Notes – Seller Carry – Tom Henderson

Real Estate Note FAQs

What is a seller carry back note?

A seller carry back note is created when a seller finances part of a property’s sale price for a buyer. The buyer makes regular payments to the seller, similar to a traditional mortgage. This arrangement can benefit both parties: buyers may obtain financing when traditional options aren’t available, and sellers can potentially gain an additional income stream.

How does a seller carry back note differ from a traditional mortgage?

While similar in structure, seller carry back notes originate from the property seller, not a lending institution. This provides flexibility in terms and conditions, allowing for tailored agreements to fit both the buyer and seller’s needs.

What is a security instrument in a seller carry back note?

A security instrument safeguards the seller’s interests in a carry back note. It’s a legal document, recorded in the county recorder’s office, establishing the property as collateral for the debt. This instrument, often a Deed of Trust, allows the seller to reclaim the property if the buyer defaults on payments.

What are the different ways to structure a seller carry back note?

Seller carry back notes offer a wide array of structuring options. 

These include:

• Fully amortized: The principal and interest are paid off over the loan term with no balloon 
• Partially amortized: Payments are spread over a set period, but a larger “balloon” payment is due at the end of the 
• Interest-only: The buyer only pays interest during the loan term with a balloon payment for the principal at the 
• Graduated payments: Payments start lower and gradually increase over 
• Stepped interest payments: Interest rates adjust at pre-determined intervals throughout the loan 

How is the value of a seller carry back note determined?

Various factors influence the value of a seller carry back note, including:

• Interest rate: Higher interest rates typically increase the note’s 
• Loan term: Shorter terms generally result in higher 
• Loan-to-value ratio: Lower LTV ratios indicate less risk, boosting the note’s 
• Payor credit worthiness: A buyer with a strong credit history adds value to the 
• Property type and location: Desirable properties in good locations enhance note 
• Prevailing market interest rates: Note values are inversely related to prevailing interest 

What options are available to note holders?

Note holders have several options, including:

• Holding the note: Receiving regular payments until the loan is paid 
• Selling the note: Obtaining a lump sum payment by selling the note to another 
• Partial sale: Selling a portion of the note’s payments for a lump sum.
• Split funding: Combining full and partial sales for a hybrid 

What is a zero coupon bond and how can it be used in real estate?

A zero coupon bond is a debt security that doesn’t pay periodic interest. Instead, it’s purchased at a deep discount and redeemed at face value upon maturity. In real estate, investors can use these bonds creatively, such as providing a down payment for a property or funding a balloon payment on a seller carry back note.

How can a buyer increase their yield on a seller carry back note?

Savvy investors can employ various strategies to maximize their yield on a seller carry back note, such as:

• Lowering the interest rate and increasingpayments: This can shorten the loan term and accelerate return on 
• Selling partial payments to other investors: Offering attractive yields to investors seeking higher returns than traditional options.
• Utilizing creative financing techniques like wrap-around mortgages: Earning interest on the spread between the underlying mortgage and the wrap note rate.

Note Investing Study Guide

Section 1: Quiz

Instructions: Answer each of the following questions in 2-3 sentences.

1. What are the three main types of security instruments used in real estate transactions? Briefly describe
2. Explain the concept of “seller carry back” financing and when it is typically
3. Describe the difference between an interest-only note and a fully amortized note.
4. What is a balloon payment, and how does it impact the value of a note?
5. Explain how the loan-to-value (LTV) ratio affects note safety.
6. Whati s note discounting, and how does it allow investors to achieve higher yields?
7. How can lowering the interest rate on a note potentially increase an investor’s yield?
8. What is a “partial” in note investing, and why are they attractive to investors?
9. Explain the “balance back” technique in note investing and how it benefits the investor.
10. Describe the concept of a “wrap-around” mortgage and how it allows investors to earn interest on money they haven’t

Section 2: Answer Key

1. The three main types of security instruments are:

Mortgages: Create a lien on the property, allowing the lender to foreclose through court proceedings (Judicial foreclosure)

Deeds of Trust: Similar to mortgages but allow for a faster non-judicial foreclosure process.

