The odds of finding a trash note at a discount that makes them investment-worthy are extremely low.
I think you're missing the point here. This is not about building a "Quality" folder. It's about buying active notes that have quit performing.
Regardless if you paid $1 for the note or $12 for the note, by the time they default, they are equally as bad. The difference is, you lose much, much less when you spent $1 for the note.
Face it. None are going to go current. So in order to find out if this would work or not, you'd have to spend no more than $1.00 or 1.05 for each note. Now, don't buy BK-7's, as these will not return anything. However, a BK-13 just might as BK-13 filers get put on a payment plan with all their creditors.
So, if you spent $100, you'd have 100 notes. And let's say each note had $19 of remaining principle. That comes out to $1900.
$100 spent against $1900 potential gain.
I'm not saying you'll get $1900 back. Far, far from it. Yes, some of those notes will go BK-7. Some will never pay another dime. One or two might end up pushing daisies. However, many of those notes will still pay something in collections. The whole idea is to let them sit (or fester, like Core said) and see what happens.
If it takes 1 year to get your $100 back, you lost nothing. But, what would happen after that from years 2-5? If you got another $100 back, you doubled your money. If you got $150 back in profit after 5-years, what kind of a YTM does that figure out to be?
Look at it like buying a new 60-month note for $100. How long would the borrower have to pay before you got your original $100 back? And, would any 60-month note give you the opportunity to double your money? I think not.
