Most note holders initially ask for a full purchase. Many of them have just discovered the fact that they have the ability to sell their note and have no idea that alternate purchase options are possible or are even available. As a result, many note brokers only focus on full purchases the majority of the time and fall back on a partial purchase option only on inferior quality notes where ITV limitations are in order.
But in a tight and competitive market, as we are experiencing now, creativity and flexibility are a note broker’s best assets. I have always believed, and have the statistics for my business to prove it, that utilizing a variety of purchase options helps note brokers to better meet the needs of a wide array of note holders. It may seem that in this economy getting the seller as much money as possible by utilizing a full purchase option is the best way to go, but it may not always be the best option.
Offering only full purchase quotes is like having a toolbox that contains only a screwdriver. It’s terrific for tightening or loosening a screw but hard to use on a bolt. Discovering a seller’s true needs and structuring a transaction specifically designed to meet those needs can mean the difference between success and failure. Likewise, offering an alternative can sometimes help a note broker stand out from the crowd.
One of the most common partial options is a Straight Partial (also known as a Front Partial). As straight partial is the purchase of the right to receive a number of payments amounting to less than the full remaining term of the note, most importantly, the NEXT number of payments. For example, if the note is amortized for 30 years (360 months) we might buy the next 60 payments. Not 60 payments at the end of the note or in the middle of the note but the next 60 payments.
Partials are always a great tool to use when the note holder has an immediate cash requirement and only needs a specific amount of money to cover a specific situation or for a specific purpose; when the seller is reluctant to take the necessary discount on the full purchase option; or when the quality of the transaction limits investment exposure.
Partials can be much easier to sell to the note holder by emphasizing the combined amount of the pay price for the partial and the residual interest they may receive in the future. You can also stress the possibility of selling the remainder of the payments if additional cash is needed in the future. Finally, you can demonstrate how the specific partial option meets the specific cash need of the not holder.
Example: Ms. Walker wants to sell a note in order to help pay for a new car. However, she does not want to take a large discount. She is friendly with the payor and feels they are solid and the property is well maintained.
Ms. Walker’s note looks like this: Owner-occupied Single-Family Home valued about $90,000. The current balance of the note is $78,591.58; payments are $538.90 at 7% interest with 327 payments remaining. We could structure a partial purchase of 120 payments of $538.90 at a 14% yield for $34,707. The amount purchased would be approximately $46,413 and the residual balance after the ten years of payments would be approximately $64,667.
Ms. Walker gets the money she needs now for her new car and retains the residual balance on the back end of the note for the future. Ms. Walker is happy; she got exactly what she needed to buy a new car. The investor is happy with a 14% yield and an ITV of about 39%. If there was a note broker involved, as a example, maybe the note broker might have offered Ms. Walker $32,207 and been able to make $2,500.
Don’t get stuck on only offering note holders a full purchase option. Successful note brokers and note buyers know how to offer partial purchase options to get more transactions to close. Be kind, keep safe and stay healthy. Remember success demands action, keep on marketing, it’s going to work! TWITA! (That’s What I’m Talkin’ About!)
Jeff Armstrong of Armstrong Capital has been a note investor and broker specializing in the performing seller financed note industry since 1991. For more updated and current information on how he can help you with your note business, note investments, note appraisals or to request pricing options on a note visit www.armstrongcapital.com to email him and subscribe to Jeff’s Weekly Training & Tips Newsletter.
Jeff, I am perplexed by 1 of the numbers you quoted here…
What is the $46,413?? I get all of the other numbers using the fincalc. But I don’t know what this number is. It isn’t 120 x $538.90. Thanks for the tips!
120 Payments times the payment amount of $538.90 equals the $64,667 figure in the example in my article. If a payoff occurs it is based on the principal balance. The future interest is not in the equation at all in the event of an early payoff. Interest is the rent on your money. When we purchase a note the value and price given is based only on the principal owed and NOT on potential future interest that a note holder may or may not receive. The $46,413 figure as stated in the article is the principal balance of 120 payments of $538.90 at the interset rate on the note of 7%. Hope this helps! I have lots of practice examples like this in my ‘Calculator Secrets’ resource. If you have more questions shoot me an email anytime! TWITA!
I think where my confusion came into play was I was reading that paragraph from the perspective of me the investor who would be buying the note at 14% yield, not the 7%. For me, the $46413 never comes into play because my investment would have been the $34.7k number. Plus, when you had mentioned payoff in your response, that also confused me because the borrower’s total payoff will range between 79k down to 65k over those 10 yrs. At least that’s how i think about partial calculations.
But I understand where you got it from now. Thx!