Your payer was fine for years. Now they're late, or they've stopped. You're stuck with the stress, the phone calls, and maybe a foreclosure you don't want to handle. Can you still sell the note?
Yes. People sell notes with late payers all the time. The price is lower, and it's figured differently. This article explains how, and what to do before you sell.
Short version: When the payer is current, the price is based on the payments. When the payer is behind, the price is based mostly on the property.
How a buyer prices a note that's behind
When a note is paying, a buyer prices it off the payment stream. When it isn't, a buyer asks a different question: if I have to take this property back, what will I end up with?
That depends on a few things:
- What the property is worth today, in its current shape
- How much equity there is between the balance owed and the value
- What it costs to fix the default. Legal fees, back taxes, and insurance
- How long it takes. Foreclosure can take months, sometimes over a year
- The condition of the property and whether anyone lives there
- Your state's rules. In Ohio, a land contract buyer who has paid five years or 20% gets foreclosure protection. In Indiana, courts often treat land contracts like mortgages.
So equity is everything here. A late payer on a house worth far more than the balance is still a sellable note. A late payer on a house worth less than the balance is a tough one.
A rough example
These numbers are for illustration only. Every deal is different.
| Detail | Amount |
|---|---|
| Home value today | $90,000 |
| Balance owed | $60,000 |
| Payer status | 6 months behind, still living there |
A buyer might work it out like this:
| Step | Rough amount |
|---|---|
| Home value | $90,000 |
| Minus cost to sell it later (agent, closing) | about $7,000 |
| Minus legal costs to foreclose | about $5,000 |
| Minus back taxes and insurance | about $3,000 |
| Minus repairs | about $8,000 |
| Minus a year of holding costs | about $3,000 |
| What the buyer might net if it goes to foreclosure | about $64,000 |
The buyer then needs a profit for their time, money, and risk. So the offer would come in well below $64,000. Offers on deals like this often land somewhere around half to two-thirds of that number.
Here's the good part. Many late payers catch up once someone works with them. A buyer knows that, and it's why they'll buy late notes at all.
What to do before you sell
You may get a better result if you try a few things first.
Talk to the payer
Find out what happened. A job loss? A medical bill? A short-term problem is different from someone who's given up. Keep it calm and keep notes.
Offer a plan
A payment plan to catch up, or a short break followed by higher payments, can get things back on track. Get any new plan in writing.
Consider a loan modification
If the payer can afford a lower payment, changing the terms can save the note. A reperforming note, one that's paying again after a default, sells for much more than a non-paying one.
Use a licensed servicer
A loan servicer can send proper notices, keep records, and handle collection the right way. It's a small cost that protects your note and your price.
What not to do
- Don't change the locks or remove belongings. That's illegal self-help in most cases, even on a land contract.
- Don't take cash with no receipt. Every payment should be documented.
- Don't threaten. It can create legal trouble and makes a workout less likely.
- Don't skip the required notices. Ohio and Indiana each have rules. A misstep can restart the clock.
When selling is the right call
Selling a late note makes sense when:
- You don't want to manage a foreclosure.
- You need the cash now, not a year from now.
- The payer won't respond or work with you.
- The property is far away or in rough shape.
A note buyer who works out defaults does this every week. You hand it off and move on.
Be honest with the buyer
Tell the buyer exactly how far behind the payer is, what they've said, and anything you know about the property. It'll come out in due diligence anyway. Being up front gets you a real number faster, and it keeps the offer from changing late.
Frequently asked questions
Can I sell a mortgage note that's in default?
Yes. The price will be based mostly on the property's value and the cost to resolve the default, not on the payments.
How much is a non-performing note worth?
It depends on the property value, the equity, and the costs to fix the default. It's often a fraction of the property's value after those costs. Get a quote for a real number.
Should I foreclose first and then sell the property?
Sometimes that brings more money. It also takes time, money, and effort, and it carries risk. Many sellers would rather sell the note and be done.
My payer is only a month or two behind. Does that hurt my price?
A little. A note that's recently late but still has a long track record can still sell well, especially if the payer catches up. Be up front about it.
Can I sell a land contract if the buyer stopped paying?
Yes. Read the state guide for Ohio or Indiana to see how each state handles defaults.
Dealing with a late payer right now? Send me the details and I'll tell you where you stand. No pressure.
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.