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Transaction Example: Options Available to a Note Holder
The following is an example of some different options available to a note holder. Your note's value may be higher or lower depending upon property type, terms and payor information. Every note, property and payor is unique and is evaluated to give you the highest possible price and best possible options available to you for your situation.
Example Of A $90,000Note on Which a Seller is Receiving Payments
Some Of The Options Available To The Note Holder1. DO NOTHING. Continue receiving the remaining 156 monthly payments of $967.14.
2. FULL SALE. Sell the entire note now.
NOTE HOLDER Receives: $76,233.18 CASH NOW
3. PARTIAL SALE-FRONT END PAYMENTS. Sell the next 5 years of payments (60 payments). Then receive the last 96 payments.
NOTE HOLDER Receives: $40,653.34 CASH NOW
plus $63.736.86 Loan Balance in 5 years
$104,390.20 Total Cash to Note Holder
4. FULL SALE - SPLIT FUNDING. Sell one half of the note (the next 78 payments) now and the other half of the note (the remaining 78 payments) after the first 78 payments are paid.
NOTE HOLDER Receives: $48,010.47 CASH NOW
plus $48.010.47 Cash in 78 months
$96,020.94 Total Cash to Note Holder
5. PARTIAL SALE - ONE HALF OF EACH MONTHLY PAYMENT. Sell one half of each monthly payment and continue to receive the other half.
NOTE HOLDER Receives: $33,114.72 CASH NOW
plus $483.57 Per Month for 156 Months
Many other options are available. Armstrong Capital can custom tailor a transaction and the options can be designed specifically for the cash needs of the Note Holder.
Detailed Explanation of Above Options
When the entire note is sold, it is always sold at a "discount" off the current principal balance of the note. The reason for this is that the face interest rate of the note is seldom as high as the market yield required in the secondary mortgage money market. In the example, the discount is $8,024.01 ($84,257.19 minus $76,233.18) assuming the secondary mortgage money market yield is 12%. The discount could be more or less depending on the current yield requirements in the secondary mortgage money market.
Partial Sale— Front End Payments
Partial sales are very attractive from the point of view of a note holder because the note holder does not have to take a big discount. The main reason for the discount being so large ($8,024.01 in the example) is that the payments due in the distant future are worth much less in today’s dollars than the payments that are due soon.
In a full sale, the note holder is selling all the payments, and not getting much for the ones at the end of the 15 year term—thus the large discount. In a partial sale where the front-end or near term payments are sold, most of the payment is interest. This means that the note holder gets a sizable amount of cash now ($40,653.34 in the example) and when the note holder gets the note back after 60 payments, the balance of the note is still fairly high ($63,736.86 in the example). The note holder then gets the remaining 96 payments of $967.14.
A partial sale of the front-end payments is like having your cake and eating it, too. You get a sizable chunk of cash now, and when you get the note back, it has a high remaining principal balance and lots of payments left to collect.
In the example, the cash the note holder receives now plus the remaining loan balance the note holder receives in 5 years is more than $20,000 higher than the current principal balance of the note. In many cases, note holders prefer this type of an arrangement rather than selling the entire note for a large discount off the current principal balance.
Full Sale-Split Funding
In the split funded sale, the note holder is selling all of the payments but is only selling part of the payments now and part of the payments in the future. This type of sale is really a hybrid between a full sale and a partial sale.
In the example, one half of the note (the next 78 payments) is sold now and the other half of the note (the last 78 payments) is sold after the first 78 payments are paid. $48,010.47 is paid in cash now and an equal amount in 6 ˝ years.
This is only one variation of a split funded sale. The note could be split into three, four or more equal or unequal parts.
Partial Sale-One Half Of Each Monthly Payment
In this type of a sale, the note holder sells on half of each monthly payment and continues to receive the other half. This is a particularly attractive way to sell a note if you need some cash now but also want to keep part of the monthly cash flow. The example shows that one half of each of the 156 remaining payments can be sold for $33,114.72 and $483.57 keeps coming in every month.
These are just some of the variations and options available to a Note Holder when considering the sale of all or part of their Real Estate Secured Note. Armstrong Capital can tailor a transaction to meet the needs of the Note Holder.
The above is an excerpt from Jeff Armstrong's Book:
"The Note Holder's Handbook - How to Profit From, and Correctly Manage Your Real Estate Note or Mortgage"
In easy to understand language, the many topics that are discussed in the Note Holder's Handbook include the following:
The Note Holder's Handbook also includes a Handy Reference Data area to keep all of the pertinent information regarding the note in one place AND a simple to use Payment Record chart to keep track of the payments you have received..
This handbook is a must for someone receiving payments on a real estate secured note.
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Last edited: 12/01/15 06:41:00 PM