance. Where am I fooling myself?

The part I'd want explained is why this one is available as a carve-out. A seller with nine loans and a buyer who'll take all nine usually sells all nine. If he's willing to let you pick, either he has more demand than paper or the other eight are better and he's happy to see this one leave. Ask him flat out what he paid for the pool and when, and what he's already tried on this file. If it's been through a servicer once already and the borrower ignored every outreach attempt, that's a different asset than a fresh default.

Slow me down. UPB is the principal still owed, ignoring interest and fees, right? And when you say you might end up with the deed, you mean you foreclose and the house becomes yours, so you're really buying a maybe-house for $80,000 instead of buying a loan. Is that the whole idea, or is getting paid back the main plan and the house the backup?

@vellum both are real outcomes and which one you get depends on the borrower, which is why I'd want the pay history before anything else. Ledger, ask for the full transaction history from origination, not the summary. Someone who paid on time for eleven years and then stopped cold after a job loss or a death in the family behaves completely differently from someone who was 60 days late every other year. The first one sometimes reperforms on a modification. The second one has told you what they do.

Run the modification exit as its own line, because it's the one people hand-wave. Say you capitalize the arrears into a new balance around $130,000, drop the rate, stretch the term, and get a payment the borrower can actually make. On a $61,000 basis a performing payment stream at that size is a strong yield on paper. Two catches. Reperformance often doesn't stick, and a modified loan that goes back to non-paying after four months has cost you four months and legal fees. Also, how you can modify, what notices you owe, and what happens to a loan that's been in default this long are governed by federal servicing rules and state law both, so the servicer and a lawyer set the boundaries, not you. Price the modification as upside, keep the collateral as the floor.

Before you argue about value, ask for the collateral file index. I want to see the original wet-ink note, every endorsement in an unbroken chain from the original lender through to your seller, the recorded assignments of mortgage, and the title policy from origination. A note that's been sold four times since 2009 often has a gap somewhere, and a missing endorsement or an unrecorded assignment turns a 16 month foreclosure into a much longer one while somebody chases a defunct originator for a corrective document.

Ask specifically whether there's a lost note affidavit in the file. That's not automatically fatal, but whether a court will let you enforce on one depends on the state and the judge, so your foreclosure attorney in that county is the person to ask before you bid, not after. Recording requirements for assignments also differ state to state, and some counties are slow enough that a needed recording adds months.

I'd make the bid contingent on a collateral file review with a real deadline. Sellers who have clean files agree to that immediately.

I'll be the one who says pass. Not on the price, on the count. One asset, 18 month timeline, your whole allocation, and your first time doing the workout. If the value is soft or the borrower files something that stalls you, you don't have eight other files earning while that one sits. That's not a portfolio, it's a bet with paperwork.

What I did on my first defaulted paper was go in with two other people on four loans so I saw four different resolutions in the same eighteen months. One reperformed, one paid off short when the borrower sold, one went to sale and I got a house worth less than I hoped, and one is still open. That spread taught me more than any single file would have and the one bad outcome didn't matter much.

Your $80,000 all-in number is fine as arithmetic and useless as underwriting because it's one path. Build four columns: reinstatement, modification and reperformance, discounted payoff or borrower sale, foreclosure to deed then retail sale. Each column gets a gross recovery, a cost line, and a month count, and then you discount to today. Assign rough weights from whatever you can learn about this borrower rather than from a blog's averages.

The foreclosure column is where I'd stress you. Value $125,000 instead of $155,000, timeline 24 months instead of 18, add an eviction and $12,000 of make-ready because occupied houses in default rarely show up clean. Sale at $118,000 less 9 percent costs is about $107,000 net against a basis that's now near $95,000 with the extra carry. That's a thin outcome for two years of work and it's not the disaster case, it's the plausible-bad case.

If the plausible-bad case pays you almost nothing at $61,000, your bid is wrong, not your strategy. What price makes that column tolerable? That's your number.

Two document items nobody has raised. First, who services this after you buy it. You cannot collect on a defaulted first lien from your kitchen table in most states, and a licensed servicer handles the notices, the escrow, the statements and the credit reporting. Get the onboarding cost, the monthly, and the default-servicing add-ons in writing, because $95 a month is a performing-loan price and default files cost more.

Second, whether you personally need any license or registration to acquire and hold residential mortgage debt varies by state, and some states also regulate who can negotiate a modification with a consumer. That's a question for a lawyer in the collateral state before you sign a loan sale agreement, and it's a cheap hour to buy.

Also read the loan sale agreement itself. Most are sold as-is with almost no representations, and the ones I've read gave the buyer a short window to kick a loan back for a defective collateral file. If that window is ten days, know it going in.

Genuine question for you, ledger: if the seller counters at $57,000 do you take it, or is the whole file wrong regardless of price?

@sable that's the right question and I think the answer is that price can't fix the two open unknowns. You don't know the interior condition and you don't know if the occupant is the borrower. Both are answerable for a few hundred dollars and a week of waiting, so answer them before you talk about $57,000 versus $61,000.

My list before I'd bid on something like this: full title search, current tax certificate rather than the website, exterior photos with a date on them, collateral file index, complete pay history, and a written quote from the foreclosure attorney in that county for an uncontested case and for a contested one. I'd also confirm whether the taxes are close to a tax sale deadline in that state, because tax enforcement timelines are state specific and a pending tax sale can outrun your foreclosure.

If the seller won't sit still for that on a single-loan trade, he's telling you he'd rather sell the pool to somebody who won't ask. Fine. Then you wait for five loans and do this properly.