I buy notes for a living. I'll still tell you that keeping your note is sometimes the smarter move. This guide helps you decide, with the questions I'd ask myself in your spot.
Short version: Sell if you have a better use for the cash or the note is causing you worry. Keep it if it pays well, the payer is solid, and you don't need the money.
Why notes sell for less than the balance
Before you decide, know the trade. A buyer pays you today for payments that come in over years. They also take the risk the payer stops. So you'll get less than the balance.
Most notes sell for around 70% to 85% of the balance. Strong ones can bring 85% to 90%. Try the note value calculator to see a rough range for yours. Then you can weigh the real numbers.
Selling makes sense when...
You have a better use for the cash
Paying off a credit card at 25% interest with money from an 8% note is a clear win. So is avoiding a high-rate loan for a roof or a car.
The payer has been late
A note that's starting to slip can get worse. Selling while it's still paying usually gets a much better price than selling after it stops. See selling a note when the payer is behind.
You're settling an estate
Heirs often want to split cash, not share a payment for 15 years. Read selling an inherited mortgage note.
You're tired of managing it
Tracking payments, checking that taxes and insurance are paid, sending yearly statements, and chasing late checks all take time. If it wears on you, that's a real cost.
The property is far away
It's hard to keep an eye on a house three states away. If something goes wrong, you'll be dealing with it from a distance.
Keeping it makes sense when...
The payer is rock solid
Years of on-time payments, a lot of equity, and they live in the home. That's a great asset. Don't sell it cheap.
The rate is good and you don't need the cash
If your note pays 9% and your other money earns 4%, the note is doing its job.
Selling would cause a big tax bill this year
Selling usually moves the rest of your gain into the year you sell. Read taxes when you sell an owner-financed note, and check with your CPA.
The middle ground: sell part of it
A partial sale gets you a set amount of cash now. You sell a block of payments, then the note comes back to you. It's a good fit if you need, say, $25,000 but want income later. See partial note sales explained, with real numbers.
Questions to ask yourself
- What would I do with the cash, and is that worth the discount?
- How would I feel if the payer stopped paying next year?
- Do I want to deal with this note for the next 10 or 20 years?
- Would a partial sale give me what I need?
- What would my CPA say about the taxes?
A quick way to compare
Write down two numbers:
- Cash today: what a buyer would pay you.
- What that cash would do: debt it pays off, or what it would earn somewhere else.
Then compare that to the payments you'd keep getting. If the cash does more for you, selling wins. If the payments do, keep the note.
Frequently asked questions
Is it smart to sell a mortgage note?
It can be, if you have a better use for the cash or the note is risky. If the note pays well and you don't need cash, keeping it may be better.
Can I sell my note later if I keep it now?
Yes. As long as it keeps paying on time, you can sell it later. Each year of on-time payments can make it worth more.
Will a note buyer pressure me to sell?
A good one won't. Getting a quote is free and you don't owe anyone anything.
What is the best time to sell a note?
When you have a clear use for the cash and the payer is still paying on time. Notes sell best while they're performing.
Not sure which way to go? Get a free quote. Knowing your number makes the choice easier, and there's no obligation.
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.