Note Purchases: Performing & Non-Performing
Owner-financed paper is one of the most overlooked illiquid assets in real estate. A seller carries back a note to close a deal, then a year later realizes the monthly check — useful as it is — doesn’t help with the down payment on the next acquisition, the kid’s tuition, or a tax bill. Note purchasing is the market that turns that paper back into capital.
Quick Answer
A note purchase is the sale of a real estate mortgage note to a private buyer for a lump sum of cash. Performing notes (paying on time) sell at a smaller discount; non-performing notes (in default) sell at a deeper discount. Texas Funding, based in Houston, buys both — providing immediate liquidity to note holders who’d rather have capital today than payments over years.
What a Mortgage Note Actually Is
When someone sells real estate and “carries the paper,” they receive a promissory note secured by a deed of trust against the property. The buyer makes monthly payments to the seller instead of to a bank. The note holder is, effectively, the bank — collecting principal and interest over years or decades.
That’s a fine position. It’s also an illiquid one. The note generates income, but the principal is locked up in a stream of small payments stretching into the future. A note purchase converts that future income into present capital.
Performing vs. Non-Performing Notes
Performing Notes
A performing note is current — the borrower is making payments on time and has been for some period (usually 12 months or more). For the holder, it’s a quiet asset. For a buyer, it’s a yield-producing investment with a verifiable payment history. Performing notes trade closer to face value, with the discount reflecting the buyer’s required yield, the term remaining, and the strength of the underlying collateral.
Sub-Performing Notes
A sub-performing note has spotty payment history — late payments, occasional missed payments, but not in formal default. These trade between performing and non-performing pricing and require more diligence on the underlying borrower and property.
Non-Performing Notes
A non-performing note is in default — payments have stopped, often for 90+ days. The holder faces a choice: pursue foreclosure (time, cost, uncertainty) or sell the note at a discount and exit cleanly. For a buyer with workout experience, non-performing paper is an opportunity to either restructure with the borrower, take the property through foreclosure, or negotiate a deed in lieu.
Texas Funding has been engaged in existing mortgage note purchase activity since 1982 — buying performing, sub-performing, and non-performing notes secured by real estate across Texas.
Why Note Holders Sell
- Liquidity for the next deal. A real estate investor with $400K tied up in a carry-back note can’t deploy that capital into a new acquisition. Selling unlocks it.
- Risk transfer. Holding a note means accepting the risk that the borrower defaults, the property deteriorates, or the market shifts. Selling transfers that risk to the buyer.
- Estate and tax planning. Notes complicate estates, generate ongoing tax filings, and require active management. A lump-sum sale simplifies an estate.
- Foreclosure avoidance. A holder facing a non-performing borrower can sell to an investor who specializes in workouts — avoiding the legal cost and emotional weight of foreclosure.
- Portfolio cleanup. Institutions and seasoned investors periodically clear out smaller notes to focus on larger positions.
Why This Matters
Cash trapped in paper is dead capital. The note holder collects interest, but the principal can’t be deployed, invested, or compounded into the next opportunity. In a market where good real estate deals require speed and dry powder, holding illiquid notes is an opportunity cost — every dollar locked in a 25-year amortization is a dollar that can’t chase a discounted commercial acquisition or fund a value-add rehab.
For non-performing notes, the stakes sharpen. Texas foreclosure is faster than most states, but it still costs legal fees, lost time, property management headaches, and the risk that the property comes back damaged. Selling to an experienced note buyer transfers all of that.
Common Mistakes & Risks When Selling a Note
- Listing with a broker who doesn’t actually buy. Many note “buyers” are brokers who flip the file to a real buyer for a fee. That adds time and reduces the seller’s proceeds. A direct buyer cuts the chain.
- Bad documentation. Missing original notes, unrecorded assignments, sloppy payment records — these reduce offers or kill deals. Clean files command better pricing.
- Misjudging the collateral. Holders sometimes assume the property is worth what the buyer originally paid. A note buyer values the collateral at today’s market — not at origination.
