My Borrower Wants to Sell the Property. What Happens to My Note?

In most cases your note is paid off in full at the closing of the borrower’s sale. The closing agent asks you for a payoff statement, your payoff comes out of the sale proceeds, and you release the lien. What else can happen depends on your documents: whether the note has a due-on-sale clause, whether the borrower wants someone else to take over the payments, and whether the property is worth enough to pay you.

The borrower is the person who owes the note and lives in, or owns, the property behind it. When they decide to sell, you are not a bystander. Your lien, the recorded mortgage, deed of trust or land contract that secures the note, sits on the title, and a buyer’s title company will not close without dealing with it.

The usual path: paid in full at closing

1. The request. The title or escrow company handling the sale asks you, in writing, for a payoff statement good through the expected closing date.
2. The payoff statement. You send the unpaid principal, interest up to the payoff date, a daily interest figure in case closing slips, and any charges your note allows, such as unpaid late fees.
3. Closing. The closing agent pays you from the sale proceeds, usually by wire.
4. The release. Once the funds have cleared, you sign the document that removes your lien and return the original note marked paid. How that works for each type of instrument is set out in what to do when a note is paid off.

Illustrative example. Round numbers.

The borrower is selling the house for $260,000. Your note has $84,000 of principal left at 6%, last paid through the 1st of the month, and closing is set for the 21st. Daily interest is $84,000 times 6%, divided by 365: about $13.81. Twenty days of interest adds about $276, so your payoff is about $84,276, plus any unpaid fees your note allows. If closing slips three days, the daily figure adds about $41.

Check your documents first

Is there a due-on-sale clause?

A due-on-sale clause lets the lender, which here means you, demand the whole balance if the property is sold or transferred without your consent. Most standard mortgage and deed of trust forms contain one. With it, you decide whether the note is paid off or whether you will let a new owner take it over. Without it, the borrower may be able to sell the property subject to your lien, leaving your note in place with a new owner of the property behind it.

Is there a prepayment charge?

Most private notes can be paid off early without penalty, but some include a prepayment charge. If yours does, it belongs on the payoff statement. Rules on prepayment charges differ by state and by type of loan, so check with an attorney before adding one you have not charged before.

Is it a land contract?

On a land contract, also called a contract for deed, you still hold legal title until the contract is paid. The buyer’s sale usually means paying off the contract at closing and you deeding the property across. If the buyer wants to assign their contract to someone else instead, read the contract’s terms on assignment and get legal advice.

When the new owner wants to take over the payments

Sometimes the borrower’s buyer wants to assume the note: keep your payments running in their own name instead of paying you off. You are not obliged to agree, and with a due-on-sale clause in place you can say no.

If you are open to it, treat the new owner as a new borrower. Ask for a credit application, proof of income and a down payment record, and put the assumption in a written agreement prepared by an attorney. A new payer has no payment history with you, and a buyer of your note later will price that. A note that changed hands to an unknown borrower without paperwork is harder to sell.

Watch for a quieter version: the property is sold and nobody tells you, and the payments keep coming from someone else’s account. If you see a new name on the checks, find out what happened. It may be a transfer your note allows you to call due.

When the sale will not cover the note

If the property is worth less than the borrower owes everyone with a lien, the borrower may ask you to accept less than your payoff so the sale can close. This is called a short sale. You can accept, negotiate or refuse. Before you agree, ask for the purchase contract, the settlement statement and what the other lienholders are being paid. If yours is not the first lien, the order of payment matters more: the first lien is paid before you. Compare the short payoff with what a note buyer would pay for the note as it stands, and with what foreclosure would cost.

Should you sell your note before the borrower sells?

Usually not. If the borrower’s sale is real and the property is worth more than the payoff, you are about to receive the full balance. Selling the note now means accepting a buyer’s discount for a note that is about to pay at par, and the buyer of your note would collect the difference.

Selling first can make sense when the sale looks doubtful: the borrower talks of selling but has no contract, the market is soft, or the payoff may come up short. In that case get a price and compare it with the realistic outcomes of waiting. If you had already sold a partial on this note, the payoff is shared between you and the partial buyer under your agreement; see what happens if the payer pays off early during a partial.

A checklist for the holder

• Get the request for a payoff in writing, from the closing agent, and confirm who they are before sending figures.
• Reconcile the balance with your own records and with the borrower before you send a figure.
• Give a good-through date and a daily interest amount.
• Send wire instructions by a channel you trust, and confirm them by phone. Wire fraud aimed at real estate closings is common.
• Do not sign the release until the money is in your account.
• If the property still carries your own bank loan, as in a wraparound, coordinate both payoffs. See notes on a property with an underlying loan.

The closing agent’s role is explained in what a title company does. If the borrower’s plans are uncertain and you want to know what the note would bring today, ask us for a price. It is free, carries no obligation, and if waiting for the payoff is the better call, we will say so.

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