Partial Purchase

The Partial Purchase Introductory:

What is a partial purchase?
A partial purchase is the purchase of a portion of a note’s remaining payments.
The goal is simple. Noteholders are looking to maximize their overall profits.

Selling a portion of a note is a straightforward process and offers many advantages for note holders looking to maximize the overall return on their mortgage note.

The primary advantage for the note holder is the ability to leverage the note’s overall value. By selling only a portion of the future payments, the holder receives an immediate lump sum and retains the note’s principal at the end of the partial schedule.

If the note holder retains the note after the initial partial has been completed. The note holder can sell another portion to reinvest, thereby minimizing the overall discount and preserving interest income on the back end of the note. This creates flexibility and the potential to capitalize on new investment opportunities.

A partial purchase offers a smaller discount than selling the entire note. Additionally, in the event of an early payoff, the note holder often realizes a higher total return than if they had sold the whole note upfront. This approach provides liquidity today while preserving long-term income potential.

Simply put, a partial purchase is the purchase of an amount less than the total amount owed on any receivable/note.

The Benefit of Partial Purchase

• The partial purchase allows the note holder to access cash from the note while retaining an interest in it. The note payments revert to you once the purchase amount has been paid.
• The most significant benefit from a partial sale of the mortgage note vs a complete buyout is the smaller discount.
• The partial purchase allows you to leverage the built-in interest over time.
• An early payoff often enables the seller to realize proceeds exceeding 100% of the note’s remaining principal balance at the time of closing.

Partial Purchase Structure

1. We are purchasing a portion of the note for less than the principal balance. This is known as the net present value.
2. The note reverts to the note holder once the purchased amount has been paid.
3. The note buyer will collect directly from the borrower with our third-party account servicer.
4. The amount purchased can be paid in advance through principal reduction payments by the borrower.
5. There is no penalty or requirement to collect a certain number of payments. The present value repayment condition will be met when the amount due is zero.
6. The repayment term can be completed at any time. 10 days, 20 months, or 30 months.
7. The outstanding balance can reach zero at any time due to the borrower’s additional principal payments.
8. Once the net present value balance purchased reaches zero, the note reverts to the note holder, indicating the transaction is complete.

Partial Note Purchase: How is this calculated?

We take the following three variables from the note.

• Payment amount.
• Interest Rate.
• Number of payments of the cash flow we are calculating.

For example, when calculating the amount purchased for a 36-payment cash flow, the value will be lower than for longer terms, such as 48 or 60 payments, because fewer payments reduce the total cash flow.

Partial Note Purchase Example #1:

Partial Example #1: The note holder has an investment requiring approximately $40,000.00. The mortgage note details below are provided for review. Based on the numbers, the note buyer offers $45,310.00 cash at closing for a 36-payment partial.

The note holder asks How would this help me?

The note balance is $300,000.00, with $45,310.00 paid upfront. The note holder retains the note after the 36-payment terms, with a remaining note balance of $286,029.87.

This is the most beneficial and straightforward option for the note holder. The details of their private note and mortgage are the following.

• $300,000.00 Current Note balance.
• 5% interest rate.
• 30-year amortization schedule.
• $1,610.46 Payment amount.

We enter the note details into a mortgage program to calculate the amount purchased over a set number of years, based on the accounting and repayment schedule.

36-Payment Note Purchase Details:

• $45,310.00 – Paid to the note holder.
• $53,734.16 – The amount Central Valley One is purchasing.
• $8,424.16 – Total discount.
• $286,029.87 – Note holder’s retaining note balance at the completion.

The amount purchased at net present value for that smaller cash flow will be $53,734.16. The detailed terms of the 36-month partial listed above are a very common transaction type.

Note Purchase Example #1 Summary:

• Purchase offer: $45,310.00
• Amount purchased: $53,734.16
• Note holder retaining amount at completion: $286,029.87
• Early payoff – Total proceeds: $291,575.84

In the worst-case scenario, if the note is paid off early, before completing the 36-payment term, the note holder would receive a total of $291,575.84

Early payoff is based on an $8,424.16 discount derived from the note amount of $300,000.00. This means the seller would end up with at least $291,575.84, regardless of any early payoff.

Partial Note Purchase Example #2:

Partial Example #2: The note holder calls and has an investment need of about $46,000.00. The mortgage note details below are provided for review. Based on the numbers, the note buyer offers $50,000.00 cash at closing for a 60-payment partial.

The note balance is $135,000.00, with $50,000.00 paid upfront. The note holder retains the note after the 60-payment terms, with a remaining note balance of $102,612.63.

