When buying real estate notes you will surely encounter a seller that flat-out refuses to take a discount. You can try explaining the time value of money until you turn blue in the face or… provide a simple alternative.
Offer to buy half the number of remaining payments for half the balance.
Not only is the seller happy, the investor can receive an increased yield.
Intrigued? Wondering how this all works? Watch this step-by-step video walk through of the 50-50 Partial from our How To Calculate Cash Flows Training.
The 50/50 Partial Investment Example
Let’s use a classic example of a $100,000 note at 10% with 360 payments of $877.57 per month.
Start by taking the remaining balance of $100,000 and dividing by 2 to get $50,000.
Next take half of the remaining number of payments (360 divided by 2) to get 180.
The Amount Offered to the seller would be $50,000 for the next 180 payments.
Sounds good for the seller but what is the investor’s return?
Calculating Yield On The Partial Cash Flow
For this we turn to a financial calculator and enter the following values:
The anticipated yield is 19.98% (or 1.665 x 12 if you are using the HP12C financial calculator). The face rate of the note remains 10% but the investment yield is almost double!
How About A 25/25 Partial Investment?
This concept also works when dividing a note into thirds or quarters. Let’s take the same $100,000 note and structure buying 1/4 of the remaining payments for 1/4 of the balance.
- Balance Remaining: $100,000 ÷ 4 = $25,000
- Payments Remaining: 360 ÷ 4 = 90
- Amount Offered: Purchase the next 90 payments for a 25,000 investment.
What happens to the yield?
The anticipated yield goes up to a whopping 39.91% (or 3.325 x 12 if you are using the HP12C financial calculator).
When structuring these offers be sure to always run a yield calculation. If you have a very low interest rate note you might not be happy with the final yield (even if it doubles or quadruples)!
Where’s The Discount?
This strategy is also referred to as a split funding, the no discount partial, or half the payments for twice the yield.
Technically of course the cash flow is being purchased at a discount from the face rate of the note. But to understand that it takes knowing how to calculate the time value of money (and now we’ve arrived full circle from the beginning of the article).
Ready to master the financial calculator for maximum profits? Check out our How To Calculate Cash Flows Training for over 50 step by step videos like the one shared here!
This information is provided for educational purposes only. The author and publisher are not soliciting investment funds and this is not intended as legal, financial, or tax advice. This investment strategy might not be suitable for your situation. Always consult with a competent attorney, financial advisor, and/or tax accountant for your protection.
I’m curious what to do in a situation where the ‘total payoff’ is higher than the UPB. It seems that this happens when there are a variety of fees that have arisen (late charges and so forth). So, the UPB might be $40K. But, the ‘total payoff’ is $55K. Do we still price the note (and calculate the yield) based on the UPB? Or, do we use the ‘total payoff’ value for the calculations, since that’s the amount of the note buyer expects to receive?
Tracy Z says
Hello Elvin, Yes – additional amounts owed for late fees, accrued or deferred interest, and other items can be calculated into the payoff. There are two ways to look at it. You could run your numbers on the standard cash flow (without those items) and consider those extras as an added bonus that makes your yield go up. Or you can put those figures in as an additional payment or balloon at the end. You normally can’t charge interest on those types of items so you wouldn’t want to add then to the balance at the start of the cash flow. They are basically in their own non-interest accruing bucket (unless your note provides otherwise). Tracy
I have a note seller who wants to sell a partial but there is a 10 year call with terms as follows:
1. Original note of $235,000 at 7% and payments of $1,900/mo for 120 months. Payments began 6/30/18
2. Current PB is $229,309.99 so there is 113 payments left at $1,900 and one of $145,597.76
If I were to offer to purchase 50/50 according to my calcs I would pay $41,955 for 57 payments, is that correct?
Tracy Z says
Hello John, That would depend on what yield you were after. If you bought 50% of the monthly payment (which is $950 or 1900/2) for 57 months and paid $41,955 the anticipated yield would be 11.08%. The keystrokes for that on an HP12C would be:
41955 CHS PV
Solve for I = .92
x 12 = 11.08%
There are other ways to split up the note. For example you could buy half of all remaining monthly payments and half the balloon which would truly be buying half of the remaining amount due (rather than half of just 57 monthly payments). Or you could buy half of all remaining 113 monthly payments and leave the balloon to to the seller. Or you could buy all $1900 of the monthly payments for a set number of months. The key to calculating what you will pay is starting with the yield you will want to achieve. Hope that helps! Tracy
tom mcgovern says
I like the 50/50 partial. i see the yiels and understand the calculation.
My question is:
When presenting this to a notre investor what happens to my comm/fee?
They buy with the yiels presented but I’m lost to my fee arrangement
p.s I will be buying the this from you in a short time
Tracy Z says
Hello Tom, You would deduct your fee from the investor’s offer. In the first example where the investor funded $50,000 for 180 payments you would offer something less to the seller. If you desired a $2,000 fee then the offer would be $48,000 tot he seller. If the seller was set on $50,000 and you needed the investor to fund $52,000 then the investor would need to buy a few more payments on the partial. It can take a little playing with the numbers to get the final desired result.
Great example Tracy
I have a note now I’m working on with very similar terms
I would like to know when you present the no discount
How do you not show your commision or fee?
Would your fee be in the yield, that part of the example I would like to know, as I like the split funding approach.HF
Are you actually doing deals like this?
love the simple steps on this video. I’m in finance and an educator for 20 years in RE finance and pride myself in using simple language to de-mystify money. And this does that !! Great job. Athena.