A note buyer picks the return they need, called the yield, then works out what they can pay today so that your payments deliver it. The discount is whatever gap that leaves between the price and your balance.
Sellers tend to argue about the discount while buyers think in yield. Once you see how one produces the other, you can check an offer line by line.
Yield is the decision, discount is the result
Yield is the annual return a buyer earns on the money they put into your note, assuming every payment arrives as scheduled. Think of it as the buyer’s version of an interest rate.
Your note already has an interest rate, which is the return you agreed to accept when you financed the sale. The buyer had no part in that agreement. They set their own target from what their money costs them, what else they could buy with it, and how risky they judge your note to be.
The discount is the balance owed minus the price paid, and nobody chooses it directly because it falls out of the yield calculation.
Keep that in mind when you compare offers. Two buyers can use the same yield and quote different discounts if they are working from different balances or a different count of remaining payments. One buyer can also quote a small discount on a short note and a large one on a long note without changing their yield at all.
The calculation, step by step
- Lay out the cash flow: every remaining payment and the month it is due.
- Choose the yield, and convert it to a monthly rate if the note pays monthly.
- Discount each payment back to today. A payment due in one month is reduced by one month of yield, and a payment due in 100 months by 100 months of yield, compounded.
- Add the results. The total is called the present value, and it is the most the buyer can pay and still earn their yield.
A financial calculator or a spreadsheet does all of this in one line. Underneath it is one idea, that each payment is worth a little less the longer the buyer has to wait for it. With either tool you can calculate the present value of your own note and see how close an offer comes to it.
The same note at two yields
The example note on this site pays $1,140 a month, has 168 payments to go and was written at 6% interest.
| Yield used | Present value of the payments | Discount from the balance |
|---|---|---|
| 6%, the note’s own rate | About $129,400 | $0 |
| 8%, the buyer’s target | $115,000 | $14,400 (11.1%) |
Illustrative example. The 8% yield is used across this site to keep the figures consistent, and it is neither a quote nor a market rate.
The first row deserves a second look. Price any note at its own interest rate and you get its balance, because a balance is simply the value of the remaining payments at the rate written on the note. The discount exists only because the buyer wants more than the note pays.
On this note, a yield two percentage points above the note rate became an 11.1% discount. The same spread would produce a smaller discount on a shorter note and a larger one on a longer note.
Why time makes the discount grow
The yield is charged for every month the buyer waits, so near payments barely feel it and distant ones feel it a great deal.
What a buyer pays for different slices of the example note, all at the same illustrative 8%, shows this. The next 36 payments add up to $41,040 and the buyer pays $36,400 for them, about 89 cents for each dollar of payments. All 168 add up to $191,520 and the buyer pays $115,000, about 60 cents for each dollar. The early payments keep most of their face amount and the late ones lose much of it.
Selling part of a note can make sense for the same reason, because a partial is priced on a smaller set of near payments, the ones that lose least.
What pushes a buyer’s yield up or down
If the yield decides the price, the useful question is what decides the yield. A buyer starts from a base that reflects their own cost of money, then adjusts for the things that make a note worth more or less in the file in front of them.
| What the buyer sees | Effect on yield | Effect on your price |
|---|---|---|
| Years of on-time payments with records | Lower | Higher |
| Plenty of equity in the property | Lower | Higher |
| First lien on an owner-occupied house | Lower | Higher |
| A new note with little history | Higher | Lower |
| Weak payer credit with nothing to offset it | Higher | Lower |
| Missing or flawed documents | Higher | Lower |
We do not publish a going rate for yields, because no single number exists. The yield a note buyer looks for moves with the wider interest-rate market and differs from one buyer to the next.
Which number to compare between offers
When you hold more than one offer on the same note, compare the price, since it is the only figure that reaches your bank account.
The yield tells you why the prices differ. If one buyer priced at a higher yield, ask what they saw that the other did not. The answer may be a real risk in your note, or it may be that buyer’s appetite and nothing more.
Treat the discount percentage with care. It is handy shorthand, but it cannot be compared between notes of different lengths or rates. A friend who sold a five-year note at a small discount did not get a better deal than you would on a fourteen-year note at a larger one, because they sold a different stream of payments.
Where a broker’s fee sits
If a broker is involved, their pay has to come from somewhere in these numbers. It can be the difference between what the end buyer pays and what you receive, or a fee set out separately. Either is a normal way for a broker to be paid, provided you can see it.
The document that shows it is a pricing worksheet, which lists the balance, the yield, the present value, the discount and the broker’s earnings. One comes with every offer we bring you, so if you ask us to price your note, you can read each of these figures for it and check them.
The figures to ask a buyer for
You do not have to run the calculation yourself, but you do need its inputs and its result:
- the balance the buyer used, and its date
- the number of payments they counted
- the yield
- the price that results
With those in hand, anyone with a spreadsheet can confirm an offer. A buyer who gives you the balance, the payment count and the price has given you enough to work the yield out as well, which is a good reason to insist on all of them in writing.
Related questions
Is the yield the same as the interest rate on my note?
They are different rates. The interest rate is what the payer pays you under the note. The yield is the return a buyer earns on the price they pay. When a buyer pays less than the balance, their yield is higher than the note's rate.
Can I negotiate the yield a buyer uses?
You can ask what it is and why. A buyer may sharpen it if you supply better evidence, such as a complete payment record. The stronger lever is a second offer, because buyers set different yields for the same note.
What is present value?
It is what a set of future payments is worth today at a chosen rate of return. For a note, it is the most a buyer can pay and still earn their target yield if every payment arrives on schedule.