Land Contracts: The seller retains ownership until the buyer completes all payments, offering less buyer protection but more seller control.

“Seller carry back” financing occurs when the seller provides financing to the buyer, acting as the  bank. This is common when buyers can’t qualify for traditional financing or lack a full down payment.

An interest-only note requires the borrower to pay only interest during the loan term, with the principal due at the  A fully amortized note includes both principal and interest in each payment, resulting in the loan being fully paid off at the term’s end.

A balloon payment is a large lump sum payment due at the end of a loan  It can increase the risk for both the borrower and the note investor. Note buyers may discount the note’s value to account for the added risk.

The loan-to-value (LTV) ratio represents the loan amount as a percentage of the property’s value.  A lower LTV signifies less risk for the note holder, as more equity protects against potential losses in case of

Note discounting involves purchasing a note for less than its face  By paying less upfront, investors increase their potential yield (annualized return) when they receive the full face value payments over time.

Lowering the interest rate while simultaneously increasing the payment amount can shorten the loan term, allowing the investor to recoup their investment faster and potentially achieve a higher overall yield.

A partial refers to purchasing a portion of a note’s payments, either for a specific period or a percentage of each payment. Partials offer flexible investment options and can provide attractive yields, particularly for smaller investors.

The balance back technique involves purchasing a note’s payments for a specific duration until the principal balance reaches a predetermined amount. At that point, the note ownership reverts to the original holder. This allows investors to customize their investment period and potentially achieve higher yields.

A wrap-around mortgage is a junior loan that encompasses the existing senior  The wrap note holder receives payments from the borrower and makes payments on the underlying loan, earning interest on the spread. This can significantly boost the investor’s yield.

Section 3: Essay Questions

1. Discuss the importance of understanding the time value of money in note  How does this concept impact decision-making when buying and selling notes?
2. Analyze the advantages and disadvantages of investing in seller-financed notes compared to traditional real estate investments. Consider factors such as risk, yield, and liquidity.
3. Explain the different strategies for maximizing yield when investing in notes. Discuss techniques like note discounting, partial purchases, and interest rate modifications.
4. Describe the due diligence process for evaluating a note before purchasing  What are the key factors to consider, and how do they influence the investment decision?
5. Compare and contrast the different methods of note acquisition, including purchasing from note holders, participating in note auctions, and working with note  Discuss the pros and cons of each approach.

 

Section 4: Glossary of Key Terms

Term   Definition

Amortization The process of gradually paying off a loan’s principal balance through regular payments over time.Balloon PaymentA large lump-sum payment due at the end of a loan term.

Deed of Trust A security instrument similar to a mortgage that places a property in a trust, allowing for non-judicial foreclosure if the borrower defaults.DiscountingPurchasing a note for less than its face value, allowing investors to achieve higher yields.

Judicial Foreclosure A legal process where a lender seeks a court order to force the sale of a property to satisfy a debt obligation.

Land Contract A financing agreement where the seller retains property ownership until the buyer completes all payments. Loan-to-Value (LTV) The ratio of a loan amount to the property’s appraised value.

Mortgage A security instrument that creates a lien on a property, allowing the lender to initiate judicial foreclosure in case of default.

Note A legal document that represents a debt obligation, outlining the loan terms, interest rate, payment schedule, and other conditions.

Partial Purchasing a portion of a note’s payments, either for a specific period or a percentage of each payment. Promissory Note A written promise to repay a specific sum of money at a future date, often with interest.

Security Instrument A legal document that provides collateral for a loan, typically a mortgage, deed of trust, or land contract.

Seller Carry Back A financing arrangement where the seller provides financing to the buyer, often in the form of a note secured by a mortgage or deed of trust.

Yield The annualized return on an investment, often expressed as a percentage.

Zero Coupon Bond A bond that does not make periodic interest payments but instead is sold at a deep discount to its face value, with the full face value paid at maturity. This creates a “zero coupon” structure, making it similar to a balloon note.

Wrap-Around Mortgage A junior loan that encompasses an existing senior loan. The wrap note holder receives payments from the borrower and makes payments on the underlying loan, earning interest on the difference.

