A payoff at $88k on a note bought for $52k, with a tax certificate that almost ate it

This file is worth walking through end to end, with the numbers, because it shows why the foreclosure case is what lets you bid. The file. A 2004 origination, note rate 5.25 percent, unpaid balance $141,200, last payment 27 months before purchase. A 1,400 square foot three bed in a small southeast market with a working local rental base. Drive by value $186,000, interior unknown, borrower occupied. Purchase price $52,000, so 37 percent of balance and 28 percent of value. The part to keep is that three recovery paths get priced before the bid. A modification to a payment the borrower's documented income supports, which values the file around $95,000 of present value at a 14 percent discount rate, and only if he performs. A discounted payoff somewhere between $85,000 and $98,000, on the theory that a borrower with $45,000 of equity has a refinance motive. Foreclosure to REO, modeled at 15 months in that state, $19,000 of legal and carry, and a $158,000 net sale, so around $139,000 gross recovery at a duration that kills the annualized number. The foreclosure case is the floor, and the floor is what justifies the bid. What happens next. The servicer makes contact and the borrower's stated goal is to refinance and stay. The buyer files anyway and keeps the case moving in parallel while negotiating, which that state allows, though procedure and any stay effects differ by state and the attorney should drive all of it. Month four, a title update shows a tax certificate was sold on the prior year's delinquency and the redemption window closes in nine days. That means wiring $5,600 to redeem, recoverable at payoff, though it was never in the model as a lump sum on a deadline. Had that update come 10 days later, the buyer would be litigating a certificate holder's position instead of collecting. Month nine, the refinance appraisal comes in at $171,000 instead of $186,000, and the lender's proceeds will not cover the $95,000 asked. The buyer takes $88,000 with a hard 30 day expiration in the agreement. Out: $52,000 purchase, $4,200 legal, $3,700 servicing, $1,450 force placed insurance, $5,600 tax redemption, for $66,950 total. In: $88,000 payoff plus $5,600 recovered advance, for $93,600. Net is $26,650 in 11 months. What to keep: pricing the foreclosure case as the floor rather than the upside, and ordering title updates every 90 days instead of at purchase only. What to change: hold a reserve equal to two years of taxes on every file from day one instead of finding the money in a week.