By Alejandro Duque
Managing Partner
DUQUE REAL ESTATE EQUITY & ADVISORY
5 MIN READ
The question is never whether selling is good or bad. It is whether it is right for your situation.
This paper is educational material drawn from real transactions. It is not an offer of securities, and it is not tax or legal advice for your situation.
When Selling Your Note Makes Sense, and When It Doesn't
Selling paper is the fastest exit and the deepest discount. A plain framework for deciding whether the discount is worth it, or whether you are leaving value on the table.
Selling a note that has stopped performing is the fastest exit. You get cash, you are done, and you move on. It is also the exit with the deepest discount: such paper often trades at forty to seventy cents on the dollar.
The question is never whether selling is good or bad. It is whether it is the right choice for your situation. Here is the framework we walk through with owners.
When selling makes sense
You need liquidity now. If you cannot wait the months a workout or foreclosure takes, selling is the answer, and the discount is the price of speed.
The legal complexity is beyond your capacity. A borrower in bankruptcy, a contested foreclosure, title disputes, several lienholders. If resolving the note calls for expertise and capital you do not have, a sale transfers the problem to someone who does.
The toll is too high. Not everyone wants to be in the workout business. If managing a default is wearing on your health, your family, or your other work, a clean exit has a value that never shows up in the arithmetic.
There is little equity behind the note. If the property barely covers the debt, the upside of a workout is limited, and a sale may net more than a long, expensive foreclosure with a thin recovery at the end.
When selling leaves money on the table
There is real equity in the property. If the collateral is worth substantially more than the debt, a buyer at a discount is acquiring a well-secured claim cheaply. That equity is yours to capture through restructuring, foreclosure, or a creative resolution.
The borrower is cooperative and has capacity. A borrower who communicates, has income, and wants to keep the property can often re-perform the note at a fraction of the cost of selling at a discount.
The default is a maturity default. The borrower made every payment on time, and now the balloon is due and they cannot refinance. This is usually the easiest situation of all to restructure. Selling a note with a clean payment history at half its face value is almost always a bad trade.
You have time, or access to expertise. If you can give a resolution a few months, or you have someone seasoned at your side, the alternatives to selling usually return more than the discount costs.
Five questions before you decide
- How much equity sits in the property behind the note?
- Is the borrower engaging with you?
- How urgent is your need for cash, honestly assessed?
- Do you have the time, expertise, and capital to pursue a resolution, or a partner who does?
- What would the note be worth to a patient owner, and are you willing to be one?
Talk the answers through with someone who has resolved paper before you accept the deepest discount available. The first conversation with us is complimentary, and it stays between us.