I've been in the courtroom where the judges do everything they can to over turn the tax sale even going as far as instructing the attorney for the owner on how to best present their case to get a favorable verdict. 

Equity builds up through mortgage payments, value-add and/or appreciation and next thing you know, your 25% ROE becomes 18% and your 12% cap becomes 9%, using market value rather than purchase price.  

So that $120k is going to be more like $90-100k.You're reducing your monthly income by losing cash flow.You're significantly reducing your Return on Equity (ROE) because your primary residence can only appreciate with the market.

@Anthony Chara - First "crook county" needs to get the state to overturn the ban on rent control. 

Joel...You just have to do the arithmetic to see which option is likely to yield a better ROE for your level of comfort.

I'm sure lots of people have their opinions about what offer is likely to be accepted for an ROE property - my opinion is it depends on the circumstances.

I didn't notice the OP's error.If you're using the income after debt service, then the denominator would make more sense being the equity; this would give you an ROE number.

But the minute there is a problem, you will find out who has the better attorney: the borrower, who will either hire one or use legal assistance, or you, who hired yourself to edit the borrower's documents.In addition, if the documents don't comply with state law, your foreclosure can get thrown out in court, or overturned, or whatever.

The ROE that the bank is earning can't be very high so I think you are getting a good deal.

@Santiago CazorlaThe difficulty in gathering information on an ROE is the information might not be available.