The typical scenario is when a note holder reaches out to several note buyers out of curiosity and receives a range of full-buyout offers, from the lowest to the highest. Ranging from ($103,000.00 – $108,000.00) with a $27,000.00 discount.

Then, with the same terms, the note holder reviews a partial with the following details:

• We make an offer of $50,000 to purchase $58,926.28 for this 60-payment cash flow.
• The retaining note balance will be $102,612.63, as the note reverts to the note holder.
• The repayment term is 60 months, with payments made directly by the borrower to our third-party account servicer.

The example above is a partial purchase of 60 months; however, the total purchase amount is $58,926.28.

60-Payment Note Purchase Details:

• Purchase offer: $50,000.00
• Amount purchased: $58,926.28
• Total Discount: $8,926.28
• Retaining note balance: $102,612.63
• Repayment term: 60 payments.
• Monthly Payments of $1,139.21

Note Purchase Example #2 Summary:

• Purchase offer: $50,000.00
• Amount purchased: $58,926.28
• Note holder retaining amount at completion: $102,612.63
• Early payoff – Total proceeds: $126,073.72

In the worst-case scenario, if the note is paid off early, before completing the 36-payment term, the note holder would receive a total of $126,073.72

Early payoff is based on an $8,926.28 discount from the note amount of $135,000.00. This means the seller would end up with at least $126,073.72, regardless of any early payoff.

Note Purchase Example #2: The Early Payoff

We are often asked, What if the borrower pays off the loan early?

• After ten days, what are the final totals: $126,073.72
• After 40 payments, what are the final totals: $142,870.91

This option (Above) has a total discount of $8,926.28.

This means that payors can pay off the loan at any time, whether in 2 days or 3 months; your total would be $126,073.72. This is because the discount is subtracted from the total balance, resulting in considerable savings.

Note Purchase Example #2 Partial vs Full Purchase:

A typical note buyer provides a full buyout at $108,000.00. Then the payor sells the property and the note buyer, in this case Central Valley One, is paid in full. There’s an immediate financial deficit of $27,000 to the note holder for accepting the full purchase. This $27,000 discount is larger than the total discount that would have been applied under a partial purchase offer from any note buyer.

Consequently, the full buyout resulted in a greater loss to the note holder than a partial purchase structure would have, illustrating the importance of carefully evaluating timing and discount terms before accepting a full purchase offer.

This holds true whether the loan is paid off in 10 days or 24 months. Considering and, more importantly, accepting a partial purchase greatly benefits the note holder. If the borrower does not make any additional principal reduction payments, the completion period is 60 months, as shown in our example.

The retaining note holder’s principal balance at completion is $102,612.63.

When evaluating options for selling a mortgage note, the note buyer will provide multiple cash-out options. These should be considered for a partial purchase; the note holder’s total could increase to $152,612.63, a significant difference from a full buyout at $108,000.00.

Notes & Important Details

Typically, a note holder will reach out with curiosity. That note holder will also contact several companies to compare offers.

It’s typical for the note holder to realize soon that purchase offers on private mortgages are often dictated by the Federal Reserve’s borrowing rate, equity, and other factors.

After conducting extensive research on several companies, the note holder will discover that their purchase offers are remarkably similar. With a total purchase offer and partial purchase offers with various options.

The situation is much different in real estate. In real estate, buyers often move out of state or project appreciation for speculative future values.

Please see our resource page under Note Buying Detail & Criteria.

Early Payoff

Suppose the borrower begins making payments to reduce the principal amount purchased. When the principal amount reaches zero, the note will revert to the note holder.

This condition must be met; otherwise, the buyer will retain the payments until the Amount Purchased has reached zero. At that time, the partial purchase is completed.

The condition can be met after only 20, 25, or 40 payments; completing a partial purchase can often be early.

We provide a custom amortization schedule detailing the cash flow of each partial purchase. Starting with the purchase amount, the month-to-month principal reduction will be detailed until the purchase is complete.

No Early Payoff

Suppose the borrower pays only the agreed-upon note amount each month.
The note buyer will receive the set number of payments detailed in the partial purchase.
By making extra principal payments, the borrower can significantly expedite the transaction and reap the potential benefits of early completion.

However, the borrower is under no obligation to make additional payments. Extra principal payments are welcome but optional. The borrower has to opt to make said
extra payments.

Partial Note Purchase with Balloon

Note Purchase Example #3

Central Valley One or most note buyers will purchase a partial that includes a portion of the final balloon due in the future. Many times, the agreed-upon terms in the note include a balloon. The final payout is scheduled in the note and is split when the note is paid in full, either by the bank with the refinance or by a third-party account servicing agent handling the payoff.

