If you hold a mortgage note, land contract, or owner-financed loan, it has a cash value today. That value is almost always less than the balance. How much less depends on a handful of things you can check in five minutes.
Short version: A note is worth what a buyer will pay today for the payments you'd collect over the years. Most notes sell for about 70% to 85% of the balance. Strong notes bring more. Weak ones bring less.
Want a number right now? Try the note value calculator. Then read on to see what moves it.
How a buyer figures the price
A note buyer looks at every payment left on your note. Then they ask, "What would I pay today to get those payments, given the risk?"
That's it. The price is today's value of your future payments, at the return the buyer needs. Higher risk means a higher return, and a lower price.
Then the buyer checks one more thing: the property. Most buyers won't pay more than a set share of what the property is worth. That protects them if the payer stops paying.
The six things that set your price
1. The payment and how many are left. More payments, or bigger payments, mean more value. But payments far in the future are worth less today than payments next month.
2. The interest rate on your note. A higher rate means bigger payments for the same balance. That usually means a better price.
3. The payer. How long they've paid and whether they pay on time. A year or more of on-time payments is a big plus. A payer who's behind cuts the price hard.
4. The property. What it's worth, its condition, and whether the payer lives there. A home the payer lives in is better than a rental. Land and mobile homes on rented lots bring less.
5. The equity. How much the property is worth compared to what's owed. More equity means less risk. A payer with 20% or more equity brings the best prices.
6. The paperwork. A recorded mortgage or deed of trust, a signed note, and clean payment records. Gaps lower the price. See the documents you need.
A real example
The note: $62,000 balance at 8%, paying $592.50 a month, with 15 years left. The house is worth $110,000. The payer has paid on time for three years and lives there.
For the math, say a buyer wants a 12% return on this note.
- Payments left: 180, totaling about $106,650
- Value today at 12%: about $49,400
- Share of the balance: about 80%
- Equity check: $49,400 is about 45% of the home's value, so equity is strong
Now change one thing. Say the house is only worth $65,000. The buyer would likely cap the price at a share of that value. The offer drops, even though the payments are the same.
That's why I always ask for the property value. It can move the price more than anything else.
Ways to get more for your note
- Sell part instead of all. A partial sale sells only the next few years of payments. The buyer takes less risk, so you get a better deal on those payments. The rest of the note stays yours.
- Wait for more history. If your note is brand new, a few more months of on-time payments can help.
- Get your papers in order. Recorded documents and bank records of payments make a buyer more confident.
- Get two offers. I always send two: the whole note and a partial. Compare them side by side.
What to watch out for
A quote is only as good as the buyer behind it. Some buyers quote high to get you on the phone, then drop the price at closing. Read red flags when choosing a note buyer before you sign anything.
Frequently asked questions
How much is a mortgage note worth?
Usually about 70% to 85% of the balance. It depends on the payer's history, the property value, the equity, the rate, and the paperwork.
Why is my note worth less than the balance?
Because a buyer pays you today and waits years to collect. Read why is my note worth less than the balance.
Can I find out what my note is worth for free?
Yes. Use the calculator for a ballpark, or get a free quote. There's no cost and no obligation.
Does the property value affect my note's value?
Yes, a lot. If there isn't much equity, the price drops, even with a great payer.
Is a land contract worth the same as a mortgage note?
Close. Both can sell well. State rules on forfeiture and foreclosure can shift the price a little. See the state guides for Ohio, Michigan, and Texas.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.