If you are thinking about selling a non-performing note, one thing is certain. You will not receive face value for it. Non-performing notes sell at a discount — and that discount can feel frustrating if you do not understand why it exists.
However, once you understand the reasoning behind it, the discount makes complete sense. Furthermore, when you compare the discounted sale price to the true cost of holding the note through foreclosure, selling often produces a better financial outcome.
This article explains exactly why non-performing notes sell at a discount, what drives the size of that discount, and how to think about it clearly when making your decision.
What does “selling at a discount” mean?
When a note sells at a discount, it means the buyer pays less than the outstanding unpaid principal balance. For example, if your note has a remaining balance of $200,000 and the buyer offers $130,000, that is a 35 percent discount — or 65 cents on the dollar.
The discount is not arbitrary. It is not a lowball tactic. It is a calculated reflection of the risk, cost, and time the buyer is taking on when they purchase a defaulted note. Therefore, understanding what drives the discount helps you evaluate any offer you receive accurately.
Reason 1 — The buyer is taking on all the risk
When you sell a non-performing note, you transfer every risk associated with that note to the buyer. That is a significant transfer of liability — and it comes at a price.
The buyer does not know how the default will resolve. The borrower might cure the default and start paying again. They might negotiate a short sale. They might fight the foreclosure in court for years. Or the property might sit vacant and deteriorate while the legal process crawls forward.
Each of those outcomes produces a very different financial result for the buyer. As a result, the buyer prices that uncertainty into the offer. The discount compensates them for accepting a situation with an unknown outcome.
Reason 2 — Foreclosure is expensive
Resolving a non-performing note is not free. In fact, it can be very costly. The buyer must fund the entire resolution process after purchasing the note — and those costs come directly out of their return.
Attorney fees alone can run $5,000 to $25,000 or more depending on the state and the complexity of the case. Court filing fees, title work, property inspections, and ongoing maintenance of a vacant property add thousands more. Additionally, if the borrower contests the foreclosure or files for bankruptcy, costs climb even higher.
The buyer factors all of these anticipated costs into the offer price. Therefore, the deeper those expected costs, the deeper the discount.
Reason 3 — Time costs money
Foreclosure takes time. In many states, it takes a lot of time. And time has a direct financial cost that note buyers account for carefully.
In judicial foreclosure states — where a court must oversee and approve the process — timelines routinely run one to four years. New York, New Jersey, Florida, Illinois, and Hawaii are among the slowest states in the country. Every month the process continues, the buyer has capital tied up in a non-earning asset. Furthermore, they are paying carrying costs throughout that entire period.
Even in faster non-judicial states like Texas, Georgia, and Missouri, the process still takes months. The buyer must wait for a return on their investment throughout that entire window. Consequently, the longer the expected timeline, the larger the discount required to make the investment worthwhile.
This is why the state your property is in has such a significant impact on the offer you receive. A note secured by a property in Texas will almost always receive a stronger offer than an identical note secured by a property in New York — simply because of the foreclosure timeline difference.
Reason 4 — The outcome is never guaranteed
Even after completing a full foreclosure, the buyer is not guaranteed a full recovery. The property must be sold — either at auction or through a traditional sale — and the proceeds must cover the outstanding balance, legal costs, and carrying costs for the buyer to break even.
Several things can go wrong. The property auction may produce a lower-than-expected sale price. The property may have hidden damage or deferred maintenance that reduces its value. Title issues may surface during the process. Junior liens or unpaid taxes may reduce the net proceeds available to the note holder.
Therefore, the buyer is not purchasing a guaranteed outcome. They are purchasing an opportunity with a range of possible results. The discount reflects the difference between the best-case and worst-case scenarios they are underwriting.
Reason 5 — The property may lose value while waiting
A non-paying borrower often stops maintaining the property as well. Deferred maintenance, neglect, vandalism, and in some cases intentional damage can significantly reduce the value of the collateral over time.
The buyer anticipates this risk when making an offer. They assume the property will not be in perfect condition by the time they take possession. Furthermore, the longer the foreclosure process takes, the more time there is for the collateral to deteriorate. As a result, that potential value erosion is factored into the discount.
This is also one of the strongest arguments for selling sooner rather than later. Every month you wait, the collateral — and therefore the note’s value — may be declining.
