Selling a private mortgage note usually brings in 60 to 90 cents on the dollar of the remaining balance, paid as a lump sum at closing. The exact number turns on the interest rate, the borrower’s credit and payment history, how much equity sits behind the loan, and how many years are left. To sell a mortgage note cleanly, you gather the original loan documents, request quotes from at least three buyers, sign an assignment and an allonge at closing through a title or escrow company, notify the borrower under federal servicing rules, and report the gain on your own tax return.
What Your Note Is Actually Worth
No investor pays face value. The buyer is taking on default risk, property value risk, and interest rate risk, and the discount pays for that. Well-structured notes with strong borrowers land at the top of the 60 to 90 cent range. Weaker notes fall below it.
Six things move the offer more than anything else:
- Interest rate on the note. A note at 8% is worth more than one at 4% because the buyer earns a higher return on the cash they put in. Below-market rates take the steepest discounts.
- Borrower credit. Buyers pull a current credit report. Scores above 700 with clean history reduce perceived risk; scores under 625 push many institutional buyers away entirely.
- Loan-to-value ratio. A balance at 60% of current property value gives the investor a cushion if they end up foreclosing. A 90% LTV note offers almost no margin, and the discount widens.
- Seasoning. Twelve or more months of on-time payments make a note far easier to sell than a brand-new one where the borrower is untested.
- Remaining term. Ten years left carries less long-term uncertainty than 25 years left. Longer terms generally mean bigger discounts.
- Property type. Single-family homes in stable markets fetch the best prices. Vacant land, mobile homes, and commercial properties draw lower offers.
Investors set a target yield, often somewhere between 9% and 14%, and work backward from the payment stream to a price that hits it. Getting quotes from at least three buyers is the only reliable way to know whether an offer is competitive.
Documents to Have Ready Before You Ask for Quotes
Missing paperwork is the most common reason a note sale stalls. Pull these together before you start shopping the note:
- The original promissory note. Under the Uniform Commercial Code, whoever holds the original is the party entitled to enforce it and collect payments. A lost original doesn’t kill the sale, but it complicates the process and lowers the price.1Cornell Law School. Uniform Commercial Code 3-301 – Person Entitled to Enforce Instrument
- The recorded mortgage or deed of trust that secures the debt against the property. It should already be on file at the county recorder.
- A payment ledger showing every payment received, the date, and the running balance. Consistent on-time payments are your strongest selling point.
- The closing disclosure or HUD-1 from the original property sale, establishing purchase price, down payment, and loan terms.
- An estoppel letter certifying the current balance, interest rate, and next scheduled payment date. This heads off later disputes about what the buyer thought they were buying.
When you request quotes, buyers will ask for the remaining principal, the interest rate, payments left, and basic borrower and property information. Plan on paying for an updated title search and closing-related document prep as part of the transaction.
Full Sale, Partial Sale, or Split Partial
A full sale transfers every remaining payment to the investor. You take the largest available lump sum and walk away from the note. The buyer absorbs all future risk. This is the cleanest exit and the most common structure.
A partial sale transfers a set block of upcoming payments, say the next 60 out of 240, and the income stream reverts to you after the investor collects those payments. The lump sum is smaller, but you keep the long tail. It fits when you need a specific amount of cash for a defined reason and don’t want to give up the whole asset.
A split partial is less common. The investor buys a slice of every monthly payment for the rest of the term. If the borrower pays $1,100 a month, the investor might take $600 and you keep $500. Whatever structure you pick, the purchase agreement should spell out what happens if the borrower pays off early or defaults.
Partial arrangements pay less per dollar of payment than a full sale because they’re more complex and less liquid for the buyer. The tradeoff is flexibility.
Who Buys Private Mortgage Notes
The buyer market has three tiers, and knowing which one your note fits helps you target quotes intelligently.
Institutional note-buying companies are the largest buyers. They use standardized underwriting: minimum borrower credit scores (often 625 or higher), maximum LTV ratios, and property type restrictions. They move quickly, sometimes closing in a few weeks, but their pricing reflects conservative risk models. If your note checks every box, this is usually the most predictable route.
Hedge funds and specialty investors take bulk purchases and notes that don’t fit institutional criteria, including non-performing loans. They’ll look at higher-risk deals but apply steeper discounts. A performing note that an institutional buyer would price at 85 cents on the dollar might get 70 cents from a fund pricing in foreclosure risk.
Individual investors round out the market. They sometimes offer flexible terms for unusual properties or creative loan structures. They may take longer to close because they’re deploying personal capital rather than institutional credit lines.
How the Closing Works
Once you accept an offer, the buyer’s team reviews your documents and orders a property valuation, either a broker price opinion or a full appraisal, to confirm the collateral still supports the balance. The buyer usually pays for it.
Two documents actually execute the transfer. You sign an assignment of mortgage (or assignment of deed of trust, depending on your state), which gets recorded with the county to change the lienholder in public records. An allonge, an endorsement physically attached to the original promissory note, transfers your rights to the new holder. Both require notarization.
An escrow or title company typically runs the closing. They confirm the assignment has been recorded, then wire funds to your bank account. Plan on 15 to 30 business days from document submission to funding. Institutional buyers sometimes close faster; individual investors sometimes take longer.
One boundary worth noting: selling the note does not trigger any due-on-sale clause in the underlying mortgage. Those clauses apply when the borrower transfers the property. Selling the note transfers the creditor’s position, not the property, and the borrower’s obligation continues on the same terms.