- Failing to season the note. A note with three payments of history is worth materially less than the same note with 24 months of clean pay. Holders who sell too early leave money on the table.
- Accepting the first offer without comparison. Note pricing varies between buyers based on their cost of capital and portfolio appetite. One quote isn’t a market.
Selling a Note vs. Holding It
| Consideration | Sell the Note | Hold the Note |
|---|---|---|
| Capital position | Lump sum today | Monthly income over time |
| Risk | Transferred to buyer | Retained by holder |
| Management | None — fully exited | Servicing, taxes, default risk |
| Total return | Discounted from face | Full interest if borrower pays |
| Reinvestment | Capital free to deploy | Locked in amortization schedule |
| Best when | You have a better use for capital | You want passive income, low risk |
When to sell: the capital has a higher-yielding use, the borrower is shaky, or the holder wants out of active note management.
When to hold: the note is performing, the rate is good, and there’s no better use for the capital. Not every note should be sold.
The Note Sale Process
- Submit note details. Loan balance, rate, payment history, original term, property address, and copies of the note and deed of trust.
- Receive an indicative quote. A direct buyer like Texas Funding (Houston-based) can give a directional price within 24–48 hours.
- Due diligence. The buyer orders a property valuation, reviews title, and verifies payment records.
- Firm offer and assignment. Final price confirmed; an assignment of the note and deed of trust is drafted.
- Close and fund. The seller signs the assignment, funds are wired, and the buyer becomes the new holder. Borrowers are notified to direct future payments to the new holder.
Total timeline: typically two to four weeks for performing notes; longer for non-performing where workout strategy must be evaluated.
Why Choose Texas Funding
Experience. Since 1982, Texas Funding has specialized in the creation and purchase of mortgage notes. Forty-plus years of buying paper across multiple real estate cycles means accurate pricing, predictable closings, and no surprises on the back end.
Reliability. Texas Funding is a direct buyer, not a broker. Quotes come from the principal making the decision. Funding is internal capital — there’s no “we have to confirm with our investors” delay that kills deals at the closing table.
Quality and process. The team buys performing, sub-performing, and non-performing real estate notes across property types. Documentation requirements are clear up front, and the diligence process is run by people who’ve been doing it for decades.
Service area. Headquartered at 10497 Town and Country Way in Houston, Texas Funding (Houston-Based) serves note holders throughout Texas — individuals, institutions, and companies of all sizes seeking liquidity from their paper. The team understands Texas note law, Texas foreclosure timelines, and Texas property markets in a way that out-of-state institutional buyers don’t.
Hold a note you’d rather convert to cash? Contact Texas Funding for an indicative quote on your existing mortgage note purchase.
Frequently Asked Questions
What discount should I expect when selling a performing note?
Performing first-lien notes secured by quality collateral with seasoned payment history typically trade in a band reflecting the buyer’s required yield and the remaining term. Specific pricing depends on rate, balance, property type, and borrower equity. A direct quote from a buyer is the only accurate number.
Can I sell just part of my note?
Yes. Partial note purchases are common — the buyer purchases a defined number of future payments (say, the next 60 months) and the note reverts to the seller after. This raises immediate cash without giving up the full asset.
What happens to the borrower when I sell the note?
Nothing changes for them other than where they send payments. The note terms, rate, and balance remain identical. Borrowers receive a notice (a “goodbye/hello” letter) telling them to direct future payments to the new holder.
Will you buy a note in default?
Yes — non-performing notes are a regular part of what Texas Funding buys. Pricing reflects the additional work and risk, but for note holders who don’t want to pursue foreclosure themselves, selling the non-performing note is often the cleanest exit.
What documents do I need to provide?
Original promissory note (or a clear copy), recorded deed of trust, payment history, title insurance policy if available, and any modifications or assignments. Cleaner files close faster.
Are second-lien notes purchasable?
Yes, though they price differently than first liens because the recovery position behind a senior loan is weaker. Equity protection, seasoning, and senior loan status all factor into the offer.