In the mortgage note market, the line between "performing" and "non-performing" is the most important distinction a note can have. It determines how the note is valued, who will buy it, and how much cash you can expect. This guide explains the differences, pricing dynamics, and selling strategies for each type.
What Makes a Note Performing or Non-Performing?
The classification is straightforward:
- Performing note: The borrower is making payments on time according to the original terms. The note is current — not late, not in default, not in forbearance.
- Sub-performing note: The borrower is making payments but is behind — typically 30-89 days late. Payments are coming in, but inconsistently.
- Non-performing note (NPL): The borrower has stopped making payments and is typically 90+ days delinquent. The note is in default.
- Re-performing note: A formerly non-performing note where the borrower has resumed payments, often under modified terms (lower rate, extended term, forbearance agreement).
How Pricing Differs
The pricing gap between performing and non-performing notes is substantial because the risk profiles are fundamentally different:
| Note Status | Typical Pricing (% of UPB) | Pricing Basis |
|---|---|---|
| Performing (24+ months) | 85-95% | Cash flow yield — interest rate, payment amount, term |
| Performing (12-24 months) | 80-90% | Cash flow yield with seasoning discount |
| Performing (under 12 months) | 75-85% | Cash flow yield with higher seasoning discount |
| Sub-performing | 60-80% | Blend of cash flow and recovery value |
| Re-performing | 65-82% | Modified cash flow — needs 6-12 months of new history |
| Non-performing | 30-70% | Recovery value — property equity minus foreclosure costs |
Why Performing Notes Are Worth More
Performing notes are priced on cash flow — the buyer is purchasing a predictable stream of payments backed by real property. The key factors are:
- Proven borrower reliability: On-time payments demonstrate the borrower is committed to the property and financially capable.
- Predictable returns: The buyer knows exactly when payments will arrive and for how long.
- Lower management costs: Performing notes require minimal intervention — just payment collection and annual property monitoring.
- Broader buyer pool: More investors buy performing notes, creating competitive pricing.
How Non-Performing Notes Are Valued
Non-performing notes shift from a cash flow analysis to a recovery analysis. The buyer is not paying for future payments — they are paying for the right to pursue recovery through one of several workout strategies:
- Loan modification: Restructure the loan terms to get the borrower back on track.
- Forbearance agreement: Temporarily reduce or pause payments while the borrower resolves a hardship.
- Short sale: Allow the borrower to sell the property for less than the note balance.
- Deed-in-lieu: The borrower voluntarily transfers the property to the note holder to avoid foreclosure.
- Foreclosure: Take the property through the legal process and sell it to recover the investment.
The buyer evaluates which strategy is most likely to succeed and prices the note accordingly. Property equity is the primary driver — without equity, recovery options are limited.
Selling a Performing Note
Selling a performing note is the most straightforward transaction in the note market:
- Submit your note details and payment history.
- Receive a cash offer within 24 hours based on cash flow analysis.
- Close in 21 days with zero fees.
The stronger your payment history and the higher the borrower's equity, the better the offer. Notes with 24+ months of on-time payments, LTV under 70%, and interest rates above current market rates command the best pricing.
Selling a Non-Performing Note
Selling a non-performing note requires a buyer with workout expertise:
- Submit your note details, including the last payment date, property condition, and any legal actions.
- The buyer evaluates recovery potential based on property equity, foreclosure costs, and workout feasibility.
- You receive a cash offer and close in 21-30 days. The buyer assumes all collection, foreclosure, and property management responsibilities.
For the seller, the key advantage is eliminating ongoing costs (legal fees, servicing, property deterioration) and converting a stalled asset into immediate cash.
Can a Non-Performing Note Become Performing Again?
Yes — this is called a "re-performing" note. If the borrower resumes payments (either on original terms or modified terms), the note transitions back toward performing status. However, re-performing notes are discounted compared to notes that never went delinquent because the borrower has demonstrated a willingness to default. Most buyers require 6-12 months of consistent re-performance before pricing improves significantly.
Which Should You Sell?
Both performing and non-performing notes can be sold — the question is timing and pricing:
- Sell a performing note when you want maximum cash value, need a lump sum for another investment, or want to eliminate the ongoing management responsibilities.
- Sell a non-performing note when you want to stop the bleeding (legal costs, servicing fees, property deterioration) and transfer the workout headache to a professional.
- Consider waiting if your non-performing borrower shows signs of resuming payments — 6-12 months of re-performance can significantly increase the note's value.
Get a Quote for Your Note
Whether your note is performing or non-performing, Note Buyers of America provides cash offers within 24 hours. We buy both types in all 50 states and explain exactly how your note's status affects the pricing. Call 800-467-2943 or submit your note details online for a free, no-obligation evaluation.