1st reforming note go for about 40% of the unpaid principal

[Account Closed]

I have an opportunity to buy a re-performing first note at a 40% discount to principal The note has only 2 payments under a recent loan modification The interest rate is 5% and the principal is about 10% above appraised value The note has been serviced and modified thru a national service company . The effective interest rate is about 10% Assuming all the paperwork is in order what are the risks of making this type of investment vs the rewards 

[Bob Malecki]

Hi Steven, 

Assuming you have verified the value of the property, the integrity of the collateral and the existence of any other liens, the highest risk I see is re-default by the borrower. 2 payments is not many and I would set a baseline of at least 6 payments, preferably 12, since I think that the industry average is a high number of reperformers will default within 24 month after a modification. In lieu of waiting for the seasoning, you could negotiate some level of guarantee from the seller of the note that he/she buy it back if the borrower redefaults.

Bob