How Partials Reduce Note Discount When Selling Mortgages

Is the sticker shock just too much when discounting notes?

It might be time to consider selling just some of the remaining payments.

Note buyers have long used the partial purchase to reduce their exposure or investment risk, but it also has benefits for the seller.

You see the time value of money makes payments due now more valuable than those further out in the future. The partial purchase takes advantage of this by letting the seller cash in the most valuable portion – the more immediate payments. Plus the seller gets to keep the face rate or interest rate on the Promissory note working for them on the portion they hold.

Take a look at how this works by contrasting examples of a full purchase and partial sale. Read more

What is a Partial Note Purchase?

When a seller allows a buyer to purchase property on installment the terms of repayment are usually spelled out in a Promissory Note or Real Estate Contact. Sellers may also elect to sell and assign their rights to future payments.

When an investor purchases all the remaining payments it is considered a full purchase.

When an investor purchases just a portion of the remaining payments it is considered a partial purchase.

For example, a note has a balance of  $90,000 at 9.0% interest payable in monthly installments of $1,140.08 with 120 months (or ten years) of payments remaining.  When the seller sells all 120 remaining payments of $1,140.48 to an investor it would be considered a full purchase.

If the investor only purchased the next 48 monthly payments of $1,140.48 each then it would be considered a straight partial purchase.  Once the investor received the next 4 years of payments, the note would be reassigned to the seller and the seller would collect the remaining 72 payments (120 total payments less investors partial purchase of 48 payments leaves 72 payments remaining to the seller).

A partial purchase can also involve splitting the monthly payments received from the buyer between the investor and the seller, also known as a split partial.  Using the same example of 120 payments of $1,140.08 each, an investor might agree to purchase $600 of each remaining payment leaving a remaining residual of $540.08 to the seller for the next 120 months.

The terms of a partial purchase are spelled out in the Partial Purchase Agreement.  This important document outlines the servicing arrangement along with what happens in the event of an early payoff or default by the buyer.  Competent legal counsel should review the partial purchase agreement to protect the rights of all parties.