Partial Purchase Option is The Way to Sell Your Owner Financed Mortgage Note
If you’re looking to use the partial purchase option to sell your owner financed mortgage note, there are several things you need to know. One of the key factors in determining how much you can get for your mortgage note is the time value of money. This is a calculation that factors in inflation and the amount of payments that will be due in the future.
The quote you receive for your partial purchase will be based on the credit history of the payor (the borrower), (650 or above for best quote), down payment (best 20% or more for best quote), interest rate of 6%+, property appraisal, and other relevant details. For example, a good credit score of the buyer will result in a lower discount rate (the discount rate is calculated from the total value of the property).
It’s important to choose a reputable note-purchasing company that has been in business for years. These companies have the experience to handle all aspects of the process. In addition, they’ll provide a no-obligation quote.
You will also need to obtain the buyer’s credit report ( or give the note buyer the name of your buyer and they will do a soft credit pull without affecting their credit score), and financial statements. Depending on your state, it may take up to 30 days to sell your note.
Before you begin, you need to decide whether to sell the whole note or a portion of it. A partial buy-out of your note will typically involve a higher discount than selling the entire note.
Partial buy-out is a great option for note-holders who need capital or want to keep their ownership rights. However, it comes with the added worry of making sure the buyer keeps up with their payments.
When you’re ready to sell a partial of your owner funded mortgage note, it’s a good idea to hire a private investigator to verify a prospective buyer’s credentials. This will save you thousands of dollars in fees.
Buying a Real Estate Note Using The Partial Purchase Option
It’s no secret that buying a real estate note using the partial purchase option is a good way to diversify a investments. Partial purchase allow you to get a piece of the action without investing a ton of money. You also reduce your risk. If things go south, you don’t lose as much as you would with a whole note.
The partial purchase option is a bit different than a whole note, in that the buyer of a partial has to be more active in the note’s resolution. As such, you’ll want to make sure you have a good grasp on the 
process.
In this article, we take a closer look at the pros and cons of buying a partial note. The good news is that it can make many deals possible. However, you’ll have to spend some time looking for the best notes to buy because all notes can’t qualify for the partial purchase option.
One of the main advantages of buying a partial is that you don’t need to be a professional negotiator. This is because a partial purchase are designed to be widely acceptable.
Another drawback to partial purchase is that you don’t have the big discount that you get with a full note. For example, if you were looking to purchase a $50,000 partial, you’d be lucky if you were to buy just 80% of the home’s value.
Although you might not be able to purchase all of the payments on a note, it’s still a good deal if it’s a quality asset. When buying a partial, you’ll have to be open and honest with the seller.
Example Of A Not So Good Note
If you were to sell this note expect a huge discount.
Sale Price: $100,000
Down Payment: $2,500 – Not good, small amount of equity
Original Note Balance: $97,500
Years Amortized: 30 Years
Interest Rate: 4% – Very bad
Seasoning: 2 Months – Not good
Current Note Payment: $733.36
Buyers Credit: Poor – Very bad
Property Value: $100,000
Investors always want to make sure they receive a good return on their investment, most note buyers would pass on this note due to it being new with a small amount of equity and with a bad credit buyer.
What if I told you that I could help you structure the above note if it was yours and get you a nice profit that will be above the selling price? It’s not magic, it’s the power of the Partial Purchase Option.
Example Of The Same Note With Better Numbers
Note buyers always try to make sure they get a good return on their investment.
Sale Price: $100,000
Down Payment: $20,000 – Very good, good amount of equity that note buyers like to see.
Original Note Balance: $97,500
Years Amortized: 30 Years
Interest Rate: 8% – Very good
Seasoning: 1 year – Very good good
Current Note Payment: $733.36
Buyers Credit: excellent – Very good
Property Value: $100,000
This is just an example of what is needed to get top dollar for your owner financed note.
Here are descriptions for related terms to real estate note partial purchase:
- Note Partial Purchase: The process of selling a portion of the future cash flows from a promissory note secured by real estate to an investor.
- Partial Note Sale: A transaction in which the holder of a real estate note sells a partial interest in the note to an investor, retaining ownership of the remaining portion.
- Real Estate Note Investment: Investing in promissory notes secured by real estate, which may involve purchasing partial interests to diversify investment portfolios.
- Cash Flow Split: The division of future cash flows from a real estate note between the original note holder and the investor who has purchased a partial interest.
- Note Seller: The individual or entity holding the original promissory note secured by real estate, considering selling a partial interest in the note.
- Note Buyer: An investor or entity interested in purchasing a partial interest in a real estate note to receive a portion of the future cash flows.
- Discounted Note Purchase: Acquiring a real estate note at a reduced purchase price, typically determined by applying a discount rate to future cash flows.
- Mortgage Note Partial Sale: The process of selling a portion of the rights to receive payments from a mortgage note secured by real estate.
- Note Securitization: The practice of pooling and repackaging real estate notes for sale as securities, which may involve selling partial interests in the notes.
- Future Cash Flows: The anticipated payments to be received over time from a real estate note, which are divided between the original note holder and the partial note purchaser.
