Discounting for Cash Today Can Be a Smart Solution

Pitfalls of Holding a Note

Maintaining a stream of income by carrying a note is a smart move to facilitate the sale of a home or commercial property. Unfortunately, there are some pitfalls that may arise over the term of a note that make selling a note an excellent alternative.

You may have difficulty collecting payments, or the payor may abandon the property. The payor may default causing a lengthy and costly foreclosure process. The payor may cause destruction and devaluation of the property, or fall into bankruptcy. They may be involved in a divorce or even pass away. The economic certainty of the payor is always an unknown variable, and there could be IRS liens and other liens against the payor.

Additionally, when you carry a note, there are federal income tax reporting responsibilities. The note devalues over time as the property depreciates, and there are market fluctuations of financed property to consider.

Why Sell Your Note

How Discounting for Cash Today Can Be a Smart Solution

Real Note Transaction Sample

$80,000 Note for Which a Seller is Receiving Payments
Sale Price $100,000
Down Payment $20,000
1st Mortgage $80,000
Current Balance $77,355
Loan to Value $77,355 / $100,000 = 77%
$80,000 Face Value Note
9% Interest Rate
15 years Term (180 payments)
$811.41 Monthly Payment
12 Payments Made Already
$77,355.42 Current Balance Owed

Note Holder's Options

Option #1 – Do Nothing
Continue to receive the rest of the payments. Receive 168 payments of $811.41 per month.


Option #

2 – Full Sale
Sell the entire note now.

Note holder receives   $65,869.79 CASH NOW

Option #3 – Partial Sale / Front End Payments
Sell the next 5 years of payments (= 60 payments). Then receive the last 108 payments.

Note holder receives   $34,107.29 CASH Now
  + $59,914.01 Loan Balance in 5 Years
Total CASH received   $94,021.30

Option #4 – Partial Sale / Half of Each Monthly Payment
Sell one half of each monthly payment. Continue to receive payments for the other half (that you did not sell).

The note holder receives $28,430.12 CASH NOW Plus half the monthly payment ($405.71) for the next 168 months

Note holder receives   $28,107.29 CASH Now
  + $68,159.28 Loan Balance in 5 Years
Total CASH received   $96,266.57

These are just a few out of the many options we make available to our note holders. Our specialty is creating a custom fit solution that will match your specific CASH needs.


In Depth Analysis of the Options Above

Option #1 – Do Nothing


Many note holders do nothing because they do not need a lump sum of cash now. Others hold on to their note because they don't mind dealing with collecting payments, record keeping, and IRS reporting regulations each year.


Option #

2 – Full Sale
Any time the entire note is sold, it is always sold at a "discount" from the current principal balance of the note. This happens because the face interest rate of the note is seldom as high as the market yield required in the secondary mortgage money market. In the example, the discount is $11,485.93 ($77,355.42 minus $65,869.79) assuming the secondary mortgage money market yield is 12%. The discount could be more or less depending on the current yield requirements in the secondary mortgage money market.




Option #3 – Partial Sale / Front End Payments
Partial sales are an attractive option from the point of view of a note holder, because the note holder does not have to take as much of a discount. The main reason for the discount ($11,485.93 in the full sale example) is that the payments due in the distant future are worth less in today’s dollars than the payments that are due in the immediate future. This is due to the risk of collecting future payments over the years – as well as depreciation on the property and market unpredictability.

In a full sale, the note holder is selling all the payments, which includes all of the principal and interest in total – this accounts for the greater discount. In a partial sale where the front-end or near term payments are sold, most of the payments are interest. This means that the note holder gets a sizable amount of cash now ($34,107.29 in the partial sale example) and when the note holder gets the note back after 60 payments, the balance of the note is still fairly high ($59,914.01 in the example). The note holder then gets the remaining 108 payments of $811.41. Again, an overall attractive total of $94,021.30! A partial sale of the front-end payments is the best of both worlds. You get a lump sum of cash now, and when you get the note back, it has a high remaining principal balance and many payments left to collect.

In the example, the total cash (cash received now plus the balance of the loan left to collect in 5 years) received by the note holder is more than $15,000 higher than the current principal balance of the note. Often times, note holders prefer this option over selling the entire note for a large discount off the current principal balance. This is why it is important to discuss your SPECIFIC and EXACT cash needs to tailor the best solution for your needs.


Option #4 – Partial Sale / Half of Each Monthly Payment
In this option, the note holder sells one half of each monthly payment. The note holder also continues to receive the other half of the payment . This is a great option if you need some cash now but also want to keep part of the monthly cash flow. The sample shows that one half of each of the 168 remaining payments can be sold for $28,430.12 and the note holder continues to receive $405.71 each month.



Find Out How Much Your Note is Worth Today! To get started on a FREE quote today, please visit our Free Quote Request page or Call Us at 1-800-294-7735.