When people call us about selling their mortgage note, most of them are only aware that they can sell their full note (all of the remaining payments). After all, loans from a bank are for a “full” amount, whether that loan amount be large or small. While selling your full note is certainly a viable option, it is frequently not the best one.
In touch economic times or in certain situations, note holders sometimes cannot obtain a high price in selling their full mortgage note. Private note buyers like us are even more concerned than normal with certain notes about payers defaulting and property values declining. Plus, as always, payments in the future are worth less than payments collected sooner in today’s dollars and are riskier.
So, what is the solution when the note buyer will not buy your full note, you don’t want to accept a substantial discount on the full note sale, or maybe you would like to keep some of the note? A partial is frequently an excellent choice. Although there are different types of partial sales, the most commonly used method is for you to just sell your near-term payments now and for you to receive the rest in the future.
For example, if you have a 30-year (360 month) mortgage, you could choose to just sell five years (60 months) of payments and keep the last 25 years worth of payments. You would receive less money upfront relative to selling the full note, but make much more in total. Here is a possible scenario for a home sold using owner financing:
Sales price: $125,000
Down payment: $ 25,000
Original note balance: $100,000
Terms: 30 years, 7% interest, payments of $665.30/month
If you choose to sell the next 60 payments (five years), you could receive $32,049.65 upfront and later receive another $199,590.00, for a total of $231,639.65. Of course, this isn’t exactly an “apples-to-apples” comparison, as you receive some money now and some in the future. However, even after incorporating the time value of money, you could still come out ahead with a partial note sale instead of a full note sale.
A partial sale of the front-end payments is like having your cake and eating it too. You get a sizable chunk of money now, and when you get the note back, it has a high remaining principal balance and many payments left to collect. In the example above, the balance would be $94,131.59 when you get the note back.
Besides collecting more money overall, other advantages for you are a possible delay in some of the capital gains taxes and having the flexibility to sell another part of the note in future, if you choose. All in all, a partial is usually a better way to go!