When a seller offers owner-financing to a buyer, they agree to accept payments from them for a period of time. But what many sellers don’t realize is that they don’t necessarily have to wait 10, 20, or even 30 years to receive their money. Sellers have the option to sell all or just a portion of their future payment stream for cash today.

Option 1 – When a note holder sells all the remaining payments on a mortgage note or land contract, it is considered a full purchase.

Option 2 – When a note holder sells only a portion of the remaining payments on a mortgage note or land contract, it is considered a partial purchase.

The Full Purchase

For example, consider a note that has a balance of $80,000 at 8.5% interest payable in monthly installments of $991.89 with 120 months (or ten years) of payments remaining. When the seller sells all 120 remaining payments of $991.89 to an investor, it would be considered a full purchase.

The Partial Purchase

If the investor purchased only the next 36 monthly payments of $991.89 each, for example, then it would be considered a straight partial purchase. Once the investor has received the next 3 years of payments, the note would be reassigned back to the seller who would then collect the remaining 84 payments (120 total payments minus the investor’s purchase of 36 payments leaves 84 payments remaining to the seller).

A partial purchase can also involve splitting the monthly payments received from the buyer between the investor and the seller. This arrangement is known as a split partial. Using the same example of 120 payments of $991.89 each, an investor might agree to purchase $500 of each of the remaining payments, leaving a residual of $491.89 due the seller for the next 120 months.

These examples describe just two of the common types of partial note purchases. The details of a partial purchase can be whatever the investor and seller mutually agree upon. The specific terms of the partial transaction are spelled out in the Purchase Agreement. This important document outlines the servicing arrangement (payment handling, splits, escrow, etc.). It also spells out what will happen if the loan pays off early or the buyer defaults on the loan. It is strongly recommended that the Purchase Agreement be reviewed by competent legal counsel in order to protect the rights of all parties.

What’s the Best Choice?

So, which is better – a full purchase or a partial? The best choice will depend on the value of the payment stream being sold and the objectives and cash needs of the note seller. A partial purchase can help minimize the discount that might be required to sell the entire note. Partials can also be a great choice when the note seller needs a specific lump sum of cash now (which is considerably less than the fair market value of the full note). However, selling a partial doesn’t relieve the note seller of the risks associated with a future default by the buyer. If a primary objective of the seller is to just “be done” with the note and its accompanying headaches, then the full purchase may be the best choice. The full purchase will give the seller peace of mind which, in many cases, is valued higher than the required discount. An honest discussion about the seller’s needs and objectives is necessary to design a solution that works great for all parties.

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