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  • Randy Rodenhouse

Introduction To Partial Notes

The partial purchase of a note is extremely powerful tool available to note buyer and sellers. Both buyers and sellers can benefit from this technique. It is a great option to the “take it or leave it” mentality with a typical full note purchase. Is a great way to recapitalized for the note seller and a low risk, high return opportunity for the note buyer.

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 buyers or note brokers only focus on full purchases the majority of the time. But in a tight and competitive market, as we are experiencing now, creativity and flexibility are important for a note buyer or note broker. Discovering a seller’s true needs and structuring a transaction specifically designed to meet those needs can mean the difference between success and failure.

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. Also, when the seller is reluctant to take the necessary discount on the full purchase option. Finally, when the buyer wants to limit his/her investment exposure due to some concerns over the property value and needs a lower LTV (loan to value).

Partials can be much easier to sell to the note holder by emphasizing the combined amount of the price paid 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 note holder.

What Is a Partial Note Purchase?

This is when someone purchases only a portion of the note and not the full note. For example, the note has 300 payments remaining and instead of buying the entire 300 payments you buy only the next 60 payments for a set dollar amount. After those payments are made the note reverts back to the original note seller for the remaining 240 payments. This is called a straight partial.

Types Of Partials

One of the most common partial options is a straight partial (also known as a front partial) which was discussed above. 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, a set number of payments.

There is also a split payment partial. This is the purchase of a portion of each payment for a specified time period and amount with the seller receiving the remainder of each payment.

Finally, there is the balloon split partial. This is the purchase of immediate payments up to and including a portion of the balloon payment with the seller retaining a portion of the balloon payment.

Benefits Of Partials

Seller’s Benefits:

  1. Gives seller choices based on needs. If seller only needs $30,000 and has a $100,000 note then does not have to sell the full note.

  2. Minimizes discount to the seller. The discount is larger when selling a full note versus a partial note.

  3. Seller can participate in future payments since the note reverts back to the seller when the buyer collects their designated number of payments.

  4. Opportunity to sell another portion in the future since established a relationship with note buyer.

  5. Shared risk for buyer and seller.

Buyer’s Benefits:

  1. Since buying a partial the ITV (investment to value) is lower which reduces the risk and exposure to the buyer.

  2. Residual income opportunity. The note seller may become a repeat customer.

  3. Typically, buyer can structure higher yields since seller is happy to get back end note payments.

  4. Limits the amount of money you need to invest.

  5. Shortens the term for the buyer. Not “stuck” in one note. Spreads buyers’ risk among more notes.

Full and Partial Examples

Example of seller finance note sell: Mrs. Jones wants to sell a note in order to help pay for a new car. However, she does not want to take a large discount.

Mrs. Jones’s property is a seller financed note where the property is valued at $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 residual balance after the ten years of payments would be approximately $64,668.

Mrs. Jones 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 an example, maybe the note broker might have offered Mrs. Jones $32,207 and been able to make $2,500.

Successful note brokers and note buyers know how to offer partial purchase options to get more transactions closed.


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