No single percentage makes a discount fair. A fair discount matches the real risk and length of your note, has been tested against other buyers, and can be explained to you line by line.
Reading a discount on one note
Take a note that pays $1,140 a month at 6%, with 168 payments left and about $129,400 still owed. A buyer who wants an 8% yield, which is the return on the money they put in, offers $115,000.
| Balance still owed | About $129,400 |
|---|---|
| Price offered | $115,000 |
| Discount in dollars | $14,400 |
| Discount as a share of the balance | 11.1% |
| Yield the buyer earns | 8% |
Illustrative example. It is one note at one yield and should not be read as a benchmark for yours.
Whether 11.1% is fair cannot be read from the percentage. Look at the bottom row and ask whether 8% is a reasonable return for this payer, this property and 14 years of waiting. If another buyer would accept a lower yield on the same note, the discount shrinks, and that comparison is what tells you where an offer stands.
Why no one can give you a standard figure
A note discount is the gap between the balance your payer owes and the price a buyer pays. A buyer chooses the yield they need and the discount falls out of the math.
Time drives part of it: the longer the note runs and the lower its rate, the larger the discount needed to reach the same yield. Risk drives the rest. A payer with a short or patchy record, thin equity in the property, a second lien or missing paperwork each push the yield up. The same percentage can therefore be generous on one note and poor on another. What your note is worth has to be worked out from the note itself, and anyone who quotes a normal discount without seeing it is guessing.
How to test an offer
- The yield is visible. A price without the return it is built on cannot be judged, so ask for the yield in plain terms.
- The yield fits the note. Ask what about your note led to that figure. A fair answer names the payment record, the equity, the property type or the lien position, which is where the note stands in line if the property has to be sold to pay debts.
- It has been compared. One offer tells you what one buyer will pay, and a second tells you whether the first was in line. If you hold only one, have your note priced here and set the yields side by side.
- The earnings are shown. A broker’s fee should appear in dollars. A direct buyer charges no separate fee, and their profit sits inside the yield.
Signs of an unfair one
- The buyer will not say what yield they used.
- The price was quoted before the buyer asked about the payer or the property.
- You are told the offer expires today.
- The reasons given would apply to any note as much as to yours.
- The buyer discourages you from getting another quote.
Each of these is also a way to spot a lowball note offer before you have signed anything.
When a fair discount is still too much
A buyer can price your note honestly and the answer can still be a sum you would rather not give up. A partial is one way round it: you sell only the number of payments needed to raise the cash you want, the discount on a partial applies to that slice alone, and the rest of the note comes back to you. Whether a buyer will take a slice depends on the note, mainly on the payments left and the equity behind them.
Keeping the note is the other way. If you have no need for the money now, the payments you already receive add up to more than any sale will pay, provided the payer keeps paying.
Checking an offer you already hold
Subtract the offered price from your balance to get the discount in dollars, then divide by the balance for the percentage. To take a round example, a $90,000 balance sold for $81,000 is a $9,000 discount, 10% of the balance. Next, ask the buyer for the yield and for what about your note produced it. The percentage tells you the size of the discount, and those two answers tell you whether it was earned.
Related questions
Is a bigger discount always a worse deal?
No. A long note at a low rate needs a larger discount than a short note at a high rate for the buyer to earn the same return. Compare the yield behind each offer, not the percentage alone.
Can I negotiate the discount?
Yes. The most effective way is to have another offer in hand and to ask each buyer what yield they used and why. Fixing problems a buyer has marked down, such as missing documents, can also improve the figure.
Does the discount include the broker's fee?
It depends on how the offer is presented. Ask for the buyer's price, any fee and your net amount as separate figures. Our worksheets show what we earn on its own line.