Selling a note is a good idea when cash now is worth more to you than a larger amount spread over years, or when the risk of holding the note has started to worry you. It is a poor idea when you have no use for the money and your payer is reliable.
What you give up
Every sale costs something. A buyer pays less than the balance your payer owes, and the difference is the discount. As an example with round figures, a $90,000 balance sold for $81,000 is a $9,000 discount, 10% of the balance. You also give up the interest the payer would have paid you over the remaining years, so the difference between selling and keeping is larger than the discount alone.
Example only. The figures show the arithmetic and are no estimate of what any note would sell for.
What you get in return is that all of the money arrives now and none of it depends on the payer. Whether that trade is a good one comes down to what the money does for you, how sure those future payments are, and how large the discount on your own note would be. The last of those is the one you cannot work out alone, and you can learn it by having the note priced before you decide anything.
Situations where selling fits
- The cash solves something specific. Paying off a debt that costs you more than the note earns, covering a medical bill, or buying a property are uses where a lump sum does a job that monthly payments cannot.
- The payer has become a concern. Late payments, lapsed insurance or unpaid property taxes all raise the chance that you end up chasing money or foreclosing. A sale passes that risk to the buyer.
- The note has to be divided. Heirs, divorcing spouses and business partners can split cash far more easily than they can split a monthly payment.
- You are done being the lender. Tracking payments on a property you no longer own has a cost that appears on no statement.
- Too much of your money sits in one place. A single note relies on one payer and one property.
Signs you should keep it
Holding is the better choice if you have no particular use for the money, or if the monthly payment is income you rely on and could not easily replace. The same goes when the payer has paid on time for years and has real equity in the property, and when the note’s interest rate is higher than you could safely earn elsewhere. A very new note is a case for waiting, since a longer payment record gives a buyer more to go on. If more than one of these describes you, think through whether to sell your note or keep it at more length before asking for offers.
Selling only some of the payments
Framing the choice as sell or keep leaves out a third course. In a partial you sell a set number of payments and the rest of the note comes back to you. If the amount you need is well below the value of the whole note, a partial sized to that amount gives up fewer payments than a full sale would. It also leaves you relying on the payer for the payments that return, and it depends on the note being one a buyer will take in part. Look at a partial and a full sale with the numbers side by side before ruling either out.
Tax and the plan for the cash
Receiving the money in one year instead of over many can change what you owe in tax and when. The rules depend on how the note was created and on your own position, so read the general picture of taxes when you sell a note and then speak to a CPA before you accept an offer.
The other point that gets missed is where the cash goes. A sale makes sense only if the money has somewhere better to be, and a lump sum left in a checking account may earn less than the note was paying you.
The figure to work out first
Multiply your monthly payment by the number of payments left. A note paying $900 a month with 120 payments to go, for example, would bring in $108,000 if every payment arrived. Any offer has to be weighed against that total, and it takes two minutes to work out before you take the first step in selling a note.
Set the price you are quoted beside it, and beside that write what the cash is for. If keeping the note comes out ahead once all three are in front of you, that is a fine result.
Related questions
Do I lose money when I sell a note?
You receive less than the balance owed and less than the total of the remaining payments. In exchange you get the money now and pass the risk of non-payment to the buyer. Whether that is a loss depends on what you do with the cash and how certain those future payments were.
Is it better to sell part of a note than all of it?
It can be, if you need a set amount that is well below the value of the whole note. A partial sells only some payments and returns the note to you afterwards. You keep the risk on the payments that come back, so it suits notes with a reliable payer.
When is the best time to sell a note?
There is no single best moment. A longer record of on-time payments generally helps the price, and a payer who has started paying late hurts it. The practical answer is to get current offers and compare them with what keeping the note would pay you.