Note Sale and Purchase Options: A Comprehensive Guide

There are several methods for selling and buying notes, focusing primarily on seller-financed real estate notes.

These methods offer different advantages and disadvantages for both note holders and buyers.

Here’s a detailed breakdown:

Selling a Note

Full Sale [1-3]:

• Description: The note holder sells the entire note, receiving a lump sum
• Advantage: Provides immediate  [3]
• Disadvantage: The note is sold at a discount to the current principal balance, especially if the note’s interest rate is lower than the prevailing market yield. [3] This discount reflects the time value of money, as payments due in the distant future are worth less today. [4]

Partial Sale• Front End Payments [2, 4-6]:

• Description: The note holder sells a portion of the future payments, typically for a set number of  They continue receiving the remaining payments after this period. [2, 4]
• Advantage: The note holder receives a significant cash amount upfront while retaining a high remaining principal balance to collect future payments. [4, 6] This minimizes the discount compared to a full  [4]
• Disadvantage: The sources don’t explicitly mention disadvantages for this

Full Sale – Split Funding [7]:

• Description: The note holder sells all the payments but in separate transactions at different times.
• Advantage: The sources don’t explicitly mention advantages for this
• Disadvantage: The sources don’t explicitly mention disadvantages for this

Partial Sale • One-Half of Each Monthly Payment [8]:

• Description: The note holder sells half of each monthly payment while continuing to receive the other
• Advantage: Provides some immediate cash while maintaining partial monthly cash  [8]
• Disadvantage: The sources don’t explicitly mention disadvantages for this

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Buying a Note

Buying Partials [9-12]:

• Description: The note buyer purchases a specific number of payments, often for a shorter duration than the original note
• Advantage: Allows the buyer to achieve a desired yield without paying the full discounted value of the entire  [11] This can be particularly attractive for buyers with limited funds. [13]
• Disadvantage: The note reverts back to the original note holder after the purchased payments are made. [14] The sources don’t explicitly mention other disadvantages.

The Balance Back Technique [15-18]:

• Description: The note buyer purchases payments until the principal balance is reduced by a specific amount. At this point, the note reverts to the original note holder. [17]
• Advantage: Enables the buyer to achieve a significantly higher yield than buying a traditional partial for the same upfront payment. [18] This method works by exploiting the time value of money, as the buyer receives more interest-heavy payments in the early years. [19]
• Disadvantage: The note reverts back to the original note holder before all payments are made. [20] The Perpetual Partial [21-23]:
• Description: The buyer repeatedly purchases a set number of payments, often 12, for the price of a smaller number, typically 10. [21]
• Advantage: Generates a high yield for the buyer due to the short duration of the purchased payments. [23] This method also offers consistent cash flow for the note holder while minimizing the perceived discount. [23]
• Disadvantage: The note (or a portion) reverts back to the original note holder after the purchased payments are made. [23]

Buying Notes with Options [24-26]:

• Description: The buyer acquires an option to purchase the note at a predetermined price within a specified timeframe. [25]
• Advantage: Offers the buyer the right, but not the obligation, to purchase the  This allows them to assess refinancing possibilities or market conditions before committing. [25]
• Disadvantage: Requires an upfront payment for the option, even if the buyer ultimately decides not to purchase the note. [25]

The sources also mention using Zero Coupon Bonds as a method of financing note purchases, particularly to cover balloon payments [27-29].

Key Considerations

• Yield Discount: The sources repeatedly emphasize understanding the relationship between the note’s interest rate, the discount, and the yield. Note buyers seek to maximize their yield, which can be achieved through various partial purchase methods and creative structuring. [30-32]
• Note Holder Motivation: Understanding the note holder’s needs and motivations is  Offering flexible solutions and framing discounts as meeting specific financial needs can facilitate a successful transaction. [12, 33, 34]
• Legal and Tax Implications: Consulting with legal and tax professionals is crucial for both buyers and sellers, especially when dealing with complex note structures [35-37]

We emphasize the importance of carefully analyzing each note and understanding the associated risks.

