Would you buy paper on a house you'd refuse to own?

Price the REO before you price the note, because on the first one that's where the money goes. 900 square feet in a mill town that's been through six years of a borrower with no escrow and probably no maintenance budget. Roof, mechanicals, and whatever the crawlspace is doing. I've walked houses like that where the number to get it listable was 22k and the ARV was 61.

Run that and your 62 loan to value is a lot closer to 90 in real terms. Scope creep on a low value house is brutal because there's no room in the resale to absorb it.

Curious about the exit mechanics rather than the pricing. On the small town house, is a note holder's realistic play there ever a retail sale, or is it deed in lieu and then flip the house to a local landlord for cash at whatever they'll pay? Feels like the second one, and if so the value that matters isn't 66k at all.

So loan to value on a note is the balance divided by the property value, and lower is better for me as the buyer because there's more equity between my loan and zero. Have I got that right?

If so I don't understand why anyone takes the 88 one. 26 payments and almost no cushion.

@vellum because the 88 one is more likely to just keep paying and less likely to become a project, which is the only thing I care about. I'm not in this to own houses. A borrower in a metro with a newer house and a payment they've made 26 times has options if things get tight, they can sell into a real market and cure. The mill town borrower has nowhere to go.

@harrow's point kills the first deal or saves it depending on the number.

28.7k basis, 41k balance, 9 something coupon presumably. If it pays as agreed you're fine on either. So the whole question is loss given default.

First note: foreclose, say 6k legal and carry in a slow state, 22k rehab per @harrow, sell to a landlord at 52k with 8% cost of sale. Net around 41.8k against a 28.7k basis plus advances. You survive.

Second note: 118.7k basis, foreclose at 9k, three months carry, sell at 143k with 8% cost. Net around 122k. You survive by 3k and a year of your life.

That's the answer and it isn't close, as long as @harrow's rehab number holds and the 66k value is real. Both of those are assumptions I'd pay for an appraisal to test. Also foreclosure timelines and cost vary enormously by state, so the 6k and the 9k are placeholders until you know the state.

I'll defend the mill town. Low price point rural collateral gets described as unsellable by people who have never listed one. There are cash landlords in every one of those towns who will take a 900 square foot house at 45 to 55 and not blink, and they close in ten days. The eleven month days on market number is retail buyers waiting for financing on a house that doesn't appraise.

What I would check, @thatch, is whether the town has one employer left or none. That changes the rent, which changes what a landlord pays.

Check the tax situation on the rural one before anything. Six years of a borrower paying their own taxes with no escrow in a county with a fast tax sale process is where I've seen notes evaporate. Whether a tax lien primes your mortgage and how much runway you get to cure is state specific and you want that answer in writing from a local attorney, not from the seller.

Also pull the assessed value history. If the county has been cutting the assessment every year, your 66k is optimistic.

The thing that would decide it for me is that the first borrower has 74 payments of demonstrated behavior and the second has 26. Six years through whatever those six years contained is a real signal about that specific household.

@ledger, your loss given default math is the argument, but doesn't it assume you'd actually go through the foreclosure? On a 28.7k basis I might just take a discounted payoff or sell the note at 55 of balance to somebody local and move on.