Performing vs. Non-Performing Real Estate Notes: What Sellers Need to Know
Real estate note holders who consider selling their note need to understand the differences between performing and non-performing notes. This is one of the most important factors that impacts the selling price.
What Is a Performing Real Estate Note?
A performing real estate note is one where the borrower is meeting their payment obligations according to the original terms of the loan. In other words, payments are being made on time, and the borrower is following the agreed schedule.
Characteristics of a Performing Note:
● Regular Payments: Borrowers are consistently making payments as outlined in the note.
● Stable Income Stream: These notes provide a predictable flow of income, which makes them attractive to buyers who are seeking passive income with lower risk.
● Lower Risk: Since the borrower is making payments reliably, there is less risk involved for the note buyer. This generally means performing notes are worth more when sold.
Why Buyers Like Performing Notes
Performing notes are appealing to a wide range of investors, including institutional buyers and individual investors. The reason is simple: a performing note promises an income stream without the hassle of trying to get a delinquent borrower back on track. Buyers are willing to pay more for performing notes because they come with predictable returns and fewer headaches.
Selling a Performing Note
When selling a performing note, you’re in a good position. The strong payment history can help you command a higher price since buyers view it as a relatively safe investment. Your negotiating power is higher, and you may be able to sell the note at a smaller discount compared to its outstanding balance.
What Is a Non-Performing Real Estate Note?
A non-performing real estate note is the opposite. In this case, the borrower has stopped making regular payments, often for a significant amount of time. This type of note represents a higher level of risk for potential buyers.
Characteristics of a Non-Performing Note:
● Missed Payments: The borrower is either behind on payments or has ceased payments altogether.
● Higher Risk: Since the borrower is not fulfilling their obligations, the risk of default is high. Buyers may need to invest time and resources into recovering the owed amount, whether through restructuring the loan or even foreclosure.
● Deep Discounts: Non-performing notes often sell at a deep discount—sometimes as much as 50% or more off the remaining balance—because of the extra work involved in attempting to bring them back to performing status. Mortgage note value calculators can instantly show you the difference of what to expect.
Why Buyers Might Be Interested in Non-Performing Notes
Non-performing notes do have a market, but it’s typically comprised of more experienced investors. These buyers are often interested in non-performing notes because they can potentially acquire them at a significant discount, invest in bringing them back to performing status, and then resell them at a profit. The high risk comes with a high potential reward, which attracts a specific type of investor.
Selling a Non-Performing Note
If you have a non-performing note, your options are more limited, but it doesn’t mean you can’t sell it. The key is to adjust your expectations—buyers will want a steep discount because they’re taking on much more risk. To make the note more attractive, you might consider working with the borrower to resume payments before attempting to sell it.
Comparison Table: Performing vs. Non-Performing Notes
Feature | Performing Note | Non-Performing Note |
Payment Status | Regular, on-time payments | Missed or ceased payments |
Risk Level | Lower risk due to consistent payments | Higher risk due to uncertainty in payments |
Buyer Appeal | Attracts a wide range of investors | Appeals mainly to experienced investors |
Sales Price | Typically sold close to outstanding balance | Often sold at a deep discount (up to 50% or more) |
Income Stream | Predictable, stable | Uncertain, requires effort to recover |
How to Decide Which Option Works for You
If you’re deciding whether or not to sell your real estate note, understanding if it’s performing or non-performing will heavily influence your strategy. Here are some considerations for each:
When to Sell a Performing Note:
● Maximising Value: If you want to maximise the price you receive, selling while the note is performing is the best route.
● Lower Hassle: Since performing notes are more attractive, the sales process tends to be quicker and involves less negotiation over the price.
When to Sell a Non-Performing Note:
● Need for Quick Cash: If you need liquidity and are willing to sell at a discount, non-performing notes can still be sold.
● Willingness to Negotiate: Be prepared for more negotiation, as buyers will need to account for the additional risk they are taking on.
Conclusion: Understanding the Value of Your Note
The status of your real estate note—whether performing or non-performing—determines both its value and the types of buyers interested in purchasing it. Performing notes are straightforward, appealing to a wide audience with predictable income and lower risk. Non-performing notes, while more complex and risky, still hold potential value for the right type of buyer. Knowing where your note stands helps you set realistic expectations and choose the best approach for selling it.
Whether you’re looking to sell a performing or non-performing note, understanding these key differences will help you get the most value from your asset. Make sure to evaluate the payment history, borrower situation, and your financial goals before making a decision.
