Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
In order to stay in business as a note broker in the field of private mortgages a broker needs to make money now and be able to make money in the future. A note broker can do this by having a good referral network that is sure to keep producing for years to come or by having a great marketing plan that will generate current and future leads. A note broker can also prepare for the future by keeping a piece of the action at every chance possible for future income or to sell during the slow periods. This can be done by keeping the back end of a note, also known as a remainderment or a tail end.
There are many different ways to keep a piece of the action. When I keep the tail end of a note it is with no money out of my pocket. For the purposes of this article I am going to focus on just keeping the tail end of a note with no money out of your pocket. A tail end is the back of a note. For example, it might be keeping the last 3 years of payments on a 20-year note or keeping a part of the balloon payment due in five years. By keeping the tail end of a note you are creating an equity position in the note. You are purchasing the entire note from the seller and selling a partial to the funding source. The funding sources that will allow you to do this will usually prepare and record all of the documents for you. You will make money at the time the transaction is closed in the form of your negotiated commission and you have the right to receive more money when the tail end pays off or comes back to you!
You can take a tail end whenever the funding source allows you to and is making a purchase based on their Investment to Value (ITV) guidelines and not their yield requirements. For instance, a funding source may require a 12% yield on a particular note and the price based on yield might be $84,543. But, their Investment to Value guidelines requires that they can only pay $80,000. This would be a scenario where you may be able to keep the tail end of the note. Let me walk you through an actual transaction that I did to better illustrate how you can keep a tail end.
Type of property Single Family Home in San Antonio, Texas.
| Sales Price: | $76,000.00 | Payment Amount: | $603.47 |
| Down Payment: | $1,000.00 | Current Balance: | $74,213.65 |
| 1st Deed of Trust: | $75,000.00 | 1st Payment Due: | 7-10-1994 |
| Date of Sale: | 6-10-1994 | Payments Paid: | 18 |
| Term: | 360 months | Payments Left: | 342 |
| Interest Rate: | 9% | Next Payment Due: | 1-10-1996 |
| Present Balance: | N | I | PV | PMT | FV |
| 342 | 9% | $74,213.65 | $603.47 | 0 | |
| Funding Source Price | 342 | 12.25% | $57,282.16 | $603.47 | 0 |
In this particular instance the funding source was willing to pay $57,282.16 for the full purchase at a yield of 12.25%. The seller accepted $55,000 from me for the full purchase and we continued with our due diligence. Then we ran into a problem. The credit of the payor was poor and the funding source didn’t want to get into the transaction any more than 60% Investment to Value.
PROBLEM: Poor credit, Investor cut to 60% ITV, maximum pay price $45,600
$76,000 X .60 = $45,600
The seller really needed the cash and she accepted $44,000 for the full purchase. I could have just left it at that and earned my $1,600 commission but the funding source still only required a 12.25% yield, so here is what I did.
How many payments is $45,600 worth to the investor at the investor’s yield?
| N | I | PV | PMT | FV |
| 145.29 | 12.25% | $45,600 | $603.47 | 0 |
SOLUTION: Buy Full Purchase from the seller for $44,000 and sell the Investor 146 payments. I receive $1,600 now and 196 payments on the back end!
I plugged the numbers into my calculator and determined that for the same purchase price of $45,600 at a 12.25% yield the funding source could purchase just 146 payments! So the funding source prepared the documents, I purchased the full note from the seller for $44,000 and at the same time sold the funding source the 146 payments. That left me in the position of holding 196 payments on the tail end of the note! If the note had paid off the month after our transaction closed I would have been entitled to $20,779.41 of the note. That was the beginning balance of my equity position in the note.
Present Balance of 146 payments:
| N | I | PV | PMT | FV |
| 146 | 9% | $53,434.24 | $603.47 | 0 |
| Present Balance of Note | $74,213.65 |
| – Present Balance of 146 Payments | $53,434.24 |
| = What 196 Payments are worth at Closing | $20,779.41 |
At this point in time the note is still current and being paid as agreed. If this goes the full term the note will come back to me on 3-10-2008 with 196 payments remaining and a principal balance owed to me in the amount of $61,860.18!
What are my 196 payments worth when I get it back on 3-10-2008?
| N | I | PV | PMT | FV |
| 196 | 9% | $61,860.18 | $603.47 | 0 |
I could keep waiting until 3-10-2008 to start receiving monthly payments or if I needed some cash during a slow period or to make a purchase I could call the funding source and sell all or part of the tail end to them at any time, for a discount of course. Two years ago I purchased a house and I got my money for the down payment, expenses, and improvements by selling off some of my tail ends. If you would like some more examples of how to keep a piece of the action just contact me and I can send you a copy of my handout for the workshop I do at the Cash Flow conventions.
I hope by reading this article you can see how keeping a piece of the action can help you make money now and in the future. In enjoying the “Bounty of the Harvest” a good note broker does not only know how to make money now but also how to save some of the harvest for the future.