You're owed $60,000. A note buyer offers $47,000. Your first thought is, "Where did $13,000 go?"
It's a fair question. Here's the honest answer.
Short version: You're trading payments you'd get over many years for cash today. A dollar in 10 years is worth less than a dollar now. The buyer also takes on the risk that the payer stops paying. The discount covers both.
A dollar later is worth less than a dollar now
Think about it this way. Would you rather have $1,000 today or $1,000 in 10 years?
Today, every time. You could use it, invest it, or pay something off. Prices also go up over time, so $1,000 buys less in 10 years.
Your note is a stack of future payments. Some come next month. Some come in 15 years. The far-off ones are worth a lot less today. That's the biggest part of the discount.
The buyer is taking on risk
When you sell, the buyer takes over the risk that:
- The payer stops paying
- The property loses value
- Taxes or insurance go unpaid
- Foreclosure takes a long time and costs money
You've been carrying that risk all along. When you sell, you hand it to someone else. They want to be paid for carrying it.
There are closing costs
A buyer checks the title, the property value, and the paperwork. An attorney or title company closes the deal. On my deals, those costs run about $900 to $1,250. They come out of the offer.
The balance isn't the whole story
Here's the part most people miss. Your balance isn't what you'd collect if you kept the note. You'd collect the balance plus interest.
Example: $62,000 balance at 8%, $592.50 a month, 15 years left.
- Balance: $62,000
- Total you'd collect if you keep it: about $106,650
- Cash today, if a buyer wants 12%: about $49,400
So the question isn't "Why do I lose $12,600 off my balance?" The real question is "Is $49,400 today worth more to me than $106,650 spread over 15 years?"
For some people, yes. For others, no. Both are fine answers.
Is selling worth it?
It depends on what the cash does for you. Selling often makes sense if you:
- Need cash for something big now
- Want to stop worrying about a payer
- Are settling an estate or splitting assets
- Have a better use for the money
Keeping the note often makes sense if you:
- Like the monthly check and don't need the cash
- Trust your payer
- Have a long time to wait
Read should you sell your note for more help deciding.
How to narrow the gap
- Sell part, not all. A partial sale sells only the next few years of payments. Near-term payments carry less risk and lose less to time. The rest stays yours.
- Show a strong payment history. Bank records of on-time payments help.
- Show the equity. A recent value estimate on the property can raise your offer.
- Clean up the paperwork. A recorded mortgage and a signed note make the buyer more confident.
- Get a real quote, not a teaser. A high number that drops at closing doesn't help you. See red flags when choosing a note buyer.
Frequently asked questions
Will anyone pay the full balance for my note?
It's rare. Only notes with a high rate, short term, great payer, and big equity come close.
What's a normal discount on a mortgage note?
Most notes sell for about 70% to 85% of the balance. Some strong notes sell for more.
Is the discount the same as a fee?
No. Most of it is the time value of money and risk. Closing costs are a small part.
Does a higher interest rate on my note help?
Yes. A higher rate means bigger payments for the same balance, which raises the value.
How can I see what my note is worth?
Try the note value calculator, or read how much is my mortgage note worth.
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.