- Investor Returns: The profits or returns generated by an investor through the partial purchase of a real estate note, based on the agreed-upon terms.
- Promissory Note Transaction: A financial transaction involving the buying and selling of promissory notes, which may include partial purchases.
- Note Portfolio Diversification: Spreading investment risk by including a variety of real estate notes, potentially achieved through partial purchases.
- Risk Mitigation: Strategies employed to reduce the potential risks associated with investing in real estate notes, including partial purchases.
- Note Valuation: The process of assessing the value of a real estate note, which can be influenced by factors such as the discount rate in partial purchases.
- Amortization Schedule: A timetable showing the repayment of a loan over time, impacting the distribution of cash flows in a real estate note partial purchase.
- Maturity Date: The date at which a promissory note becomes due for full repayment, influencing the timing of future cash flows.
- Note Holder Agreement: The legal document outlining the terms and conditions of a real estate note partial purchase, governing the relationship between the seller and buyer.
- Seller Financing: A method where the seller of real estate provides financing to the buyer, which may involve the creation and sale of promissory notes.
- Note Discount Rate: The rate applied to calculate the discounted purchase price of a real estate note in partial transactions, reflecting the time value of money and risk.
FAQ
Frequently Asked Questions
How does the closing on a purchase option work?
We obtain an appraisal and order an updated title commitment. When we are ready to close, the seller may go to the attorney’s office or Title Company for the closing.
We will have them sign an assignment that clearly states that this purchase is for the next amount payments. The seller will receive their upfront money at the time of the closing,
Is my partial purchase mortgage notes considered income?
There is no definitive answer to this question as the answer will depend on the specific facts and circumstances of your particular situation. Generally speaking, partial purchase mortgage notes would not be considered income as they represent a fractional ownership in the property. However, this is not always the case and it is important to speak with a qualified tax advisor to ensure that your specific situation is treated correctly.
Partial purchase mortgage notes for a house?
A partial purchase mortgage note is a type of mortgage note that is issued for a property that is not the entire purchase price of the property. Partial purchase mortgage notes are typically issued when one or more of the following occurs: the buyer does not have enough money to buy the entire property; the buyer is financing part of the purchase price of the property; or the buyer is purchasing the property with the intention of selling it in phases.
What is a mortgage note document?
A mortgage note document is a document that evidences the terms and conditions of a mortgage loan. The note typically includes information such as the amount of the loan, the interest rate, the term of the loan, and the repayment schedule.
Does a real estate note partial purchase decrease value?
The impact of a real estate note partial purchase on the value can vary depending on the specific terms of the transaction and the perspectives of the parties involved. Generally, when a real estate note is partially purchased, it means that a portion of the future cash flows from the note has been sold to an investor.
Here are some factors to consider:
- Discount Rate: The price at which the note is partially purchased is often determined by applying a discount rate to the future cash flows. A higher discount rate may result in a lower purchase price, potentially impacting the perceived value.
- Remaining Cash Flows: The remaining cash flows that the original note holder retains after the partial purchase can still contribute to the overall value. However, the reduced future income may affect the perceived value compared to holding the entire note.
- Risk Perception: Investors may adjust their valuation based on their perception of the risk associated with the remaining cash flows. If the partial purchase is seen as increasing risk, it could impact the perceived value.
- Market Conditions: Overall market conditions and interest rates can influence the valuation of real estate notes. Changes in these conditions may affect the pricing of partial purchases.
It’s essential to note that the impact on value is subjective and depends on individual perspectives and the specifics of the partial purchase agreement. If you’re considering such a transaction, it’s advisable to consult with a financial advisor or real estate professional who can provide insights tailored to your specific situation.
Is a real estate purchase agreement binding?
Yes, a real estate purchase agreement is generally a legally binding contract between the buyer and the seller. The purchase agreement outlines the terms and conditions under which the buyer agrees to purchase a property from the seller. Once both parties have signed the agreement and there is a meeting of the minds, meaning they have reached mutual agreement on the terms, the contract becomes binding.
Here are key points regarding the binding nature of a real estate purchase agreement:
- Mutual Consent: For a purchase agreement to be binding, there must be mutual consent and agreement on the terms and conditions by both the buyer and the seller. This is typically demonstrated by both parties signing the agreement.
- Consideration: The agreement is supported by “consideration,” which means something of value is exchanged between the parties. In real estate, this is usually the purchase price.
- Legal Requirements: Real estate purchase agreements must comply with legal requirements, which may vary by jurisdiction. The contract should cover essential elements such as the property description, purchase price, closing date, and any contingencies.
- Contingencies: While a purchase agreement is binding, it often includes contingencies that allow the parties to withdraw from the contract under specific circumstances. Common contingencies include financing, inspections, and the sale of the buyer’s existing property.
- Deposit or Earnest Money: The buyer typically provides a deposit or earnest money as a show of good faith and commitment to the purchase. The agreement may specify the conditions under which this money can be forfeited or refunded.
- Performance: Both parties are expected to perform their obligations as outlined in the agreement. Failure to do so could result in legal consequences, such as damages or specific performance (forcing the parties to fulfill the terms of the contract).
