Yes. A note where the borrower has stopped paying is called a non-performing note, and there are buyers who specialize in them. Expect a lower price than a paying note would bring, fewer bidders, and a buyer who studies the property more closely than the borrower.
Why someone would buy a note that is not paying
The borrower’s promise has failed, but your lien, the legal claim on the property that secures the debt, is still in place. A buyer of non-performing notes is buying that claim and the right to enforce it. They intend to work out a new payment plan with the borrower, accept a negotiated payoff, take the property back by agreement, or foreclose and sell it. Each of those takes money and time, and the buyer subtracts the expected cost from what they will pay you.
What decides the price
On a paying note a buyer studies the payment stream. Here they study what stands behind it.
| Factor | Raises the price | Lowers the price |
|---|---|---|
| Property value against balance | Value well above what is owed | Value near or below what is owed |
| Lien position | First lien | Second lien, behind another lender |
| Property taxes | Paid up | Unpaid, since tax debts can take priority over your lien |
| Occupancy and condition | Lived in and looked after | Vacant or damaged |
| Paperwork | Original note, recorded lien, full payment record | Missing originals or gaps in the record |
| Borrower’s status | In contact and willing to talk | In bankruptcy, or cannot be found |
| Location | States where enforcement tends to be quicker | States where it tends to be slow and costly |
We do not quote a typical price for a non-performing note, because the range is too wide for a single figure to be honest.
What makes a non-paying note hard to sell
- No real equity. If the property is worth less than the debts against it, a buyer has little to recover.
- An unsecured note. With no property behind it, there is nothing to enforce against but the borrower.
- An active bankruptcy. A sale may still be possible, but the court process limits what any owner of the note can do. See selling a note when the borrower has filed bankruptcy.
- A broken paper trail. A lien that was never recorded, or a note that cannot be found, has to be put right first.
What you can do before selling
Write down the history while it is fresh: the date of the last payment, the amounts missed and every contact with the borrower since. Call the county tax office about the property taxes and confirm whether the property is still insured. Find out who is living there, since a drive past or a call to the borrower answers one of a buyer’s first questions. When you send us the note details, include when payments stopped, what you know about the property and whether anything has been filed.
Two things are better left alone. There is no need to start foreclosure just to make the note saleable, because buyers purchase before or after a case is filed. If one is already under way, tell the buyer where it stands and what you have spent. And hold off on formal default notices until a local attorney has checked them, since a notice worded or timed wrongly can cause trouble later.
If the borrower can be brought current, the note becomes far more valuable. A note that has returned to regular payments after a default is called re-performing, and each month of renewed payments gives more buyers a reason to bid.
Is a partial sale possible?
Seldom, because a partial purchase is the sale of a set number of future payments and depends on those payments arriving. With none arriving, a full sale is the practical route, and a partial on a non-performing note is the exception.
Should you sell or enforce it yourself?
If the property is worth much more than the balance and you have the money and time, enforcing the note yourself may recover more than a sale would. If the equity is thin, or you want neither the cost nor the property, selling gives you a known amount and ends your part in it. Before choosing, work out whether selling is cheaper than foreclosing on your own figures.
What to tell a buyer about the default
A buyer will find out everything about the default during their checks, so the price that survives to closing is the one based on the full story. Leaving out an unpaid tax bill or a case already filed only moves the price cut from the first offer to the days before closing. Some defaulted notes cannot be placed, and you will get a straight answer from us on whether yours can. A default is among the harder situations in which to sell a note, but a buyer who has heard all of it at the start has less reason to change the number later.
Related questions
How many missed payments before a note counts as non-performing?
There is no single rule, and buyers draw the line in different places. The term describes a borrower who has stopped paying, as opposed to one who pays late, so a single late payment does not put a note in that category. Ask each buyer how they would classify yours.
Does the borrower have to be told I am selling?
Read your note, but a note can generally be transferred without the borrower's consent. After the sale the borrower is told in writing who the new owner is and where to send payments. Notice rules vary, so leave that step to the buyer or its servicer.
Am I still responsible for anything after I sell a non-paying note?
The purchase agreement sets that out. Expect to be asked to confirm certain facts about the note, such as the balance and that you own it. Read those statements with care, since a buyer can come back to you if one proves untrue.