Reason 6 — The buyer needs a return on their investment
Note buyers are investors. They are deploying capital into a distressed asset with the expectation of generating a return. That return must justify the risk, the costs, the time, and the effort involved in resolving the default.
If a buyer paid full face value for a non-performing note, they would almost certainly lose money after accounting for legal fees, carrying costs, and the discount they would need to apply to sell or resolve the asset. Therefore, the discount is not just about covering costs — it is also about generating a return that makes the investment viable.
The size of the return a buyer requires depends on the risk profile of the note. Higher risk means a higher required return — which means a deeper discount. Lower risk means a lower required return — and a stronger offer for you.
What determines the size of the discount?
Not all non-performing notes are discounted equally. The size of the discount varies based on several specific factors. Understanding these helps you assess whether an offer you receive is fair.
Loan-to-value ratio
The LTV is the most important factor. A low LTV means strong equity in the property and better collateral protection for the buyer. As a result, the discount is smaller. A high LTV means thin equity and more risk — which means a deeper discount.
State foreclosure timeline
As discussed, slow judicial foreclosure states produce deeper discounts. Fast non-judicial states produce shallower ones. This single factor can move an offer by 10 to 20 percentage points on its own.
Property type
Single-family residential properties are discounted less because they are the most liquid and easiest to resolve. Commercial properties, vacant land, and multi-family assets carry deeper discounts because they are harder to sell and more complex to manage.
Stage of default
Notes that are further along in the foreclosure process have more legal clarity. In some cases, that reduces the discount because the buyer inherits a process that is already underway. However, very late-stage defaults with complex legal histories can also increase uncertainty and widen the discount.
Borrower equity and motivation
A borrower with equity has an incentive to cooperate. That reduces the buyer’s risk and narrows the discount. A borrower with no equity and no motivation to resolve the situation increases risk — and the discount grows accordingly.
The real cost of holding vs. selling
Here is the most important reframe for any note holder considering a sale. The discount is not a loss. It is a trade.
You are trading a potential future recovery — which is uncertain, delayed, and expensive to pursue — for a guaranteed cash payment today. The question is not whether the discount is large. The question is whether the net result of selling is better than the net result of holding.
Consider the math. You hold a $200,000 non-performing note. You receive an offer of $130,000 — a 35 percent discount. On the surface, that feels like a $70,000 loss.
However, now consider the alternative. You pursue foreclosure in a slow judicial state. You spend $20,000 in legal fees over two years. The property deteriorates and sells at auction for $180,000. After fees and costs, your net recovery is $160,000. But you waited two years and carried all the risk and stress throughout.
In that scenario, selling at $130,000 today was not obviously the wrong decision. Furthermore, if you reinvest that $130,000 immediately, the opportunity cost of waiting two years makes selling look even stronger.
Frequently asked questions
Is the discount negotiable?
Every offer is based on a specific evaluation of your note. However, if you have additional information that changes the risk profile — such as a recent appraisal or updated information about the borrower — a reputable buyer will always review it.
Can I get a better offer by waiting for the borrower to cure?
Possibly. If the borrower cures the default and the note becomes performing again, the discount will narrow significantly. However, there is no guarantee that will happen. Additionally, every month you wait costs you time and potentially collateral value.
Do all note buyers use the same discount methodology?
No. Different buyers have different return requirements, risk tolerances, and capital costs. Therefore, it is always worth getting multiple offers to ensure you are receiving a competitive price.
Does the discount apply to partial note sales too?
Yes. A partial note purchase — where the buyer acquires a set number of future payments rather than the entire note — is also priced at a discount to the present value of those payments.
How do I know if the discount I am being offered is fair?
The best way is to understand the factors driving the discount — LTV, state, property type, stage of default — and compare those to the offer you receive. A reputable buyer will always be willing to walk you through their reasoning.
The bottom line
Non-performing notes sell at a discount because the buyer is taking on real risk, real costs, and real time. The discount is not a trick. It is a fair reflection of what it takes to resolve a defaulted note and generate a return in the process.
Understanding why the discount exists helps you evaluate offers accurately. And in many cases, when you compare the net result of selling to the true cost of holding, selling is the smarter financial decision.
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