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.

Note Buying Example #1 – The Full Offer

Consider a transaction with a balance of $100,000 at 10% interest with 360 payments of $877.57 per month. If the investor desires an 11% yield, the pay price will be $92,150.55.

• Current Balance:  $100,000.00
• Cash at Closing – Full Offer:  $92,150.55
• Discount:  $ 7,849.45

Note Buying Example #2 – The Partial Offer

Now compare what happens if the seller elects to assign just half of the remaining cash flow – the next 180 monthly payments. The investor can pay $77,210.31 at an 11% yield for the right to receive an amount equal to 15 years of payment.

Compared to the full offer in the first example the initial cash to the seller at closing is reduced by $14,940.24 … but look at what the seller retains!

When the mortgage or deed of trust is assigned back to the seller in 15 years, the principal balance still owed by the payer will be approximately $81,665.21. The seller defers payment of the $14,940.24 in exchange for a balance of $81,665.21 in 15 years!

• Current Balance:  $100,000.00
• Cash at Closing – 180 Partial Purchase:  $77,210.31
• Plus Remaining Balance in 15 years:  $81,665.21
• Seller Receives Over Time:  $158,875.52

Keeping It Real

You may have seen note buyers advertise:

“No Discount” or “We Pay Full Face Value”

In reality they are likely using some sort of partial purchase similar to the prior example.

There is a sum of cash at closing for the partial purchase and then the balance is reassigned to the seller in the future, with the two combined amounts equaling or exceeding the principal balance at closing. This might also be structured as a two-stage buyout with cash at closing for the first partial stage, with another advance in the future for the seller’s remaining interest or the second stage.

While “No Discount” is an eye catching marketing phrase, it can also be misleading to the seller as they aren’t truly receiving 100% of the balance at closing. Rather it is received in stages over time.

In order to avoid any confusion or misrepresentation, avoid using these marketing slogans and just present the options as partial purchases with money now and money later.

It’s also important to know the future payout can be impacted if the payer stops making payments or pays off the balance early. These provisions are outlined in the purchase agreement and should be reviewed carefully with a trusted legal or tax adviser.

Searching for more ways to buy and sell mortgage notes, including sample partial agreements? Be sure to check out the Personal Profit Series now available in owner financed resources.

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.