Yes. You can agree to let your borrower clear the note early for less than the full balance. The arrangement is called a discounted payoff. It ends the debt where a sale to an investor would transfer it, and it only works if the borrower can raise the money.
What “selling it back” means
When an investor buys your note, the debt carries on and the borrower keeps paying, just to someone new. When the borrower “buys” it, the debt ends: they pay you an agreed lump sum, you accept it as payment in full, and the lien on their property is released.
Unless your note restricts early payment, the borrower is already free to pay the full balance whenever they like, so read its prepayment terms first. What is being negotiated is whether you will accept less than that balance in exchange for having it now.
Why a borrower can afford to pay more than an investor
An investor’s price has to leave room for the return they want on their money. The borrower’s sums are different. Every dollar of discount you give them is a dollar of debt gone, and they stop paying interest on the rest. To take round figures as an example, a borrower who pays $85,000 to clear a $90,000 balance has saved $5,000 at once and all the future interest as well, while an investor may need a deeper cut than that to earn their return.
A payoff is simpler too, since a borrower has no need to study the payment history or the title before paying off their own loan, and nothing is assigned to a new holder.
Why payoffs fall through
The obstacle is money. A borrower who chose seller financing because a bank would not lend to them needs savings or a new loan to pay you off, and a new loan depends on their credit, their income and the property’s value today.
A payoff is slower than it looks as well. A refinance runs on the lender’s timetable and can fail late. By then you have told your borrower that you would take less than they owe, which is hard to take back if the payoff collapses.
A borrower also has no way to offer you a partial. If you only need part of the note’s value in cash, an investor may be able to buy a block of payments and leave the rest with you, depending on the note.
Get the investor figure first
Find out what investors would pay before you raise the subject with your borrower, or before you reply if your borrower has asked to pay off early at a discount, because that figure is your floor. Have your note priced and keep the number to yourself while you negotiate. If the borrower can beat it and can show where the funds are coming from, the payoff is likely the better deal, and if they cannot you have lost nothing.
| Discounted payoff by the borrower | Sale to an investor | |
|---|---|---|
| What happens to the debt | It ends | It continues with a new holder |
| Where the money comes from | The borrower’s savings or a refinance | The investor’s own funds |
| Main risk to you | The borrower cannot fund it | The price changes if the file does not match what was described |
| Partial option | None | Depends on the note and the buyer |
Costs come out of both routes, so compare the two offers on what would reach your account under each.
Putting a payoff in writing
A short payoff agreement should state the amount, the date by which it must be received, and that the debt is satisfied in full on receipt. The deadline matters because it lets you move on to selling the note to an investor if the refinance stalls. Once you are paid, a document releasing the lien has to be signed and recorded. Depending on the state it is called a satisfaction of mortgage, a release or a reconveyance. Have a title company or an attorney handle the money and the recording.
Accepting less than the balance can have tax consequences for you, and forgiven debt can have tax consequences for the borrower, so each of you should ask a CPA before signing. Until the agreed sum has arrived, nothing has changed: the note and the lien stand as written, and the borrower’s regular payment is still due each month.
Related questions
Does my borrower have a right to buy the note at a discount?
No, unless your note says so. A note may let the borrower pay the full balance early, but a discount is something you choose to offer. Read your own note for its prepayment terms.
Should I tell my borrower I am thinking of selling?
You do not have to. A sale to an investor generally does not need the borrower's consent. If you want to offer a payoff, it helps to know the investor price first so you negotiate from a real figure.
What if the borrower's refinance falls through?
Then the note carries on as before and you can still sell it to an investor. This is why a written payoff agreement should have a clear deadline.