You can sell a note when the payer is running late, but the late payments will lower the price, because buyers pay for a reliable record. Find out why the payer is late first. If it is a short-term problem that can be fixed, a few months of on-time payments may be worth more than selling now.
Everything below assumes a payer who is still paying, only not on time. If the payments have stopped altogether, the note is priced in a different way: see selling a note when the payer has stopped paying.
What “late” means to a buyer
A buyer sorts a payment history into more exact categories than “a bit slow”, and the differences between them show up in the price.
| Pattern | What a buyer is likely to make of it |
|---|---|
| Pays within the grace period every month | On time |
| Pays a week or two late, every month, for years | A habit: a mark against the note, but a predictable one |
| Was on time for years, late in the last few months | Something has changed, and the buyer will want to know what |
| Skips a month, then catches up | Cash is tight |
| Pays part of the amount due | Close to default, and priced with real caution |
The grace period is the number of days after the due date before a payment counts as late under the note. Check your note for it, because a payment inside the grace period is on time however much the wait annoys you.
Direction counts for more than the number of late payments. A payer who was late twice three years ago and has been clean since is a better risk than one whose first late payment was last month.
Why late payments cut the price
A buyer pays a lump sum today in return for payments in the future, and sets the price so that those payments give the return the buyer wants on that money. The more doubt there is about the payments arriving, the higher the return the buyer asks for, and the less they will pay for the same payments.
Seasoning is the name for a note’s record of payments made, and it is the best evidence a buyer has. A long, clean record says the payer can and will pay. A record with recent late payments raises the opposite question, and no other document in the file outweighs it, which is why late payments lower the value of a note even when the property and the paperwork are sound.
Late payments also change which buyers are interested. Some only buy notes with a clean record, while others specialize in notes with problems and price them accordingly.
Find out why before you decide
The reason behind the lateness decides whether to sell now or wait, and the way to learn it is to ask the payer, directly and politely.
- A temporary setback. A gap between jobs, a medical bill, a repair. If the payer has a plan and a history of paying, the problem may pass.
- A change in pay dates. The payer’s wages may now arrive on a different day of the month. Moving the due date in writing can end the lateness entirely.
- A lasting drop in income. If the payment no longer fits their budget, it will get worse.
- A dispute. The payer is holding back over a problem with the property or the paperwork. This needs resolving before any sale.
- The property has lost its appeal. If the payer owes more than the place is worth to them, they have less reason to keep paying.
While you are asking, check that the property taxes are paid and the insurance is in force. Both protect the property behind your note, and a payer who is short of cash may have let them slide without telling you.
What you can do about it
Wait and rebuild the record
If the cause is temporary and you are not under pressure, waiting may pay best. Each on-time month adds to the record. There is no fixed number of months that restores a price, and buyers differ, but a clean recent stretch reads better than a recent late one.
Agree a written fix with the payer
A changed due date, or a short plan to catch up on missed amounts, can turn a slow payer into a punctual one. Put it in writing and keep it simple. Be careful with anything larger, such as lowering the payment or the rate, since changing the terms of a note has legal consequences and affects how buyers see it. Take advice first, and read selling a note after a loan modification for what buyers look for.
Sell now, as it is
If the cause looks lasting, or you do not want to wait and find out, selling now passes the risk to a buyer at a price that reflects it. That price will be lower than a clean note would bring. It may also be well above what the note would bring after the payer has stopped, because a late-paying note still has payments to price and a note in default has little but the property. To see the figure, send us the note with its late payments included, and we will ask buyers who take this kind of record what they would pay.
Hold and be ready to enforce
You can keep the note and use the remedies in it if things get worse: late fees if the note allows them, a formal notice of default, and in the end foreclosure or the equivalent for your type of contract. What you may do and when is set by your documents and your state’s law, so speak to an attorney before sending any formal notice.
Does a partial work on a late-paying note?
Seldom. In a partial the buyer pays for a specific run of upcoming payments and hands the note back afterwards, so everything rides on those particular payments arriving. With a mild, long-standing pattern of lateness, some buyers will still consider one. With recent missed payments, expect to be offered a full sale only.
Be straight about the record
Before funding, a buyer checks the payment record against bank statements or servicer reports. If the record turns out to be worse than you said, the offer is re-priced or withdrawn, and you have lost weeks.
Give the full history up front, with dates, and add what you know about the cause and anything that has been done about it. A late payment that comes with an explanation and a recovery gives a buyer something to weigh against it, which an unexplained one does not. If you have not kept a formal ledger, bank statements showing each deposit are one way of proving the payment history on a note.
Selling now against waiting
The choice between the first and third options above is hard to make without a figure for today, and the figure is only as good as what you know when you ask for it. So talk to the payer, list the date of every late payment, and check the taxes and insurance before you get a price. When it comes, ask what a run of clean months would be likely to change. Late payment is one of several situations that push holders toward a sale, and of all of them it is the one where waiting has the best chance of paying you more.
Related questions
How many late payments are too many to sell a note?
There is no fixed number. Buyers look at how recent the late payments are, how late they were, and whether the pattern is getting better or worse. A note with a poor record can usually still be sold, at a price that reflects it.
Should I charge late fees before I sell?
Only if your note allows them, and only as the note sets out. Late fees do not repair the record a buyer sees. What helps the price is the payer returning to on-time payments.
Will the buyer contact my payer about the late payments?
Buyers verify the payment record from documents first. Some also confirm the balance and terms with the payer before closing. Ask any buyer how and when they contact the payer, so it does not come as a surprise.