A secondary market for notes is where existing notes are bought and sold after they have been created. The original deal between lender and borrower is the primary market, and every later change of owner is a secondary sale. For private notes this market has no exchange and no posted prices, only private buyers who each price by their own rules.
If you hold a note, this is the market you would be selling into. How it is organized accounts for much of what feels odd about a note sale, beginning with the fact that two buyers can quote different prices for the same piece of paper. This page belongs to the note basics guide and assumes only that you know what a note is.
Primary and secondary in one example
You sell a house and agree to let the buyer pay you over 15 years. The two of you sign a note, the written promise to repay, and a mortgage or deed of trust that secures it against the property. That is the primary transaction, the one that creates the note.
Some time later you decide you would prefer a lump sum, and you sell the note to an investor who collects the payments in your place. Nothing new has been lent. An existing note has a new owner, and that is a secondary market transaction. Your payer is not a party to it, and their rate, payment and payoff date stay as written. What changes for them is where the payments are sent.
The bank market and the private market
The phrase “secondary market” covers two very different worlds.
| Institutional market | Private note market | |
|---|---|---|
| What trades | Loans made by banks and mortgage companies | Notes created by individuals and small businesses |
| How they trade | In large pools, to standard rules | One at a time, or in small groups |
| Who buys | Large agencies, funds and institutions | Individual investors, small funds and note-buying firms |
| How price is set | By standard criteria and published market rates | By each buyer, note by note |
| Where it happens | Established trading channels | Direct contact, brokers and online listing sites |
A seller-financed note belongs in the right-hand column. Bank loans are written to common rules so that they can be pooled and sold in bulk, whereas a private note was written by two people and their attorney, or by two people and a form from the internet. No two are alike, so each has to be examined and priced by itself.
What trades in the private market
Private note is a broad term. It takes in seller-financed notes secured by a mortgage or deed of trust on a house, land or commercial property, and land contracts, where the seller keeps title until the buyer has paid. Business notes from the sale of a business trade here too, as do private loans secured by real estate.
Buyers also sort notes by how they are behaving. On a performing note the payer is paying as agreed, and on a non-performing note the payer has stopped. The two draw different buyers, because the first is held for income and the second is a problem to be resolved.
A note need not be sold whole either. A buyer can purchase a set number of payments, called a partial, after which the rest of the note returns to the holder. Only a note with a steady payer and enough payments left to divide suits a partial purchase.
Why anyone trades
The market exists because the two sides want opposite things. A note holder has income spread over years and may want cash now, for retirement, an estate, a debt or another purchase. An investor has cash now and wants income spread over years. A sale lets each swap into the position they prefer.
Who buys
| Buyer | Where the money comes from | What they look for |
|---|---|---|
| Individual investors | Savings or a self-directed retirement account | One note at a time, of a kind they can understand, such as a performing first lien |
| Note-buying companies | Their own capital, credit lines and investors | A steady flow of notes, to hold or to resell |
| Small private funds | Money pooled from several investors | Larger balances or groups of notes that fit a stated strategy |
| Specialist buyers | Varies | One niche: non-performing notes, land, mobile homes, business notes |
| The payer | A refinance or savings | To pay their own debt off early, sometimes at a discount |
How a note travels
A note may change hands more than once. A holder sells to a note-buying company, which keeps it or sells it on to an individual investor, and a broker may sit between any two of them.
Everyone in that line is paid out of the same stream of payments, and a buyer who plans to resell has to buy low enough to leave room for their own profit. The route therefore matters to a holder: the fewer hands between you and whoever will finally hold the note, the more of its value can reach you.
How prices form without an exchange
Private notes have no screen, no last-sale price and no public record of what any note sold for, so each buyer prices alone. They start from the yield they want on their money and work back to what they can pay for the remaining payments to earn it. When that yield is above the note’s interest rate the price falls below the balance owed.
The yield is each buyer’s own decision. It reflects what their money costs them, what else they could buy that week, how risky this note looks to them and how much they want notes of this kind, which is why offers differ from buyer to buyer. The step from a yield to a price is plain arithmetic, and how note buyers calculate a price is the same for all of them once the yield is chosen.
What moves the whole market
Individual notes are priced on their own facts, but some forces push prices in one direction together. When safe investments pay more, note buyers ask for more too, and a higher required yield means lower prices for existing notes. Rising property values put more equity behind a note and make buyers more comfortable, and falling values do the reverse. More money looking for notes lifts prices and less lowers them. An offer therefore reflects the moment as well as the note.
What this means if you hold a note
- One offer is one opinion. With no public price, a single quote tells you what one buyer wants to pay. It takes several quotes to show what the note is worth.
- The buyer has to fit the note. A note on rural land sent to a buyer who wants suburban houses will get a poor price or none. The same note sent to a land buyer may do well.
- Information is your side of the bargain. In a market where every note is examined by hand, clear documents and a provable payment record are what you bring to the table.
The first two are what a broker is for: knowing which buyers suit which notes and putting their prices next to each other, which is most of what a note broker does. To have that done for yours, tell us about your note.
Before you sell into it
A sale here is slower than selling a share of stock, because a buyer has to check the title, the property and the payment record before funding, and less transparent, because prices are private. It also involves a discount whenever the buyer’s required yield is above the rate on the note. For a holder who likes the income and has no pressing need for cash, keeping the note can be the better choice.
The decision deserves real numbers either way, and in a market with no posted price the only source of them is the buyers. Until more than one of them has priced your note, any figure you have in mind for it is a guess.
Related questions
Is there a public price list for private notes?
No. Sales are private and nobody publishes what individual notes sold for. Each buyer sets a price from their own required return and their view of the risk, which is why asking several buyers is the only way to find a note's value.
Can a note be sold more than once?
Yes. A buyer may hold your note to the end or sell it to another investor. The payer's terms stay the same each time. Only the party entitled to the payments changes, and the payer must be told where to pay.
Do banks buy private seller-financed notes?
A single private note is a poor fit for an institution set up to buy standard loans in volume. Individuals, note-buying companies and small funds that examine each file by hand are the buyers a holder will meet.