When does liquidating a carried note stop being a loss and start being a trade
A note I use to think through this: a seller carries 180k at seven percent over fifteen years, roughly 1,617 a month. Two years in, the buyer has never missed a payment. A note buyer offers 148k for the remaining stream. That looks like a loss of 32k against face, so most sellers walk away from the conversation. But the number that matters is what 148k does next, compared to what 160 monthly payments still ahead actually return in present value terms at any reasonable discount rate.
If the seller's next use of capital is another property that will throw off nine or ten percent unlevered, the discount starts to look different. The note buyer is pricing to their yield, probably eleven or twelve percent after servicing costs on a performing first position note with two years of payment history. The gap between what the seller leaves on the table and what they can actually deploy into is the real trade, not the spread between face and offer price.
What keeps the economics from working is when the seller has no clear next move. Cash sitting in a checking account while a note buyer pockets twelve percent is the scenario where holding the paper wins. What makes the trade rational is a specific use of the lump sum that beats the coupon, not a general preference for liquidity.
The thing most sellers do not model before the conversation is their own implied discount rate. If you would take a long term bond at six and a half percent, you should probably hold the note. If you need seven figures moving inside eighteen months for a deal you have already identified, the discount is just a transaction cost. What is the rate of return on the use of capital you are considering if you do sell?
