Cash Flow Notes: What They Are and How They Are Valued

A cash flow note is a private debt that pays its holder a stream of payments over time, most often a seller-financed real estate note, a land contract or the note from the sale of a business. Because it pays a predictable stream, it can be valued today and sold, in whole or in part, for a lump sum. That is the core idea: future payments can be turned into present cash, at a discount.

This post is the overview: what counts as a cash flow note, how one is valued, and the choices a holder has. Our guides go deeper on each piece.

What makes something a cash flow note

The term is used loosely, but in the private note market it usually means a written promise to pay, made between private parties, with a regular payment schedule. The common types are:

• Real estate notes: a promissory note secured by a mortgage or deed of trust, often created when an owner sells a home or land and carries the financing. See real estate notes.
• Land contracts: also called contracts for deed. The seller keeps legal title until the buyer pays in full.
• Mobile home notes: with or without the land underneath.
• Business notes: created when an owner sells a business and accepts part of the price in payments.
• Commercial mortgage notes: secured by income property, retail or industrial buildings.

Other payment streams, such as structured settlements, annuities and lottery payouts, are sometimes called cash flows too. They are a separate market with different rules. Structured settlement transfers, for example, generally require court approval under state law. We price private real estate and business notes, not those. If you hold one of those, get several quotes and read the transfer rules for your state carefully.

For a short definition with examples, see our glossary entry on the cash flow note.

How a cash flow note is valued

A buyer values a note by asking: what would I pay today for this stream of payments, given the return I need and the risk I am taking? That return is the buyer’s yield. The price is the present value of the remaining payments at that yield. The gap between the unpaid balance and the price is the discount.

The yield a buyer asks for depends on risk. The main factors are:

• How much equity is behind the note (the borrower’s down payment and the property’s value).
• The payer’s credit and payment history. A record of on-time payments is called seasoning.
• The note’s interest rate and remaining term.
• Lien position: a first lien is paid before a second.
• The property type and condition.
• The quality of the paperwork.

The guide on how note buyers calculate a price, yield and discount walks through the math step by step.

A worked example

Say you hold a note that pays $900 a month with 10 years (120 payments) left, at a 7% interest rate. The unpaid balance is about $77,500. A buyer who wants a 10% yield would price it like this. The figures are illustrative.

The full sale works out to about 88 cents for each dollar of balance. The partial gives you less cash, but after 60 payments the remaining 60 payments come back to you. A different buyer, a different yield or a note with weaker equity would change every number.

Why holders sell cash flow notes

• A lump sum need: a purchase, a debt, a medical or family cost.
• Retirement or estate planning: turning a long stream into cash that is easier to plan with or split.
• Payer trouble: moving the risk of a late payer to someone set up to manage it.
• Tired of collecting: no more tracking payments, taxes and insurance.

Selling is not always the right move. If you do not need the cash and the payer is reliable, keeping the note and collecting the full payments is often worth more over time. That is an honest answer, and sometimes the best one. See should I sell my note or keep it.

Full sale or partial

A partial purchase means selling a set number of upcoming payments, or a share of each payment, rather than the whole note. Because the buyer takes less risk over a shorter time, the discount on each dollar is often smaller. Partials suit holders who need a specific amount, not all of the note’s value. Our partial purchases section shows how they work and what to look for in the agreement.

What a buyer will ask for

To quote a cash flow note, a buyer typically wants:

1. A copy of the signed note and the mortgage, deed of trust or contract.
2. The closing or settlement statement from the original sale.
3. A payment history, ideally from a loan servicer.
4. The property address and a recent idea of its value.
5. Proof that property taxes and insurance are current.

The full list is in documents you need to sell a note.

Bottom line

A cash flow note is a stream of future payments, and its value today depends on the yield a buyer needs and the risk they see. Knowing that one idea lets you read any offer: find the yield, check the assumptions, and compare a full sale, a partial and keeping the note. If you want to see those three side by side for your note, you can get it priced with the math shown.