by Jeff Armstrong
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.
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.
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