• Note Amount: $120,000
• Interest Rate: 8%
• Amortized: 15 years.
• Balloon due: 5 years.
• Monthly Payments $1,146.78.
• Balloon Amount: $94,519.69

Final Summary:

• Purchase offer: $50,000.00
• Amount purchased: $56,557.42

• Note holder retaining Balloon: $94,519.69
• Early payoff – Total proceeds: $113,442.58 – Seller totals if note paid in full immediately.

Overview:

• The note holder receives $50,000 upfront.
• The note holder retains the final balloon of $94,519.69 due at maturity.
• Overall totals: $144,519.69. With this partial option-buying payments only, the seller retains the balloon.

Partial Note Purchase with split payment:

Note Purchase Example #4:

Let’s take a $600,000 private mortgage note at 6.5% with a ten-year term.

Payments: $6,812.88

The offer is to purchase a partial of 48 payments of $3,500.00 per month.

Note seller retains $3,312.88 per month. Then, the note reverts to the note holder.

• $405,289.04 is the amount retained by the note holder as the principal balance.
• The retaining payment for the duration of the note is $6,812.88.

• Purchase offer: $120,000.00
• Payments retained: $159,018.24
• Note Holder retaining: $405,289.04
• Amount Purchased: $147,586.19

An example of an early payoff is provided below, along with a partial split payment.

The note is paid in full after 30 payments are applied to the account.

• $484,278.34 – Note balance at the time of payoff.
• $59,871.94 – Amount owed to the note buyer.
• $424,406.40 – Amount retained by the note holder after 30 payments applied.

Overall Totals: $643,792.80

• $424,406.40 – Final Payoff amount.
• $99,386.40 – Payments received over a 30-month period.
• $120,000.00 – Amount Paid Upfront.

Note Buyer Comparison: Partial vs. Full Purchase

The majority of note buyers provide multiple partial purchase options for mortgage notes. The primary reason for this practice is to comply with legal disclosure requirements and ensure transparency with note holders. While full buyouts are often more profitable for note buyers, partial purchases offer significant advantages related to risk management, compliance, and long-term investment strategy.

The Economics of Note Buying

According to the fundamental principles of note investing, many note buyers are reluctant to purchase smaller balance notes. The lower investment amount often yields a profit margin too small to justify the time, effort, and transaction costs. Consequently, many buyers choose to offer full buyouts instead of partial purchases.

However, a full buyout typically involves a larger discount than a partial purchase. In most cases, note buyers make more money from a full buyout, while note holders receive less due to the steeper discount applied to the sale.

Example Scenario

Consider a situation when a note buyer negotiates a significant discount for a full buyout but fails to mention or offer a partial purchase option. The note holder agrees to the full sale, unaware that a partial structure could have provided a better financial outcome.

If an early payoff occurs, such as six months after the sale. The note holder may face a substantial financial deficit, ranging from $25,000 to $300,000, depending on the original discount. This outcome benefits the note buyer, who realizes a larger profit, but leaves the note holder at a clear disadvantage.

Legal and Ethical Considerations

Legal counsel generally advises that note buyers present partial purchase options as part of their disclosure obligations. If a note holder later learns that an early payoff occurred and discovers that a partial purchase would have significantly benefited them, their family, or their investment entity, they could argue that the note buyer failed to disclose material facts.

This failure to disclose may expose the note buyer to legal action and reputational risk. Therefore, offering partial purchase options is not only a matter of ethical best practice but also a proactive legal safeguard.

Strategic Benefits of Partial Purchases

While a note buyer may earn less profit from a partial purchase compared to a full buyout, there are multiple strategic benefits to the partial purchase model. These include:

• Reduced Risk Exposure: By purchasing only a portion of the note, the buyer limits capital exposure and diversifies portfolio risk.

• Steady Income Generation: The partial purchase creates a predictable cash flow and contributes to ongoing income within an IRA or investment portfolio.

• Portfolio Growth: Increasing recurring income streams establishes long-term financial stability, leading to additional investment opportunities for note buyers and note investors.

This method reflects a sophisticated investment strategy that prioritizes sustainable growth over short-term gain. Although it requires patience and disciplined management, the long-term rewards often outweigh the immediate profits of a single full buyout.

Partial note purchases represent an important strategy for sustainable note investing. They not only help maintain legal and ethical standards but also increase investor portfolio growth and reduce overall investment risk. While full buyouts are the note buyer’s best friend as they bring higher immediate profits, the partial purchase model demonstrates a disciplined, long-term approach that benefits both note buyers and note holders.