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The Power of Partials For Cash Flow Note Investors & Brokers

by Jeff Armstrong

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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 investors and 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.

The Most Money Not Always Best
It may seem that in this tough 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). A 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.

Why Partials?
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 note holder.

For Example
Mrs. 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.

Her 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.

She 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 had been a note broker involved, the broker might have offered her $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.

Remember, success demands action! Keep on marketing, it’s going to work! TWITA!
(That’s What I’m Talking About!)

Jeff Armstrong of Armstrong Capital has been a note broker and investor specializing in the seller carryback note industry since 1991. For information on how he can help you with your note business, your note investments or to request a quote on a note you currently have visit www.armstrongcapital.com

Hawaii Now Prohibits Seller Installment Sales w/o A Broker

The state of Hawaii now prohibits homeowners from using “seller financing” without a licensed broker.

According to a Hawaii real estate attorney, “The statute now requires any “seller financed” transaction to be handled by a licensed or registered broker, even in a family situation. I hear the registration process is too involved for most one-time sellers. Our Government Affairs Committee has begun to look at options to get clarification and see if legislation is needed during the next session to provide appropriate exemptions. Actually, the prior law allowed seller financing by exemption, but the new law removed the exemption. On that basis, the Hawaii State Bar has concluded that it now prohibits unregistered seller financing.”

This is a commentary by the Political Affairs Director of the Maui Realtors Association:

December 03, 2014

“This one appeared out of the blue. Or out of the telephone. About two weeks ago a long-time Maui agent called to complain that he was being told that the State Legislature wiped out the owner’s right to finance the purchase of the owner’s property.

“That was news to me, HAR (the Hawaii Association of Realtors), our attorney and a variety of other people one would expect to know these types of things.

“The agent said he was working on a deal involving family-held property in Olinda and the owner was offering financing. The buyer liked the proposal but wanted to ask her attorney. And that attorney informed the buyer that the State Legislature removed that owner’s right in its last session and that action went into effect on July 1.

“How can that happen without responsible persons knowing about it, you might ask? The answer is: easy, because our state legislative process resembles an organized train wreck. With 3,000 bills being reviewed in 60 days, seemingly innocuous measures that are depicted as “housekeeping” by the proposing agency, get a lot less review than more notorious measures. There are always goofs. Given the amount of material blasting through the State Capitol in such a short time, it’s just a wonder that there are not a lot more goofs.

“This particular action – removing the exemption in the state’s mortgage loan origination act (aka Hawaii SAFE Act or HRS 454) that allows owners to finance the sale of their own homes or for family members to finance the sale of property within the family – was a one-liner in an eight-page bill that dealt with a variety of adjustments to the SAFE Act. The SAFE Act was written to tighten up Hawaii’s mortgage origination laws and licensing requirements after the 2008 mortgage meltdown. It is a consumer protection measure and the decision to eliminate the owner’s right to finance fell into that category.

“Mortgage loans involved substantial assets and should be handled by qualified licensees,” DCCA said in its testimony on the bill. That one line is the sum total of the discussion on removing the owner’s right to finance that could be found in the testimony and committee reports on Senate Bill 2817, later to become Act 198-14.

“While not much of an argument, it did include a fundamental flaw in logic. Because the statement was not specific, there is no way to tell who the department was referring to by “qualified licensees.” Was the department referring to licensed mortgage originators or were they referring to licensed Realtors and attorneys? The bill was mainly about mortgage originators. But the DCCA bill did not request that the Legislature remove other existing exemptions for Realtors and attorneys if they are working on behalf of their clients who want to finance.

“It appears from later statements, that the Department wanted to eliminate the owner’s right in total and force them to take the mortgage originator licensing test if they want to make loans. But they apparently inadvertently left in place the other Realtor and attorney exemptions. And those exemptions imply that the right of owners to finance still exists as long as they are working with a Realtor or an attorney.

“Why did DCCA believe this action was necessary? Apparently because in the few years since the Hawaii SAFE Act when into effect, there had been a handful of owner-financed deals that had blown up. That was a handful too many for DCCA. The state was looking to update the SAFE Act anyway, making timely adjustments, and decided to include this minor adjustment.

