If the buyer stops paying, what am I actually holding?

"Just take the house back" is doing an enormous amount of work in that sentence. In a nonjudicial state a trustee sale can move in a few months. In a judicial state you're filing a lawsuit and the calendar belongs to a court, which can mean a year or more with no payments coming in.

Order a lender's title policy at closing and read the exceptions. I've seen carry deals where an old judgment lien sat in front of the seller's new lien and nobody noticed until they tried to sell the note. The premium on the lender's side of a simultaneous issue is small, a few hundred in a lot of states.

Do the servicing companies handle the default piece too, or do they just stop collecting and hand you a file? Trying to understand where a servicer stops and a lawyer starts.

12% down means your note is 88% of value on day one. Foreclose and resell and you're likely looking at legal costs, holding costs, and a sale that nets somewhere in the low 90s of value at best. Add six months of missed payments plus taxes you advanced and the cushion is gone. Underwrite the borrower like the cushion doesn't exist, because at 88% it barely does.

I read a deed of trust last night and got stuck on "power of sale." That's the clause where the borrower agrees in advance that the trustee can sell without a court, right? It felt like the most important sentence in the document and it's buried on page nine.

@sextant which is why most of these end in a modification rather than a foreclosure. Extend the term, capitalize the arrears, keep a paying borrower. It's usually the higher recovery even though it feels like losing an argument.

On land I'd still use a contract for deed in the states where forfeiture actually works, since there's no structure to insure and the whole value is the dirt. Duplex is a different question. You've got tenants, habitability duties, and a court that will look at whether the buyer built up equity.

Here's the one I've never understood. If I foreclose and the house sells for more than the balance, do I keep the extra? Or does the buyer get his payments back somehow?

@compass surplus over the debt and costs generally goes back to the borrower, and the exact waterfall is state law. @quarry the clause I'd add to your read-through is the default interest rate and how late charges accrue, because six months of arrears at a default rate changes the payoff figure a lot, and some states cap what you can charge.

Running quarry's numbers. Say $250k duplex, $30k down, $220k note. Six missed payments, $6k in advanced taxes and insurance, legal and trustee costs at 3% of value, resale costs at 7%. You need roughly $250k of value at sale just to break even on the balance, and you started with $30k of cushion. Any softness in the market and you're negotiating with the borrower whether you like it or not.

Which is the argument for patience. On my land notes I've never wanted the property back, so I've built modification into how I think about the position from the start.

So the answer to quarry's question is that what he's holding is the down payment plus whatever the borrower has paid down, and everything else is a lawsuit he'd rather not file. That's less comforting than the agent's version...