Seller-Financed Notes: A Comprehensive Study Guide

Quiz

1. What is a seller carryback note?
2. Describe the three main types of security instruments used in real estate 
3. What is the purpose of a loan-to-value (LTV) ratio in note safety?
4. Explain the concept of “time value of money” in the context of note investing.
5. How can lowering the interest rate on a note potentially increase the yield for the note holder?
6. Describe the benefits of using zero-coupon bonds in real estate
7. How can a note holder potentially profit from facilitating the refinancing of a property with an existing owner-financed note?
8. Explain the concept of a “wrap-around mortgage” and its advantages for the note holder.
9. What are the potential risks associated with balloon payments in notes?
10. How can “partial” note purchases be used to achieve higher yields for investors?

Answer Key

1. A seller carryback note is a financing agreement where the seller of a property acts as the lender, allowing the buyer to make payments over time instead of paying the full purchase price upfront.
2. The three primary types of security instruments are: (1) mortgages, which grant the lender a lien on the property; (2) deeds of trust, which involve a third-party trustee holding title for the benefit of the lender; and (3) land contracts, where the seller retains title until the buyer completes all payments.
3. The loan-to-value ratio (LTV) indicates the proportion of the property’s value covered by the loan. A lower LTV generally signifies lower risk for the note holder as there is more equity cushioning potential losses in case of default.
4. The time value of money recognizes that money received today is worth more than the same amount received in the future due to its potential earning capacity through investment or interest accrual.
5. Lowering the interest rate can incentivize the borrower to make higher payments, leading to a faster repayment schedule and a higher effective yield for the note holder due to the accelerated return of
6. Zero-coupon bonds can be used as down payments or even full purchase prices in real estate deals. Their deep discounts provide leverage for investors, allowing them to control properties with less upfront cash.
7. By assisting the borrower in refinancing, the note holder can secure a lump sum payment for their note, often at a discount. This allows them to exit the investment and potentially reinvest in other opportunities.
8. A wrap-around mortgage is a junior lien that encompasses existing senior liens. The holder receives payments on the full loan amount and makes payments on the underlying loans, profiting from the interest rate spread.
9. Balloon payments carry the risk that the borrower may not be able to secure refinancing or come up with the large lump sum due at maturity, potentially leading to default and
10. Purchasing portions of notes, such as specific payment streams or a fraction of the principal balance, allows investors to target specific yields and cash flow needs while potentially mitigating risk by diversifying their investments.

Essay Questions

1. Analyze the advantages and disadvantages of seller carryback notes from both the seller’s and the buyer’s
2. Discuss the different factors that influence the value of a note in the secondary mortgage
3. Compare and contrast the three main types of security instruments used in real estate lending: mortgages, deeds of trust, and land contracts.
4. Evaluate the strategies for maximizing note value and mitigating risks for note holders, including loan-to-value considerations, payment management, and note
5. Explore various creative financing techniques in real estate investing, such as lease options, zero-down strategies using notes, and the use of zero-coupon bonds.

Glossary of Key Terms

• Amortization: The gradual repayment of a loan principal and interest over time through regular
• Balloon Payment: A large lump sum payment due at the end of aloan term, often exceeding the regular payment
• Beneficiary:  The lender in a deed of trust
• Deed of Trust: A security instrument that places the property title in the hands of a trustee for the benefit of the
• Default: Failure to fulfill the terms of a loan agreement, such as missing
• Discounting: Calculating the present value of a future payment stream based on a desired yield or interest
• Foreclosure: A legal process by which the lender seizes and sells a property to recover the unpaid loan amount after the borrower defaults.
• Judicial Foreclosure: A foreclosure process conducted through the court
• Land Contract: An agreement where the seller retains title to the property until the buyer completes all
• Lien: A legal claim against a property as security for a
• Loan-to-Value Ratio (LTV): The percentage of a property’s value covered by a
• Mortgage: A security instrument that grants the lender a lien on the
• Note: A written promise to repay a debt, including the loan terms and conditions.
• Partial Note Purchase: Buying a portion of a note, such as specific payments or a fraction of the
• Promissory Note: A legally binding document that outlines the terms of a loan, including the principal amount, interest rate, payment schedule, and maturity date.
• Security Instrument: A document that provides collateral for a loan, typically involving a property
• Seller Carryback Note: A financing arrangement where the property seller acts as the
• Time Value of Money: The concept that money available today is worth more than the same amount in the future due to its earning potential.
• Trustee: A third party who holds legal title to a property in a deed of trust transaction, acting on behalf of the lender and
• Yield: The rate of return on an investment, often expressed as an annual
• Zero-Coupon Bond: A debt security that makes no periodic interest payments but is sold at a deep discount, with the full face value paid at maturity.
• Wrap-Around Mortgage: A junior lien that includes the balance of existing senior liens, allowing the holder to profit from the interest rate spread.

