How Note Buyers Price Non-Performing Notes
The discounts feel aggressive, but they are not arbitrary. What drives a buyer's number, and why knowing their math tells you whether to take it.
By Alejandro Duque6 min read
You hold a note that has stopped performing and you want to move on. The first buyer offers fifty cents on the dollar, the second forty-five, the third fifty-five with conditions. The discounts feel aggressive, but they are not arbitrary. Buyers price problems with a framework, and once you see it, you can judge whether their number beats your alternatives.
What drives the price
Equity above the debt. This is usually one of the first factors. A larger equity cushion gives a buyer more room for legal cost, carrying time, and a lower-than-expected sale. A thin margin leaves less protection.
Property type and condition. A well-kept house in a liquid market is generally easier to value and sell. Rural land, commercial buildings, or properties needing work may take longer and carry more uncertainty.
The state and its foreclosure clock. A longer or less certain enforcement process can reduce what a buyer will pay. Time and legal cost are material parts of the offer.
The borrower's posture. A contested default, counsel on the other side, or a bankruptcy filing adds time and legal cost, and the price falls with each.
The file itself. A complete file (original note, recorded security instrument, payment history, notices properly served) prices meaningfully higher than one with gaps. Missing paper is legal risk, and buyers charge for it.
Lien position. A first lien generally offers more collateral protection. A junior lien can be impaired or extinguished by a senior foreclosure, depending on the documents and local law.
The buyer's arithmetic
Most offers begin with the same building blocks: expected recovery, less legal and carrying costs, less the return the buyer requires for time and risk. Buyers may weigh those inputs differently. The result reflects the resolution ahead, not what the note originally meant to you.
What this means for you
If the buyer's number is close to what you expect to net from a workout or cooperative exit, selling may buy useful certainty. When meaningful equity protects the note, compare the discount with the likely result of a restructure, venture, negotiated swap, or enforcement. Run the buyer's math before accepting it.