Notifying the Borrower
Federal law requires borrowers to be told when the servicing of their mortgage changes hands. Under RESPA’s Regulation X, two notices go out. The outgoing servicer, typically you or your loan servicer, must send a transfer notice at least 15 days before the effective date. The incoming servicer must send its own notice no more than 15 days after the transfer takes effect.2eCFR. 12 CFR 1024.33 – Mortgage Servicing Transfers
Both notices must state the effective date, contact information for the old and new servicer, when the borrower should start sending payments to the new servicer, and that the transfer does not change the loan terms. A single combined notice from both servicers works, but it must go out at least 15 days before the transfer. Skipping these notices violates federal regulations.
Taxes When You Sell the Note
Most seller-financed deals were treated as installment sales when the property changed hands, which means you’ve been reporting a portion of each payment as gain over time. Selling the note accelerates that.
How the IRS Calculates Your Gain
Under IRC Section 453B, selling an installment obligation triggers gain equal to the difference between what the investor pays you and your remaining basis in the note.3Office of the Law Revision Counsel. 26 US Code 453B – Gain or Loss on Disposition of Installment Obligations Your basis is the face value of the note minus the gain you would still need to report if the borrower paid the loan off in full. The IRS treats the resulting gain as though it came from selling the original property, which determines whether it qualifies as long-term capital gain.
A simplified example: you hold a note with a $100,000 remaining balance and your basis in the obligation is $70,000. An investor pays you $82,000. Your recognized gain is $12,000. Interest income you had been reporting on each payment stops once you no longer hold the note.
Capital Gains Rates and the Net Investment Income Tax
If you held the original property for more than a year before the installment sale, gain from selling the note qualifies for long-term capital gains rates. For 2026, those rates are 0%, 15%, or 20%, depending on taxable income.4Internal Revenue Service. Topic No. 409 – Capital Gains and Losses Single filers with taxable income under $49,450 pay 0%. The 20% rate applies above $545,500 for single filers and $613,700 for married couples filing jointly.
Higher earners also owe a 3.8% net investment income tax on top of the capital gains rate. The surtax applies when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly.5Internal Revenue Service. Topic No. 559 – Net Investment Income Tax Note sale proceeds count as net investment income, so the effective top rate can reach 23.8%.
Depreciation Recapture on Investment Property Notes
If the underlying property was a rental where you claimed depreciation, there’s another layer. Depreciation recapture must be recognized in the year of disposition and cannot be spread out under installment sale rules.6Office of the Law Revision Counsel. 26 US Code 453 – Installment Method Unrecaptured Section 1250 gain, the portion attributable to depreciation on real property, is taxed at a maximum rate of 25%.4Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
If you already recognized all recapture in the year you sold the property, this doesn’t come back around when you sell the note. If you didn’t, selling the note forces the issue. Miscalculations here can draw a 20% accuracy-related penalty on the underpayment.7Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments A CPA who has worked with installment obligations is worth the fee.
Don’t Wait for a 1099-S
Some sellers expect a Form 1099-S from the note buyer. That form reports proceeds from real estate transactions, meaning actual property changing hands.8Internal Revenue Service. Instructions for Form 1099-S – Proceeds From Real Estate Transactions Selling a mortgage note transfers a financial instrument, not real estate. Report the gain on your own return using Schedule D and Form 8949. Track the transaction yourself; the 1099 may never come.
If the Borrower Is Behind on Payments
A performing note, current on payments, commands the best price. A delinquent note can still be sold, but to a different buyer pool, mostly funds that specialize in workouts or foreclosure. Expect 40 to 60 cents on the dollar or less on a note in default, depending on how much equity sits behind it.
Buyers of delinquent notes care most about loan-to-value. A borrower six months behind on a $100,000 note secured by a $200,000 property gives the investor room to recover through foreclosure or modification. The same delinquency at 95% LTV is far riskier and priced accordingly.
Federal rules affect the timeline any new holder faces. Under Regulation X, a servicer cannot begin foreclosure until the borrower is more than 120 days delinquent.9Consumer Financial Protection Bureau. 12 CFR 1024.41 – Loss Mitigation Procedures If the borrower submits a complete loss mitigation application before foreclosure starts, the servicer must evaluate it first. Investors price these delays into their offers.
Origination Compliance Affects the Price You Get
A note originated in compliance with federal lending rules sells more easily than one that wasn’t. Buyers know a non-compliant note can expose them to borrower defenses. If you’re still writing seller-financed deals and plan to sell the notes later, how you originate directly affects your exit price.
Under Regulation Z, a person who provides seller financing for three or fewer properties in any 12-month period is not classified as a loan originator, provided the financing is fully amortizing, the seller made a good-faith determination that the borrower can repay, and the interest rate is fixed or adjustable only after five or more years.10eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling Exceed that threshold or miss the conditions, and you may need a mortgage loan originator license under the SAFE Act.11eCFR. 12 CFR Part 1008 – SAFE Mortgage Licensing Act
Ability-to-repay matters even for exempt seller-financers. If the borrower later argues you never verified their ability to repay, that defense can follow the note to whoever buys it. Documented income, debts, and credit history at origination protect both you and any future investor. Sophisticated buyers ask to see this documentation, and its absence depresses offers.