Accept only if the borrower’s figure beats what a note buyer would pay you and you would rather have cash than the payments. If you were never planning to sell, you have no reason to take less than you are owed.
What the offer is competing with
| Your choice | What you receive | When |
|---|---|---|
| Keep collecting | Every remaining payment, interest included | Over the rest of the term |
| Sell the note to a buyer | The buyer’s price, which is below the balance | At closing |
| Take the borrower’s discounted payoff | Whatever figure you agree | When they can fund it |
The middle row is your floor, because it is the cash you could get without the borrower’s help. The borrower will not have that figure, and if you do not have it either, send us your note details for a written quote before you answer. Say, as an example, that the balance is $90,000 and a note buyer has quoted $80,000. A borrower offering $84,000 is offering $4,000 more than the market would pay, and that deserves a serious look if you want out. A borrower offering $75,000 is $5,000 under the buyer’s quote, and you can tell them so and name the figure.
Example figures chosen to show the comparison. A real quote depends on the payer’s record, the property and the lien position.
A borrower can afford to pay more than a note buyer, which is the whole case for selling your note back to the borrower. Every dollar under the balance is a dollar the borrower saves, while a buyer has to earn a return on top of the price, and that difference leaves room for a figure that suits both of you.
Why would you take less at all
For the same reasons you would sell: you want the cash for something specific, you are tired of collecting, or you doubt the payer or the property will hold up for the rest of the term. Those are the cases described in when selling a note makes sense. If none of them is yours, decline. The note is a contract, and the borrower remains free to pay the full balance whenever the note allows.
It also helps to ask why they want to pay early. Someone refinancing with a bank has a lender prepared to pay off the loan, and may well pay you in full if you hold your ground. Someone who has come into money and wants to be free of debt may be willing to move up. Someone in difficulty who is asking for a reduction is having a different conversation with you, closer to a workout than a payoff.
What to check before you say yes
- Where the money is coming from. Ask for evidence, such as a lender’s approval letter or proof of funds, before you treat the offer as real.
- The exact figure and the date. Get it in writing, with a deadline. If the date passes, the full balance stands.
- How the closing will run. A title or escrow company should receive the funds and handle the paperwork, so that you release your lien only when the money has arrived.
- What you sign. You will sign a release or satisfaction, the recorded document that clears your lien from the property. An attorney should prepare or review it.
- The tax effect. Receiving the balance in one year, and receiving less than the balance, can both change what you owe. Ask a CPA before you agree to a figure.
How to counter
Yes and no are only two of the answers open to you. You can name a higher figure, for instance one that splits the gap between their offer and the balance, and explain that a note buyer’s quote has already set your floor. You can trade price for certainty by offering a better figure in return for a shorter deadline, since a note discount is easier to justify when the money arrives soon. Or you can suggest a partial paydown, in which the borrower pays a lump sum toward principal now, at no discount, and keeps paying on the rest.
Whatever you agree, keep accepting the regular payments until the payoff actually closes. If the borrower stops paying while a deal is being discussed and the deal then falls through, you are left with a note that has fresh missed payments on its record.
And if the figure you settle on is above the note buyer’s quote and you wanted the cash anyway, take it. The borrower is the one buyer who gains from every dollar of the reduction, so they can afford a figure that a note buyer cannot.
Related questions
Does my borrower have a right to a discount for paying early?
No. Unless your note says otherwise, the borrower owes the full remaining balance whenever they pay it off. A discount is something you may choose to give, usually in exchange for cash sooner.
Can I charge a penalty if the borrower pays the note off early?
Only if the note contains a prepayment clause, and rules on such clauses vary by state and loan type. Read the note and ask an attorney before you raise it with the borrower.
What if the payoff falls through after I agreed to it?
If the agreement had a deadline and it passes, the original note continues as written. That is why you should keep accepting regular payments and release your lien only when the funds have arrived.