In money you have to find up front, yes. A note sale does not ask you to fund a legal case, while foreclosure means paying attorney and holding costs before you recover anything. Selling carries a cost of its own, the discount, and that can be larger than a foreclosure bill. Which route leaves you with more depends mainly on the equity in the property.
Money spent against money never received
Foreclosure costs are money you pay out. The cost of a note sale is money that never reaches you. Both reduce what you end up with, so they have to be set side by side before “cheaper” means anything.
| Selling the note | Foreclosing | |
|---|---|---|
| Cash you pay out | Ask for any costs of the sale to be itemized in the offer. | Attorney fees, court or trustee fees, title work, notices |
| Cost you carry while waiting | None after closing | Property taxes, insurance, repairs, and no payments coming in |
| Cost built into the result | The discount on a non-paying note | Selling costs and any drop in the property’s value |
| Your time | Supplying documents | Managing the case, then a property |
| Risk that it costs more than expected | Low once the buyer has finished its checks | Real. A contested case or a bankruptcy filing adds time and fees. |
The foreclosure column has no dollar figures because they vary too much by state, by county and by how the borrower responds. A local real estate attorney can estimate them for your case.
Why the discount runs deep on a note in default
A discount is the difference between the balance owed on your note and the price a buyer pays for it. Where the borrower pays on time, it reflects the buyer’s wait for their money. On a non-performing note, the kind you hold when you are selling a note whose payer has stopped paying, the buyer is also taking on the whole right-hand column above: the legal costs, the delay and the uncertainty. They subtract all of that, plus a return for the risk, from what they will pay. The foreclosure cost has not gone away when you sell. It has been priced into the offer along with the buyer’s profit.
Working out your own comparison
- Estimate what foreclosure would recover. Take a realistic sale value for the property in its present condition. Subtract the cost of selling it, unpaid property taxes, any lien that ranks ahead of yours and the attorney’s estimate of the legal cost. A lender is generally limited to recovering what it is owed, so ask the attorney what happens to any amount above that.
- Allow for the wait. That money arrives at the end of the process, and you fund the costs in the meantime.
- Get the note priced. Send us the note details and we will put it in front of buyers who purchase non-paying notes. This is a figure you can have in writing before you commit to either route.
- Weigh the two for certainty as well as size. The foreclosure figure is an estimate. A note offer becomes a fixed amount once the buyer’s checks are complete.
Where each route comes out ahead
Selling tends to cost less when equity is thin. Equity is what the property is worth less the debts against it, and with little of it the legal and holding costs can consume most of what a foreclosure would recover. The same goes for a property in poor condition or one that is hard to resell, for a second lien where another lender is paid before you, and for a state where foreclosure runs through the courts, which adds steps.
Foreclosing tends to cost less when the property is worth far more than the balance, leaving room to absorb the costs and still be paid in full. It helps if you hold the first lien on a clean title, have the cash and the time, and are comfortable owning the property for a while.
Routes that cost less than either
If the borrower is willing, a repayment plan or a modified payment can restore the note with no legal case and no discount. A borrower may also agree to hand back the property through a deed in lieu of foreclosure, which can shorten the process, though an attorney should review it first.
Getting both sides of the sum
The comparison needs two figures and you can ask for both this week: a foreclosure estimate from an attorney in the property’s state, and a price for the note. Cost is only one test. Whether you want the property back at all, and the other circumstances in which holders sell, can matter more than the difference between the two figures. Foreclosure rules differ in every state, so treat this page as background and take the attorney’s word on yours.
Related questions
Do I pay anything up front to sell a non-paying note?
Getting a quote from us is free. Any costs of the sale should be set out in the offer and its worksheet, so you can see what you would receive before you agree to anything.
Can I recover my foreclosure costs from the borrower?
Many notes say the borrower owes the lender's costs of enforcement, and those amounts may be added to the debt. Whether you actually collect them depends on the property's value and on state law. Ask your attorney.
Can I sell the note after I have started foreclosure?
Yes. Notes are sold part of the way through foreclosure. Tell the buyer what stage the case has reached and what you have spent, since both affect the price.