Yes, a note can be sold after the payer has stopped paying. A buyer then prices it on the property and the cost of recovering it, so the discount is much deeper than on a paying note. The real comparison is between that price and what you would net by enforcing the note yourself.
A note in default is called a non-performing note, and there are buyers who specialize in them. What follows is how those buyers think and what your other routes are.
What changes when the payments stop
A buyer of a paying note is buying a stream of payments, and the price is the amount that lets those payments give the buyer the return they want on their money. With no payments, that sum has nothing to run on. The buyer instead asks what they will end up with, how long it will take, and what it will cost to get there, and the answer nearly always runs through the property.
How a buyer prices a non-performing note
The starting point is what the property is worth now, in its current condition, which may be worse than when your payer moved in. The price it sold for years ago tells the buyer little.
Next comes whatever is owed ahead of the note. Lien position means the order in which claims against the property get paid, and unpaid property taxes generally rank before your lien, as does any loan that sits in front of yours.
Then there is the route to the property. Foreclosure, or forfeiture under a land contract, follows state law, and states differ on whether the process runs through a court. The longer and costlier the route, the lower the price.
The paperwork matters more than it does on a paying note, because a buyer who has to enforce needs the original note, a recorded security document and a clear record of what was paid and when it stopped. Finally the buyer looks at the payer’s position: still living there or gone, willing to talk or silent, in bankruptcy or not.
From those the buyer estimates a recovery, subtracts costs and time, and builds in a return for the risk. The offer that results can be a long way below the balance owed, because the balance has stopped being what sets the value.
Selling is one of four routes
| What you do | What it costs you | What you end up with | |
|---|---|---|---|
| Work it out | Agree a catch-up plan or new terms with the payer | Time, and possibly legal fees to document it | A paying note again, if the plan holds |
| Take the property back by agreement | The payer hands over the property voluntarily | Legal and title costs, plus whatever the property needs | The property, to sell or keep |
| Enforce the note | Foreclose, or use the remedy in your contract | Attorney fees, court or trustee costs, and no income while it runs | The property, or the proceeds of a sale |
| Sell the note | Assign it to a buyer as it stands | A deep discount | Cash, and no further involvement |
A workout can be the best-paying result if the payer wants to stay and has income again, since it restores a note worth more than either the property route or a distressed sale. It needs a payer who answers the phone. Have any change to the terms drafted properly, because a badly documented workout creates problems for you and for any later buyer.
Taking the property back by agreement is done with a deed in lieu of foreclosure, in which the payer signs the property over to you. What the payer is released from in exchange is set by the agreement, so have an attorney draft it. It avoids a contested process, but you take the property with whatever other claims are attached to it, which makes a title check the first step.
Enforcing is your right under the documents, and it is also a project. You pay the costs as they arise, receive nothing while it runs, and at the end may own a property that needs work, back taxes paid and a sale, which is why whether selling a note is cheaper than foreclosing depends so much on the property and the state.
Selling hands the whole problem to someone who deals with defaults for a living. You accept a lower figure in exchange for certainty and an end date.
How to compare selling with enforcing
Do the sum for your own note. An attorney in the property’s state can give you the cost and likely length of the process, and a local agent can give you a realistic sale value. Then set it out:
- What the property would sell for, less selling costs.
- Less unpaid taxes and anything else ahead of your lien.
- Less legal costs, repairs, insurance and upkeep while you hold it.
- Less the income you go without during the process.
What is left is your estimated net from enforcing, with a date attached and a good deal of uncertainty. The other side of the comparison is a buyer’s price for the note today. For that, send us the note with its payment history and what you know about the property, and we will put it in front of buyers who price defaulted notes and show you how each of their offers was worked out.
Suppose, purely as an example, the sum comes to $70,000 a year from now and a buyer offers $60,000 today. The $10,000 difference is what you would be paid for a year of work, risk and waiting, and whether that is enough is your call. If enforcing nets clearly more and you have the money and patience for it, enforce. If the gap is small, the certain figure has a lot going for it.
Things that make a defaulted note easier to sell
- A complete file. The original note, the recorded mortgage or deed of trust, and any assignments.
- An exact payment record. Including the date of the last payment and the amount now past due.
- Current facts on the property. Whether it is occupied, its condition, whether taxes and insurance are paid.
- Honesty about what you have already started. If a foreclosure is under way, say so. Some buyers will take over a process in progress.
Things to be careful about
There are rules on how a default must be declared and how a payer may be contacted about a debt, and they differ by state and by type of loan, so use an attorney for formal notices.
Bankruptcy changes the picture again. When your borrower has filed bankruptcy, collection activity is generally paused by the court and special rules apply, so whether and how the note can be sold at that point is a question for an attorney before you do anything.
Waiting has a cost of its own. Unpaid taxes accumulate, empty properties deteriorate, and the law limits how long a debt can be enforced, with the limit depending on the state. Ask your attorney how long you have.
A partial, in which you sell some of the payments and keep the rest, has nothing to work with on a note where no payments are coming in. It belongs to the other situations in which a note gets sold, where the payer is still paying.
The figures to collect before you choose
From the attorney: the cost and probable length of enforcing in the property’s state, and how long your right to enforce lasts. From a local agent: what the property would sell for as it stands. From the county: the unpaid taxes. From buyers: a price for the note today. With all four in hand, the list in the comparison section above can be filled in with your own numbers, and the choice is between two amounts and two dates. Ask for the attorney’s answers first, because the limit on how long you can enforce keeps running while you collect the rest.
Related questions
Is a note worthless once the payer stops paying?
No. The note is still secured by the property, and that security has value. The price drops because a buyer now has to recover the property or reach a new arrangement with the payer, both of which cost time and money.
Can I sell a note after I have started foreclosure?
Often, yes. Tell the buyer where the process stands and who your attorney is. Some buyers will step into a foreclosure that is already under way, and the work done so far can count in the note's favor.
Do I have to tell the payer I am selling a defaulted note?
The payer is notified of the new owner after the sale. Whether any notice is needed before then depends on your documents and state rules, so ask the attorney or title company handling the closing.