With a borrower who is late but still paying, start with neither. Talk to them, find the cause and try to get the note current. If that fails, selling suits a holder who wants a certain result at lower cost, and foreclosing suits one whose property is worth far more than the debt and who has the money and patience to see the process through.
Late or stopped
Two weeks late every month is an irritation. Three missed payments in a row is a default, and it calls for a different response. This page deals with the first and with the point where it begins turning into the second. If payments have ended altogether, read whether you can still sell a note when the borrower has stopped paying.
Before choosing either
- Ask what happened. A job change, a medical bill or a new pay date can sometimes be dealt with by moving the due date or agreeing a short catch-up plan.
- Use the note’s own terms. If the note allows a late charge, apply it. Send any notice the note requires, in writing.
- Put any new arrangement on paper. A signed, dated agreement protects you and shows a future buyer what was agreed.
- Consider a servicer. A loan servicer is a company that collects payments and sends late notices for you, which puts a formal process between you and a borrower who has grown used to your patience.
Selling compared with foreclosing
| Sell the note | Foreclose | |
|---|---|---|
| What you end up with | Cash | The property, or the proceeds of its sale |
| Who pays the legal costs | The buyer takes on what follows | You, up front |
| How long it takes | The length of a note sale | Varies widely by state and by how the borrower responds |
| How certain the result is | Known once an offer is accepted and checked | Unknown until it is over |
| What it costs you | A discount on the balance, deeper because of the late record | Fees, time, upkeep, and the risk of a damaged property |
| The most you could recover | The sale price | The full debt, if the property is worth enough |
What points toward selling
Selling fits if you do not want to own or manage the property again, if you live far from it, or if you cannot fund attorney fees with no fixed end date. It also fits when equity is thin. Equity here means what the property would fetch less the debts secured on it, and with little of it a foreclosure may not return your balance after costs.
Selling a note when the payer is late means a lower price than a clean record would bring, because buyers price the risk they can see and late payments are plain to see. How far late payments lower a note’s value turns on how late, how often and how much equity sits behind the note.
What points toward foreclosing
- The property is worth a good deal more than the balance owed.
- You hold the first lien, meaning you are first in line to be paid from the property.
- You know the local market and are willing to resell or rent the property.
- You can carry the costs for as long as the process takes.
Foreclosure law differs from state to state, and land contracts follow rules of their own. Borrowers also have protections that can stop or delay the process, bankruptcy among them. A local real estate attorney should look at your note before you take a formal step.
Why timing matters
Of the situations that push a holder toward selling, a late borrower is one where waiting has a visible cost: as a late record lengthens, fewer buyers bid and their offers fall. If you already doubt the borrower will recover, having the note priced while it is merely late, with the late history included, keeps more choices open than waiting for a default.
Two numbers to collect
If a conversation with the borrower does not settle it, the decision comes down to two figures. One is an attorney’s estimate of what foreclosure would cost where the property sits. The other is what a buyer would pay for the note today. Set the attorney’s estimate against the equity in the property. If the costs would eat most of what a foreclosure could recover, the buyer’s figure is the one to take seriously, and if they would barely dent it, foreclosure deserves a closer look.
Related questions
How late does a borrower have to be before I can foreclose?
That is set by your note and by state law, and it varies. Read the note for its definition of default and for any written notice or chance to catch up that it requires, then ask a local real estate attorney before taking a formal step.
Can I sell a note while the borrower is behind?
Yes. Buyers purchase notes with late payments. The price is lower than for a note with a clean record, and how much lower depends on how far behind the borrower is and how much equity is in the property.
Should I accept partial payments from a late borrower?
Be careful. In some states and under some notes, accepting less than the full amount can affect your rights. Get an attorney's view before you agree to it, and put any arrangement in writing.