Welcome to Real Deals! It’s always easier to learn from real life so here we share note investing information from actual owner financed transactions.
When the mortgage balance is greater than the property value a partial purchase can rescue the purchase of a seller financed note. Watch the video below and discover solutions to overcoming 3 challenges on this real deal in Texas.
Texas Owner Financed Note Details
We were approached to purchase a well-seasoned note secured by a 15-unit Motel in Texas as follows:
- Sale Price $160,000
- Down Payment 20,000
- Original Balance $140,000
- Terms 11% interest payable in 360 payments of $1,333.28 per month
- Payments Made 151
- Remaining Balance $123,836.85
- Remaining Term 209 months
The note was well seasoned, equity strong, and the payer even had excellent credit with a score above 725. A full offer was agreed to resulting in a net purchase price to the seller of $111,880 and the appraisal was ordered.
Note Investing Challenge #1 – Low Property Value
Unfortunately, the appraisal revealed this area was economically depressed with the fair market value of the real estate only appraising at $123,000 based on recent sales of comparable properties. This appraised value was considerably lower than the sale price and effectively eliminated the payer’s equity.
The transaction still had some positives based on the payer’s credit and long time payment history. The payer also resided on the property in the larger owner’s quarters.
The Solution: Limit the Investment to Value (ITV)
Note Investing Challenge #2 – Lowering The ITV Creates A Big Discount
The funds available for a purchase were limited to a 70% Investment to Value or $86,100 ($123,000 x .70 = $86,100). This resulted in a discount on the full balance that was understandably too high for the seller.
The Solution: Buy A Partial Rather Than A Full
Note Investing Challenge #3 – Seller Does Not Want To Wait For Their Share Of A Partial Purchase
In order to alleviate the large discount and meet the needs of this elderly seller, a split payment partial offer was structured. The seller would receive funds at closing and retain $333.28 from each of the remaining 209 monthly payments. The investor purchased $1,000 of each monthly payment and kept their ITV exposure at acceptable limits based on the lower appraised value of $123,000.
The Solution: A Split Payment Partial
The split payment partial purchase was able to create a win-win scenario for both the seller and the investor allowing the transaction to close.
Real deals are based on past actual transactions. Market conditions change frequently resulting in pricing and underwriting changes by note investors. Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters. We do not provide legal, tax, or investment advice.
For more real life case studies including calculations, documents, and partial purchase wealth strategies be sure to visit the bookstore for How To Calculate Cash Flow Notes and Finding Cash Flow Notes.
Andrew N says
If I understand the deal right, the seller sold the note for $86,100, but he (she) had to paid the broker fee and the difference of $123,836.85 – $86,100 = $37,736.85 to make up the total due on the note ($123,836.85), before she can receive the $333.28 from the $1,333.28 monthly split partial?
Assuming a 3% broker fee for ($123,836.85 x .03 = $3,715.1), in this case the seller nets
$86,100 – $3,715.85 – $37,736.85 = $44,648.04
Did you use a land contract for the deal?
Tracy Z says
Hello Andrew, The seller did not have to make up the discount or total due on the note. They received funds at closing (the $86,100 less the note finder fee) and started receiving the $333.28 on the first month after closing. It is not necessary to deduct the discount from the funding amount (that already comes off the amount purchased which results in the purchase price). The existing note was purchased using a partial purchase agreement, note endorsement, and assignment of deed of trust. It was not a land contract rather a Warranty Deed with Vendor’s Lien and Deed of Trust (the standard TX version for owner financed notes). The average finder’s fee we see in the note business is 3-6% of the amount invested. If you want a greater understanding of the amount purchased, purchase price, discount, yield, and fees we go into great detail in the How To Calculate Cash Flows Training. The details are here: https://noteinvestor.com/calculating-cash-flow-notes-training/
Daniel Kim says
This video is so powerful. Can you recommend an attorney or company you used to help facilitate this type of closing? I need a company / attorney who can prepare all the documents and truly understand this type of creative structuring. The companies that I’ve talked to seems oblivious to this type of deal structuring. E.g I’ve talked to loan servicing companies and attorney’s and they don’t really get it.
Howard Freeman says
Tracy Z says
So the buyer ended up giving the seller $86,100 cash plus the $333.28 per month for 209 month????
Tracy Z says
Hello Sue, Yes that is correct. $86,100 was funded by the investor at closing which went to the seller less a note finders fee. The seller also receives $333.28 from each of the 209 monthly remaining payments.