How Note Buyers Price Non-Performing Notes

Note buyers are buying a problem. They're paying cash today for the right to resolve a non-performing loan, knowing that the resolution will take time, money, and effort. Their price reflects the risk they're taking and the return they need.

The main factors:

Property value relative to the debt (equity position). This is the single biggest factor. If you hold a $200,000 note on a property worth $400,000, there's $200,000 in equity protecting the buyer. They can foreclose, sell the property, and likely recover their investment plus a return. If the property is only worth $220,000, the margin is thin and the price drops accordingly.

Property type and condition. A well-maintained SFH in a liquid market is the gold standard. Buyers can liquidate it quickly and predictably. Rural property, vacant land, commercial, or properties in poor condition are harder to sell and carry more risk.

State and foreclosure type. A non-performing note in Texas (non-judicial, 60+ day timeline) is worth more than the same note in New York (judicial, 2-3 year timeline). Faster, cheaper foreclosure means faster recovery for the buyer.

Borrower situation. An unresponsive borrower with no legal representation is "easier" (from the buyer's perspective) than one who is represented by counsel, has filed bankruptcy, or is contesting the default. Legal complexity adds time and cost.

Documentation quality. A complete file (original note, recorded deed of trust, payment history, default notices properly served) prices higher than a file with gaps. Missing documents create legal risk that the buyer will price into the discount.

Lien position. First liens are significantly more valuable than second or junior liens. A second lien can be wiped out by a first-lien foreclosure, which makes it much riskier.

Non-performing note pricing varies widely, but here are general ranges based on the unpaid principal balance (UPB):

• Strong equity, good documentation, fast foreclosure state: 55-70% of UPB
• Moderate equity, decent documentation, moderate timeline: 40-55% of UPB
• Thin equity, documentation gaps, slow foreclosure state: 25-40% of UPB
• Negative equity or severe complications: Below 25% of UPB, or no bid

These are rough ranges. Every note is unique, and buyers adjust based on the specific circumstances.

A note buyer's internal calculation generally looks like this:

Expected recovery: What they think they'll ultimately collect, either through workout, foreclosure and property sale, or a combination.

Minus expected costs: Legal fees, property preservation, taxes, insurance, repairs, disposition costs.

Minus time cost: The buyer's money is locked up for months or years while the resolution plays out. They need a return on that capital.

Minus risk premium: Things can go wrong. The property might be worth less than expected. The foreclosure might take longer. The borrower might file bankruptcy. The buyer builds in a margin for surprises.

Equals: their maximum purchase price.

If the buyer expects to recover $250,000 on a property (after costs and time), and they need a 15-20% annualized return on their capital, they'll work backward to a purchase price that delivers that return. On a 12-month resolution, that might be $210,000-$215,000. On a 24-month resolution, lower.

When you sell a non-performing note, you're transferring all the upside along with the risk. The buyer captures the difference between what they pay you and what they ultimately recover.

If there's significant equity in the property and the borrower is potentially salvageable, that upside can be substantial. A buyer who pays you 50 cents on the dollar and restructures the note to performing status now owns a performing note worth 90+ cents on the dollar.

This doesn't mean selling is always wrong. If you need immediate liquidity, can't manage the workout, or the legal complexity is beyond your capacity, a clean exit at a discount may be the right call.

But if you have time, capacity, or access to partners who can help with the resolution, you may capture significantly more value by pursuing a workout, joint venture, or exchange rather than a note sale.

Note buyers aren't lowballing you for fun. They're pricing risk, cost, time, and their required return. The discount reflects the reality of resolving a non-performing asset.

But that same discount means there's value being left on the table when you sell. Before accepting an offer, understand what the buyer is planning to do with the note, because if you could do the same thing (or partner with someone who can), you'd keep that value for yourself.