- Legal Recourse: If one party fails to comply with the terms of the purchase agreement without a valid reason, the other party may have legal recourse. This could involve seeking damages or specific performance through the legal system.
It’s crucial for both buyers and sellers to thoroughly understand the terms of the purchase agreement before signing. Consulting with legal professionals, such as real estate attorneys, can provide additional guidance and help ensure that the contract meets legal requirements.
What happens if the buyer stops making payments?
The first option is for the seller to simply pay the note buyer back the amount that is still owed for the initial partial purchase. This option allows the seller to then foreclose on the property and keep all the profit. If the seller does not want to foreclose then the second option will be for the note buyer to foreclose on the property. If they foreclose then they will want is the amount that is owed plus any costs that incur in the foreclosure process such as cleaning up the home for resell, realtors costs, etc. After those cost have been paid the note seller keeps the rest.
How does a partial purchase mortgage notes hold value?
A partial purchase mortgage notes holds its value based on the underlying assets of the property being purchased. If the underlying assets are worth more than the mortgage note, the mortgage note will be worth more than the actual purchase price. If the underlying assets are worth less than the mortgage note, the mortgage note will be worth less than the purchase price.
Is a mortgage note public record?
The Note is not recorded at your Courthouse, A mortgage note is not a public record. A mortgage note is a private document that is between the lender and borrower.
How do i get a copy of my mortgage note?
Mortgage notes are typically provided to homeowners when they obtain a new mortgage. In some cases, homeowners may be able to view their mortgage note online. If you cannot find your mortgage note or if it is damaged, you can contact your mortgage lender to request a copy.
How does a real estate note partial purchase agreement work?
A real estate note partial purchase agreement involves selling a portion of the future cash flows from a promissory note secured by real estate. Here’s an overview of how it typically works:
- Identification of Note: The process begins with identifying a specific promissory note that is secured by real estate. This note represents a debt obligation where the borrower promises to repay a certain amount over a specified period.
- Agreement Terms: The note holder (seller) and the investor (buyer) negotiate the terms of the partial purchase agreement. This includes determining the percentage of future cash flows to be sold, the purchase price, and any other relevant terms and conditions.
- Purchase Price and Discount Rate: The purchase price for the partial purchase is often determined by applying a discount rate to the future cash flows. The discount rate reflects the time value of money and the risk associated with the investment. A higher discount rate results in a lower purchase price.
- Closing Process: Once the terms are agreed upon, the parties proceed with the closing process. This involves legal documentation to formalize the partial purchase agreement. The buyer typically pays the purchase price to the seller.
- Retained Interest: After the partial purchase, the original note holder retains the remaining interest in the note. This means they continue to receive a portion of the future payments from the borrower.
- Ongoing Payments: The borrower continues making payments on the entire note amount, but the payments are split between the buyer and the seller based on the agreed-upon percentage.
- Risk and Responsibilities: The investor assumes the risk associated with the purchased portion of the note. This includes the risk of default by the borrower. The seller retains the remaining risk and responsibilities associated with the retained interest.
- Amortization and Maturity: The partial purchase agreement may include provisions related to the amortization schedule and the maturity date of the note. These details impact the timing and amounts of future cash flows.
It’s important for both parties to carefully review and understand the terms of the partial purchase agreement. Legal and financial professionals are often involved to ensure the transaction complies with applicable laws and regulations. Additionally, disclosure requirements may apply to inform the borrower about the change in ownership of the note.
Does a real estate purchase agreement need to be notarized?
The requirement for notarization of a real estate purchase agreement depends on the laws and regulations of the jurisdiction where the property is located. In many cases, a real estate purchase agreement does not need to be notarized to be legally binding. However, there are exceptions, and it’s essential to check the local laws and practices.
Here are some considerations:
- State and Local Laws: Real estate laws vary by state and locality. Some jurisdictions may require certain real estate documents, including purchase agreements, to be notarized, while others may not have this requirement.
- Legal Formalities: While notarization adds an extra layer of formality and authentication to a document, it is not always a mandatory step for a real estate purchase agreement to be legally binding. The key factor is often the mutual agreement between the buyer and seller and compliance with other legal requirements.
- Recording Requirements: Even if notarization is not required for the purchase agreement to be binding, there may be recording requirements imposed by local authorities. Recording the agreement in the public records helps establish the legal transfer of ownership and provides notice to third parties.
- Consultation with Professionals: It’s advisable for both buyers and sellers to consult with real estate professionals, including real estate attorneys, to understand the specific legal requirements in their jurisdiction. Legal professionals can provide guidance on whether notarization is necessary and ensure compliance with all applicable laws.
While notarization may not be universally required for real estate purchase agreements, parties involved in real estate transactions often choose to have important documents notarized as a best practice. This can add an extra level of assurance regarding the authenticity of the signatures and the agreement. Additionally, some financial institutions or title companies may request notarized documents as part of their internal processes.
To ensure compliance with local laws and to address any specific requirements, it’s recommended to seek legal advice and, if necessary, have the real estate purchase agreement notarized based on the applicable regulations.