Graduated Payment Systems in Note Transactions: A Breakdown

A graduated payment system, also referred to as a stepped payment system, offers a structured approach to note payments that can benefit both the note holder (seller) and the note buyer. This system involves scheduled increases in the periodic payments made by the note payer (borrower). The sources offer insights into how this method works and its advantages.

How Graduated Payments Work

• Scheduled Increases: Instead of fixed payments throughout the note’s term, a graduated payment system establishes predetermined increases in the payment amount at regular intervals. These increases can be annual, biannual, or any other agreed-upon timeframe. [1]
• Decreased Loan Term: The gradual payment increases accelerate the principal reduction, ultimately leading to a shorter loan term compared to a traditional fixed-payment amortization schedule. [1]
• Example: The sources illustrate this concept using a $15,000 note with a 10% interest  Instead of a 5-year balloon payment, the note incorporates annual $30 increases to the monthly payment. This structure results in the loan being fully paid off in a little over 9 years, significantly shorter than the original 30-year amortization. [2, 3]

Benefits for the Note Holder

• Reduced Balloon Risk: Graduated payments mitigate the risk associated with balloon  With a balloon, the note holder faces uncertainty regarding the borrower’s ability to make a large lump sum payment at the end of the term. Graduated payments provide a more predictable and manageable repayment structure. [2, 4]
• Faster Principal Repayment: The accelerated principal reduction through graduated payments means the note holder receives their capital back more quickly, reducing their overall investment exposure. [1]
• Flexibility and Negotiation: Graduated payments offer flexibility for both parties to renegotiate terms if the borrower experiences financial  The note can be recast to adjust payment amounts or extend the term, potentially avoiding foreclosure. [3, 5]

Benefits for the Note Buyer

• Potential for Recasting and Increased Yield: A note buyer purchasing a note with graduated payments has the opportunity to further enhance their yield by recasting the  By strategically increasing payments or shortening the term, the buyer can achieve a higher effective interest rate. [6]
• Motivated Borrowers: Borrowers facing graduated payments have a strong incentive to seek refinancing to secure lower, fixed  This motivation can benefit the note buyer if they hold an option to purchase the note at a discount, as they could profit from the borrower’s refinancing efforts. [5]

Key Considerations

• Borrower Affordability: While graduated payments offer advantages, note holders and buyers must carefully assess the borrower’s ability to afford the increasing payment schedule. [7]
• Note Structure: The specific terms of the graduated payment system, including the frequency and magnitude of payment increases, should be carefully considered to balance the needs of both

The sources present graduated payments as a viable alternative to balloon payments, particularly for seller-financed notes. By understanding the mechanics and benefits of this system, note holders and buyers can structure transactions that mitigate risk, accelerate repayment, and potentially enhance returns.

Three Methods for Determining Loan Balance and Balloon Payment

The “Note Professor Notebook” outlines three methods for determining the balance of a loan and a balloon payment. These techniques leverage the principles of Time Value of Money and utilize a financial calculator.

Method 1: Adjusting the Number of Payments (N)

This method involves modifying the number of payment periods (N) to reflect the elapsed time and then solving for the present value (PV), which represents the remaining loan balance.

