One of the things that make buying and selling mortgage notes so appealing is the multitude of ways an investor can purchase a note.
Frankly, you are limited only by your imagination. Well, maybe imagination and reaching a desired yield.
Here is a quick look at calculating the cash flow business that even those with math phobias will like.
The Top 5 Ways to Buy Mortgage Notes
1. FULL – A full is just that. Buying the entire note.
If the seller has 322 payments remaining, the investor purchases all 322. The full purchase is the most popular way to buy mortgage notes.
Even though it may not be the best choice for a seller, many sellers just want to be completely done with the note.
2. PARTIAL – Anytime an investor purchases something other than a Full it’s referred to as a “Partial.”
Typically when someone uses the term “Partial” we are talking about purchasing the next immediate “X” Number of Payments. This can be any number of payments.
The most common partial purchases are 60 months, 120 months, and 180 months.
If the investor purchases the next 60 payments, the promissory note reverts back to the seller on payment 61. The seller, at their discretion, may choose to sell more payments or keep the remaining payments.
3. PAYMENTS ONLY – This type of partial purchase involves a balloon mortgage note where the seller is due a large balloon payment at the end.
For example, the note holder is to receive 120 more monthly payments and then a balloon payment of $50,000.
“Payments only” would be when the investor purchases just the remaining 120 monthly payments but none of the balloon payment. The seller of the note would retain future possession of the balloon.
4. SPLIT BALLOON – Very much like the “payments only” option except in this case the investor purchases all of the monthly payments and a portion of the balloon.
For example, the investor purchases all the remaining 120 payments and $30,000 of the balloon payment.
This would leave the seller the remaining $20,000 due of the balloon payment.
The seller and investor have effectively “split” the balloon ($30,000 to the investor, $20,000 to the note holder).
5. SPLIT PAYMENTS – In this type of partial, the investor purchases a portion of each monthly payment.
It is typically reserved for when the seller of the note is receiving a sizeable amount each month (although it really could be implanted at any time).
For example, let’s say the note holder is due 145 payments of $2,500.00 each month.
The investor may elect to purchase $1,750 of each month. This would leave the remaining $750.00 each month for the seller of the note.
Typically the payer mails the full $2,500 each month to the investor and then the note investor forwards the $750 to the seller. This avoids confusion among the payer of the note as well as helps the investor make sure the note is being paid in full each month.
The “amount” of each monthly payment that is purchased is completely up to the agreement of the investor and seller. It just needs to be worth the extra handling efforts.
MAKING THE CHOICE
As you can see, there’s more than one way to buy mortgage notes. Matter of fact, there may just be literally hundreds of ways to purchase notes since many of the methods can be used in combination with each other (including Reverse and Split Disbursement partials).
As long as the deal can fit into the best financial calculator, there is a mathematical way to purchase the note.
So which method is best?
The best method is dictated by the needs of the note seller and how best to meet that need while still protecting the yield and exposure requirements of the investor.
Want to run purchase options, yields, and partials like a pro? Check out our How To Calculate Mortgage Notes Training for over 60 step by step videos!