Real Deal #153 – Split Payment Partial Rescues Note Purchase

Welcome to Real Deals! It’s always easier to learn from real life so here we share information from actual owner financed transactions.

When the mortgage balance is greater than the property value a partial purchase can rescue the purchase of a seller financed note similar to this real deal in Texas.

We were approached to purchase a well-seasoned note secured by a 15-unit Motel in Texas as follows:

• Sale Price                        $160,000
• Down Payment                  20,000
• Original Balance          $140,000           
• Terms                                  11% interest payable in 360 payments of $1,333.28 per month
• Payments Made                151
• Remaining Balance        $123,836.85
• Remaining Term            209 months

The note was well seasoned, equity strong, and the payer even had excellent credit with a score above 725. A full offer was agreed to resulting in a net purchase price to the seller of $111,880 and the appraisal was ordered.

Unfortunately, the appraisal revealed this area was economically depressed with the fair market value of the real estate only appraising at $123,000 based on recent sales of comparable properties. This appraised value was considerably lower than the sale price and effectively eliminated the payer’s equity.

The transaction still had some positives based on the payer’s credit and long time payment history. The payer also resided on the property in the larger owner’s quarters.

The funds available for a purchase were limited to a 70% Investment to Value or $86,100 ($123,000 x .70 = $86,100). This resulted in a discount on the full balance that was understandably too high for the seller.

In order to alleviate the large discount and meet the needs of this elderly seller, a split payment partial offer was structured. The seller would receive $78,093 at closing and retain $333.28 from each of the remaining 209 monthly payments. The investor purchased $1,000 of each monthly payment and kept their ITV exposure at acceptable limits based on the lower appraised value of $123,000.

The partial purchase was able to create a win-win scenario for both the seller and the investor allowing the transaction to close.

Real deals are based on actual transactions completed within the past ten years. Market conditions change frequently resulting in pricing and underwriting changes by note investors.  Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters.

For more real life case studies including calculations, documents, and partial purchase wealth strategies be sure to visit the bookstore for Personal Profit Series: Notes – Your Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!