“While HAR missed this one (that includes me), this action flew so far under the radar that even Senate Judiciary Committee Chairman Gil Keith-Agaran did not know about it. For some reason this measure did not go through his committee, so Gil never saw the bill’s details. When he figured out what had happened, the Senator spoke to DCCA to get their side of the story and then wrote a letter to the State Attorney General to get an official opinion: no owner financing is allowed or only with a Realtor or an attorney? He hopes to have an answer from the AG by the end of the month. If not, then he will start writing a bill to amend HRS 454.

“HAR is also studying its options and getting ready to use its resources to get this fixed.

“So the question RAM and HAR should consider is: what sort of amendment do we want? If the owners’ right remains, as long as they get an attorney to bless the deal, maybe an amendment is not necessary. Or do we want to go back to where the law was last year with called-out exemptions for owners selling their own homes or family members financing family members? But now that the door is open for this discussion, why not broaden the law so that an owner can finance the sale of any kind of property they own as long as they work with an attorney?

Whatever the conclusion is, the resulting law definitely needs to clear up the current conflict.”

There is one organization fighting for the right of property owners to sell with installment sales (“seller financing”): www.SaveSellerFinancing.org Please visit the website, read the issues, sign the petition and support them by donating generously.

Economic Fact of the Day

by Mark J. Perry http://www.aei.org/publication/sunday-afternoon-links-5/

Economic Fact of the Day. For every $100 in sales, the average discount retailer like Walmart and Target earns $3.10 in profits, while the average take for the states with state and local sales taxes is more than twice that amount — almost $7, based on the 6.94% average sales tax rate for the 46 states that tax retail sales. Some high-tax states like Tennessee (9.45%), Arkansas (9.2%), Louisiana (8.9%) and Washington (8.9%), take in more than (or almost) $3 in state and local sales taxes for every $1 in retail profit. But look at who attracts the protests and boycotts….

 Who Boycotts Walmart — which makes a modest 3.12% profit margin by helping to feed and clothe people who typically do not have a lot of spare money? Social-justice warriors who are too enlightened to let their poor neighbors pay lower prices.  

READ MORE:  http://www.nationalreview.com/article/393648/who-boycotts-wal-mart-kevin-d-williamson/page/0/1

The Secret Financing Behind Dodd-Frank

The newly-created Consumer Financial Protection Bureau (CFPB) writes and enforces the regulations of the Dodd-Frank Act.

What virtually no one knows is that the CFPB is financed by the banking industry.

And of course the banks want to outlaw “seller financing” and force everyone to get a conventional loan (from them).   See http://www.consumerfinance.gov/budget/ under “Funding Requests.”   When you look at that page you’ll see the letters from Richard Cordray, Director of the CFPB, requesting funding from the Federal Reserve.

   “Hold on, Bill!  You said that they are funded by the banking industry?”

   I did.  Who do you think owns the Federal Reserve?  Not the federal government.

   To read the little-known story of how the Federal Reserve was created, by whom, and how it works, read The Creature From Jekyll Island and watch the YouTube video at  http://www.youtube.com/watch?v=lu_VqX6J93k
Also watch the Mises Institute video “How The Fed Loots Us”:  http://teapartyeconomist.com/2014/07/05/video-federal-reserve-system-loots-us/

Our conference on non-performing notes starts tomorrow (Thurs.) afternoon with bonus seminars.  Investors, brokers, hedge funds, servicers and more are coming from all over the country.  I hope you’ll be part of this exciting event!  There’s still time to register:  http://papersourceseminars.com/non-performing-notes-seminar-2014/ or call 800-542-2270.

Supreme Court to consider if 2nd mortgages can be voided

Investors in second mortgages need to be aware that the US Supreme Court will decide whether homeowners who declare bankruptcy can void a second mortgage if their home’s market value has dropped below the amount they owe on their first mortgage.

For more:  http://news.yahoo.com/court-consider-second-mortgage-void-144311619.html

Our Las Vegas conference “Profiting From Non-Performing Notes” begins this week!  If you haven’t registered, now is the time:

http://papersourceseminars.com/non-performing-notes-seminar-2014/  or call 1-800-542-2270.

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