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.
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.