Most note investors know about performing and nonperforming mortgage notes and how to buy them at a discount. Buying a partial note is another way notes can be bought. What is a partial note? Well, it is exactly what it sounds like! You are purchasing part of a note, or several future payments that are due on the note.
Let me give a very simplified example: Say you have a 30-year note paying $500 monthly, if you sell the first 3 years of payments on that note, you’ll get $18k in upfront money to do with what you wish. Typically, investors deploy that capital in another note or investment. Again, this is just a simplified example. You would still be advised to have your attorney draw up the agreement and assist with the terms based on your amortization schedule.
Why would anyone want to sell part of their note? Well, as laid out above, sometimes you might just want some capital up front rather than waiting for monthly payments. This would be a good strategy if you had a great stable performing note. There is a risk that the borrower may stop paying, then you’ll have to go through the foreclosure process. That’s why it’s imperative that you have the right legal counsel do the agreement.
One other caveat and reason to consult an attorney, is that selling a partial note may be considered selling a security. This is going to be determined based on whether you are a passive or active participant in the investment. The number of investments you have of this kind will also come into play. It’s way too complicated to go into detail in this short article, but always involve legal counsel in this type of transaction to be sure. Also, more information is available at the Securities and Exchange Commission (SEC.GOV).
Partial notes are also a good way for investors with smaller amounts of money to invest and still get a decent return. It also keeps their investment to note value in a better range. So, if you have an IRA and small amount to deploy, you may be able to place your investment in a partial note where it will be at 60-80% of the overall value of the asset being held as collateral in the mortgage note.
For more information on notes or if you have notes to sell, reach out to Zee at Awanna Holdings, LLC (571)659-5005. ©Awanna Holdings, LLC (Feb 2020-9), zee@awannarandh.com/www.awannarandh.com
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