12 Days Of Note Investing - Day #11 The Balloon Split Partial

[Tracy Z. Rewey]

Sometimes it takes creative thinking to find the opportunity in a transaction. See how $24.80 was turned into $15,540 with a little time and know how.

Owner financing is a frequent “go-to” solution for hard to finance mobile homes. This transaction involved a 1973 doublewide located on deeded lot in a mobile home community.

The sales price was $59,950 with $5,000 down and the seller agreed to owner finance the balance of $54,950 at 9.25% interest using a Real Estate Land Contract. The buyer was required to make ten years of payments at $452.06 per month and then the note had a balloon payment of $49,358.75. When the contract paid off the buyer would receive the warranty deed.

After collecting payments for a year the seller wanted to sell the note for cash now. Due to investment-to-value limitations the best offer was a purchase price of $43,400 from a local note buyer. The seller was only interested in a full purchase and needed to net at least $43,150 due to medical costs and challenges.

That only left a fee of $250 ($43,400 less $43,150). On top of that there were title and recording expenses to be paid of $225.20 leaving a net fee of only $24.80.

Here’s how we turned the $24.80 into $15,540!

The investor was willing to purchase all of the monthly payments and PART of the balloon payment for $43,400. The seller was willing to sell the whole note (payments and ALL of the balloon) for $43,150. So we purchased a full from the note seller and sold the partial to the note buyer.

We only earned $24.80 on the initial note transaction but when the balloon paid off 9 years later we earned another $15,540.53.

The $15,540.53 represents the portion of the balloon payment we retained, also known as the remainder interest, tail end, or back-end of a mortgage note. The note investor paid the note seller at closing so the transaction did not require an upfront investment by us.