From a sale, only when the rate on your note is at least the return a buyer wants. A buyer who pays the full balance today earns just the rate written on your note, so one who wants more has to pay less. Full value is still collectable by keeping the note, and a sale can be arranged so that the shortfall is smaller.
What the gap looks like on one note
This note pays $1,140 a month at 6%, with 168 payments left and about $129,400 still owed. The buyer wants an 8% yield, yield being the return earned on the money put in.
| Sell it all | Sell 60 payments | Keep it | |
|---|---|---|---|
| Cash today | $115,000 | $56,200 | $0 |
| Total you receive | $115,000 | $179,320 | $191,520 |
| Who carries the risk afterwards | The buyer | The buyer for 5 years, then you | You, for 14 years |
Illustrative example. Totals add up the scheduled payments and assume the payer keeps paying. They are not adjusted for the value of money over time.
The full sale leaves $14,400 of the balance behind, which is 11.1%. The other columns pay more in total, although much of that money arrives years from now and only if the payer keeps paying. Which column suits you depends on how much cash you need and how soon you need it.
Why a sale falls short of the balance
Your note pays a fixed rate. When a buyer wants a higher return than that rate, the only way to get it from fixed payments is to pay less than the balance, and the difference is the discount. The buyer is also taking over things you carry today, and they are the other reasons notes sell for less than the balance: the wait for the money, the chance that the payer stops, and the cost of collecting if that happens. Swapping years of payments for one check has a price, and the discount is that price.
When a price at the balance is possible
The same math runs the other way. If the rate on your note is at or above the yield a buyer wants, the price comes out at or above the balance. A seller-financed note whose rate was set low to help the property sell will sit below what an investor asks for the risk, and a note like that cannot get there. One with a high rate, a strong payer and plenty of equity in the property has the best chance of coming close, since those are the things that decide what a note is worth to a buyer. Ask any buyer who prices your note whether it falls in that group, and what yield they would need to see.
Keeping more of the value
Holding the note to its last payment is the only route that pays every dollar of principal and interest. It also leaves all of the risk and all of the waiting with you. If you have no need for the cash, keeping it may well be the better choice.
If you need some cash, a partial sells a set number of payments and returns the rest of the note to you, so the discount applies only to the slice you sell. A partial needs a note with enough payments left and enough equity for a buyer to take a slice of it, so it cannot be arranged on every note. When you ask us to price your note, say how much cash you need, and if the note suits a partial we can price one beside the full sale.
If you sell the whole note, the price depends on who is bidding. Buyers want different yields and see risk differently, so a single offer shows you one buyer’s view and a second shows you whether the first was in line. You can also deal with the things a buyer would mark down before you ask for a price. Missing paperwork, an unproven payment record and unpaid property taxes all push the yield up, and putting them right is the main way to raise the value of your note before you sell.
Quotes that promise full value
A quote at or near the balance, given before the buyer has seen your documents, deserves questions. Ask what yield it is based on and what would cause it to change. An opening number that is high and then cut during the buyer’s review is one of the signs covered in how to spot a lowball note offer.
The numbers to work out first
Multiply your payment by the payments left to get the total you would collect by keeping the note. Then write down how much cash you actually need and by when. The first is the most the note can ever pay you, and the second tells you how much of it you have to give up. Set each offer you receive, full or partial, beside those two numbers and see how much of the total it asks you to give up for the cash you need.
Related questions
Is there any way to receive every dollar my note is due to pay?
Yes, by holding it until the last payment. That is the only route that pays all the principal and all the interest. It also leaves the waiting and the risk of non-payment with you.
Would my payer pay me the full balance if I asked?
A payer who refinances or pays off early owes you the full balance, so it can be worth asking. Whether your payer can raise the money is another matter, and it depends on their credit and on lenders at the time.
Does a partial sale avoid the discount?
It limits the discount to the payments you sell. The rest of the note comes back to you undiscounted. Whether a buyer will take a slice depends on the payments left and the equity behind the note.