• Example: Let’s consider a $90,000 loan at 10% interest for 30 years with monthly payments of $789.81.
• To determine the balance after two years (24 months), follow these steps:
  • OriginalLoan:N = 360 (30 years x 12 months)
  • ¾i= 0.83 (10% annual interest/ 12 months)
  • PV= -$90,000
  • PMT= $789.81
  • FV= 0

1. Adjust N: Subtract the elapsed time (24 months) from the original N: 360 – 24 = 336
2. Solve for PV: Using the adjusted N (336) and keeping the other variables (¾i, PMT, FV) the same, solve for PV on a financial  The result will be the remaining loan balance after two years. [1, 2]
   • This method essentially calculates the present value of the remaining payments, which equates to the outstanding loan balance.

Method 2: Calculating the Future Value (FV)

This method focuses on determining the future value (FV) of the loan after the elapsed time. The calculated FV represents the outstanding loan balance at that future point.

• Example: Using the same loan details as above, to find the balance after two years:

1. Set N for Elapsed Time: Set N to 24, representing the two years passed.
2. Solve for FV: Using the original loan details (PV, PMT, ¾i) and the adjusted N (24), solve for FV
3. The result will be the loan balance after two years. [3, 4]
   • This approach highlights the principle that the future value of the initial loan amount, after accounting for the payments made, equals the remaining balance.

Method 3: Using the Balance (BAL) Function

Many financial calculators offer a dedicated balance (BAL) function that simplifies the calculation.

• Example: Using the same loan details:

1. Input Original Loan Details: Enter the original loan variables (N, ¾i, PV, PMT, FV) into the calculator
2. Utilize BAL Function: Enter the elapsed time (24 months) and then use the BAL 
3. This will directly display the remaining loan balance. [5]

Determining Balloon Payment

All three methods can be applied to determine the balloon payment due at a specific future date.

The calculated balance, whether through adjusting N, calculating FV, or using the BAL function, represents the balloon payment amount.

• Example: If the loan above had a 5-year balloon, the balance calculated using any of the three methods after 60 months would be the balloon payment due. [5]

We provide practical examples using these methods, emphasizing the importance of understanding the relationship between the Time Value of Money variables and their impact on loan balances and balloon payments. [1-7]

Two Methods for Discounting Payments with a Balloon

Below we provide detailed explanations and examples for discounting a series of payments combined with a balloon payment. This process involves determining the present value of both the periodic payments and the future lump sum (balloon) payment, considering the desired yield or discount rate.

Here are two methods described in the sources:

Method 1: Separate Discounting of Payments and Balloon

This method involves calculating the present value of the payment stream and the balloon payment separately, then adding them together to arrive at the overall present value.

1. Discount the Series of Payments:

• Identify the variables:
• N= Number of payment periods
• ¾i= Desired yield (monthly periodic rate)
• PMT= Amount of each payment
• FV= 0 (assuming the payment stream fully amortizes)
• Solve for PV: Input the variables into a financial calculator and solve for
• This represents the present value of the payment stream alone.

1. Discount the Balloon Payment:

• Identify the variables:
• N= Number of periods until the balloon payment
• ¾i= Desired yield (monthly periodic rate)
• PMT= 0 (no periodic payments are considered in this step)
• FV= Balloon payment amount
• Solve for PV: Input the variables into a financial calculator and solve for  This represents the present value of the balloon payment alone.

1. Add the Present Values: Add the present value of the payment stream (from step 1) and the present value of the balloon payment (from step 2) to obtain the total present value of the note. This combined figure represents the price a buyer would pay to achieve the desired yield on the entire note,

Example:

Source [1] illustrates this process with a $10,000 note with 10% interest-only monthly payments and a 5-year  balloon.

To determine the purchase price for a 12% yield, the calculations involve:

• Discounting the monthly payments:
• N= 60 (5 years x 12 months)
• ¾i= 1 (12% annual yield/ 12 months)
• PMT= $83.33 (interest-only payment)
• FV= 0
• Solving for PV results in -$3,746.10.
• Discounting the balloon payment:
• N= 60
• ¾i= 1
• PMT= 0
• FV= $10,000
• Solving for PV results in -$5,50
• Adding the present values: (-$3,746.10) + (-$5,504.50) = -$9,60. Therefore, a buyer would pay $9,250.60 for the entire note to achieve a 12% yield.

