A non-performing note is one where the payer has stopped paying, or has fallen far enough behind that a buyer no longer counts on the payments. The debt is still owed and the note can still be sold, with the price worked out from the property and the cost of collecting.
Where the line is drawn
“Non-performing” is one of the labels buyers put on a note, and no statute fixes the point at which a note earns it. Each buyer applies a test of their own, built around how many payments in a row have been missed and whether the payer is still in contact.
A single late payment that was later made up keeps a note on the paying side of that line for nearly any buyer. Several months of silence, or small payments that never catch up, put it on the other side.
The legal idea that sits beside it is default, meaning the payer has broken a term of the note. Missed payments are the plain case, and what counts as default on a note can also take in unpaid property taxes or lapsed insurance, depending on what your documents say.
What a buyer pays for when the payments have stopped
With a performing note, the buyer is paying for a stream of payments they expect to keep arriving. Once the stream has stopped, what is left to buy is the right to sort the problem out, backed by the property if the payer cannot be brought back.
That moves the buyer’s attention to the property. Its value today caps what they could recover. They want to know whether the taxes and insurance are paid, because unpaid property taxes generally rank ahead of your lien (your recorded claim on the property) and would have to be cleared first. They ask whether anyone is living there and what condition the place is in, since an occupied, maintained house is a lighter risk than an empty one. They also estimate the cost and time of resolving it, which turn on the state and the paperwork.
Why the price falls so far
Buyers work from the return they need on the cash they put in. Here they are paying today for an outcome that is uncertain in both amount and timing, and they may have attorneys, back taxes and repairs to fund before they see any of it. Each of those costs comes off the offer, so the gap between what is owed and what a buyer pays is wider than on a paying note.
Equity does the most to narrow it. Equity is the property’s value above the debt against it. As an example, a $60,000 balance secured by a sound house worth $150,000 has $90,000 of value behind it, and that cushion is what draws stronger offers. The same $60,000 owed on a house that would sell for $55,000 has no cushion at all, and the offers fall to match.
What you can do with a note that has stopped paying
| Route | What it involves | The trade-off |
|---|---|---|
| Work it out with the payer | A catch-up plan or changed terms | Costs little, but depends on the payer following through |
| Enforce the note yourself | Foreclosure or forfeiture through an attorney | You keep the full claim, and you carry the cost and the wait |
| Sell the note as it is | A buyer takes over the problem | Cash and an exit now, at a deeper discount |
A payer who gets back on track and stays there turns the note into a re-performing note, which sells for more, so a workable catch-up plan is worth weighing before you sell at today’s status. Enforcement steps vary by state, so speak to a local attorney before you begin any formal action.
The file that narrows the discount
The payment record is fixed, but the doubt around it can be reduced, and a buyer who can see the whole picture prices in less risk. Put these together before you ask us to price the note, and tell us how many payments have been missed:
- The original note.
- The recorded mortgage or deed of trust.
- A ledger of every payment received, with the date of the last one.
- Proof of where the property taxes and insurance stand.
- Any letters or messages between you and the payer.
Buyers of non-performing notes each have a different plan for the property, so their prices for the same note can sit far apart. That spread is the risk in selling a non-performing note to the first buyer who calls, and a complete file is what lets you put the same facts in front of more than one.
Related questions
Is a note that is one month late non-performing?
No single rule decides it, because each buyer sets the point for themselves. A lone late payment that is later made up is read as a late note. The label applies once several payments in a row have been missed.
Do I have to foreclose before I can sell a non-performing note?
No. You can sell the note as it stands and the buyer takes over the decision about what to do next. If you have already started a foreclosure, tell the buyer, because it changes what they are taking on.
Can I sell only part of a non-performing note?
As the note stands, no. A partial purchase depends on payments arriving, and a non-performing note has none to sell. If the payer starts paying again and builds a record, a partial may become possible later.