Can I Sell a Non-Performing Note?

You carried back financing to help a buyer purchase your property. For a while, the payments came in like clockwork. Then they slowed down. Then they stopped. Now you're sitting on a non-performing note, wondering what your options are — and whether anyone would even want to buy it.

The short answer: yes, you can sell a non-performing note. But the longer answer involves understanding what "non-performing" means to a buyer, how it affects pricing, and what alternatives you should consider first.

What Is a Non-Performing Note?

A note is generally considered "non-performing" when the borrower has missed payments for 90 days or more. Some buyers draw the line at 60 days, others at 90. The key distinction is that the borrower has stopped making regular, on-time payments as agreed in the promissory note.

Non-performance exists on a spectrum. A borrower who missed two payments but is communicating with you is a very different situation from a borrower who hasn't paid in eight months and won't return your calls. Both are technically non-performing, but they carry very different risk profiles — and very different price tags.

Your Options Before Selling

Before you decide to sell the note, it's worth considering a few alternatives:

Contact the borrower directly. Sometimes life happens — job loss, medical emergency, divorce. If the borrower is willing to communicate, you may be able to work out a modified payment plan. Even a reduced payment is better than no payment.
Offer a loan modification. You could temporarily reduce the payment amount, extend the term, or defer a portion of the balance. This can get payments flowing again without the cost and hassle of foreclosure.
Propose a deed-in-lieu of foreclosure. If the borrower can't pay and knows it, they may be willing to simply hand back the property. This avoids foreclosure costs for both of you. You get the property back and can sell it on the open market.
Begin foreclosure. This is the nuclear option. It's expensive (typically $5,000 to $30,000 or more depending on your state), time-consuming (6 months to over 2 years in judicial foreclosure states), and emotionally draining. But sometimes it's necessary.

If none of these options appeal to you — or if you've already tried and gotten nowhere — selling the note to a professional buyer is a legitimate path forward.

Why Sell Instead of Foreclosing Yourself?

Foreclosure sounds straightforward in theory: the borrower doesn't pay, you take back the property, you sell it. In practice, it's anything but simple.

First, there's the cost. Attorney fees, court costs, filing fees, property preservation, and potentially eviction costs can easily run $10,000 to $30,000 or more. In judicial foreclosure states like New York, New Jersey, or Florida, the process can take over two years.

Then there's the property itself. Non-paying borrowers often aren't maintaining the property either. By the time you get it back, you may be looking at significant repairs. And during the entire foreclosure process, you're receiving zero income from the note.

When you sell a non-performing note, you transfer all of that headache to the buyer. They have the legal teams, the systems, and the experience to work through the resolution — whether that's getting the borrower to start paying again, negotiating a deed-in-lieu, or completing the foreclosure. You get cash and move on with your life.

How Non-Performing Notes Are Priced

Let's be straightforward: non-performing notes sell at a steeper discount than performing notes. That shouldn't surprise anyone. A note where the borrower is paying on time is worth more than one where they've stopped. The question is how much steeper the discount will be.

Pricing for non-performing notes depends heavily on several factors:

Property value vs. loan balance (equity). This is the biggest factor. If the property is worth $200,000 and the loan balance is $80,000, there's significant equity protecting the investment. The buyer knows that even in a worst-case foreclosure scenario, the property value covers the debt. If the property is worth $120,000 and the balance is $110,000, there's very little margin for error.
Property condition. A well-maintained property is worth more as collateral than one that's been neglected or damaged.
State foreclosure timeline. Notes in states with fast, non-judicial foreclosure processes (like Texas or Georgia) are worth more than notes in slow judicial states (like New York or New Jersey) because the resolution timeline is shorter.
How far behind the borrower is. Three months late is very different from eighteen months late. The longer the delinquency, the less likely a voluntary resolution becomes.
Occupancy status. Is the borrower still living in the property? An occupied property is generally in better condition but may require eviction after foreclosure. A vacant property may be deteriorating but is easier to take possession of.
Lien position. A non-performing first lien note is far more valuable than a non-performing second lien, because the first lien holder has priority in foreclosure.

As a rough guideline, performing first-lien notes might sell at 75–90% of the remaining balance, while non-performing first-lien notes might sell at 40–70% of the remaining balance — sometimes even less if the situation is particularly challenging. Non-performing second liens can trade at 15–40% of face value.

Act Sooner Rather Than Later

Here's something many note holders don't realize: the longer a note stays non-performing, the less it's typically worth. There are several reasons for this.

Properties deteriorate when borrowers stop paying. Maintenance gets deferred, sometimes deliberately. In extreme cases, borrowers strip the property of fixtures and appliances before leaving. Every month that passes without resolution is a month where the collateral may be losing value.

Additionally, the longer a borrower goes without paying, the harder it becomes to get them to start again. A borrower who's two months behind might catch up. A borrower who's twelve months behind almost certainly won't.

If you're holding a non-performing note and considering your options, don't wait. The math only gets worse with time. Understanding what buyers look for during due diligence can help you prepare for the process.

What You'll Need to Provide

When you submit a non-performing note for a quote, be prepared to share:

The original promissory note and deed of trust or mortgage
The current loan balance and payment history (including when payments stopped)
The property address and your best estimate of current property value
Any communication you've had with the borrower about the default
Whether you've begun any foreclosure proceedings
Whether the property is occupied or vacant

The more information you can provide upfront, the faster and more accurate your quote will be. Check out our overview of what types of notes we buy to see where non-performing notes fit in.

The Bottom Line

A non-performing note isn't worthless — it's just worth less than a performing one. If you're dealing with a borrower who's stopped paying, you have options. You can try to work it out directly, you can foreclose, or you can sell the note and let someone else handle the resolution.

There's no wrong answer, but there is a wrong approach: doing nothing and hoping the situation resolves itself. It almost never does. Whether you decide to sell or pursue another path, take action now while you still have the most options available to you.

Getting a quote on your non-performing note costs nothing and takes about five minutes. Even if the number is lower than you'd like, at least you'll know where you stand — and you can make an informed decision from there.