Method 2: Combined Discounting Using All Variables

This method offers a more streamlined approach by directly inputting all the note’s variables into the financial calculator and solving for the present value (PV).

1. Identify All Variables:

• N= Total number of payment periods, including the balloon period
• ¾i= Desired yield (monthly periodic rate)
• PMT= Amount of each periodic payment
• FV= Balloon payment amount

1. Solve for PV: Input these variables into a financial calculator and solve for  This calculated PV represents the price a buyer would pay for the entire note, considering both the payments and the balloon, to achieve the desired yield.

Example: Applying this method to the same note example as above:

• N= 60
• ¾i= 1
• PMT= $83.33
• FV= $10,000
• Solving for PV directly results in -$9,250.60, the same price as calculated using the separate discounting

Choosing a Method

While both methods yield the same result, the combined discounting approach offers a quicker calculation. However, understanding the separate discounting method can provide a deeper understanding of how the present value of the payment stream and the balloon payment contribute to the overall note value.

The sources emphasize the relationship between yield, discount, and the time value of money. By manipulating these variables, note buyers can assess different purchase prices and their corresponding yields. Note sellers can also use these methods to understand the implications of accepting various discount offers.

Benefits of Buying Half a Note, Then the Other Half Later

Buying half of a note, then the other half later can be a strategic investment approach that offers benefits for both the buyer and the seller. Buying Partials can be used to achieve higher yields while addressing the seller’s needs.

Advantages for the Buyer:

• Higher Yields:  By purchasing half the note at a discount, and then the remaining half at a later date, the buyer effectively increases their yield compared to purchasing the entire note  [1] This is because the buyer gains the benefit of receiving interest and principal payments on the first half of the note while waiting to acquire the second half. The sources explain that this strategy generally doubles the original yield of the note when the buyer purchases the second half after receiving half the total payments. [1] The yield can be quadrupled if the buyer purchases a fourth of the note initially and the remaining portion later. [2]
• Flexibility: This approach allows the buyer to spread out their investment over time, potentially reducing their upfront capital outlay. [3] This can be particularly advantageous for buyers with limited funds or those seeking to diversify their investments.
• Reduced Risk: By initially purchasing only half of the note, the buyer mitigates their risk exposure. [4] If the borrower defaults on the note, the buyer’s losses are limited to the investment in the first half.

Advantages for the Seller:

• Immediate Cash: This strategy provides sellers with immediate cash without having to sell their entire note at a steep discount. [5, 6] This can be beneficial for sellers facing urgent financial needs or those who are hesitant to part with their entire note.
• Potential for Future Income: By retaining a portion of the note, sellers can continue to receive income from the remaining payments after the buyer acquires the first  [7] This can provide a steady stream of cash flow for the seller.
• Psychological Comfort: Some sellers are simply uncomfortable with the idea of selling their entire note at a  [3] This method allows them to obtain cash while maintaining a sense of ownership in the note.

Examples from the Sources

• The sources provide specific scenarios illustrating how this strategy can be employed. One example involves Nick and Nora Noteholder, who need cash but are reluctant to heavily discount their $85,562.87 note. A buyer offers to purchase half the note immediately for $42,781.44 and the remaining half after 150 payments. By structuring the purchase this way, the buyer nearly doubles the original yield of the note. [1, 8]
• Another example showcases how a buyer can achieve a 35% yield by purchasing ten payments in advance from a note holder for the right to receive twelve payments. This strategy, referred to as the “Ten for Twelve Method” or the “Perpetual Partial,” provides the note holder with immediate cash while offering the buyer a high  [6, 9, 10]

Important Considerations

• Due Diligence: As with any note purchase, buyers must conduct thorough due diligence to evaluate the borrower’s creditworthiness and the underlying collateral securing the note.
• Legal and Tax Implications: Consulting with legal and tax professionals is essential to structure the transaction appropriately and ensure compliance with relevant regulations. [5, 11-15)

The sources emphasize that understanding the principles of Time Value of Money is crucial for effectively implementing this strategy. By leveraging these concepts, buyers can achieve significant returns, while sellers can meet their cash needs without sacrificing their entire note investment.