What am I missing?

[Matthew W.]

Please forgive me if this post is naive. 

I have a friend who has been investing in real estate for years. Specifically, he is involved in non-performing loans in the New York and New Jersey areas.  He always has told me how he buys mortgages from the banks at a significant discount, forecloses on the property, then takes the property to auction. He makes it seem so easy.

I've been given the opportunity, through him, to review a portfolio of mortgages being offered from a bank, and to make offers on anything I find interesting - there are hundreds.

The spreadsheet I looked at had the following info:

Property Address

Foreclosure Start Date

Original Balance

Current Balance

Corp Adj

Escrow Adv

Months Dlq

So for instance, here is an example (and the properties span the tri-state area):

55 Main Street, Newark, NJ

Foreclosure Start Date: 10/17/2013

Original Balance: $350,000

Current Balance: $322,000

Corporate Adj: -$5822

Escrow Adv: -$56,918

Months Dlq: 83

He tells me that the bank will probably accept an offer of 50-60% of the current balance (Again, he has done this dozens of times.) For the owner to become current they would have to come up with $322,000 + $5822 + $56,918.  The property is probably valued around $375k. When foreclosed and brought to auction, the loan value and interest and penalties are more than the estimated property value - so I would most likely wind up with the house.

I suppose I just don't get it...what am I missing from this picture?

Please tell me why this is a terrible idea to get involved with.

[Cody Begg]

Podcast #169 explains purchasing notes in some detail. I highly recommend listening to the experiences shared there. He talks about the pros and cons. Specific to your example above, I think that you need to determine your end game for the property. It is probably better to get the person in the property to start paying again, which would produce cash flow for you on new terms that you set that would be more manageable for the homeowner. At face value, if the house is really worth 375k still and you can purchase it for 175k cash by buying the note, I would say sounds like a deal worth investigating further. Otherwise the foreclosure process I am not too familiar with. Hope this helps.