Good Time To Sell Partials

[Marco Bario]

Cash is King, and investing is about managing risk. 

I market to owners of Seller-Financed notes interested in trading future payments for cash. Buyers of this type of paper are still buying, but with the COVID19 economic cycle just beginning, there's uncertainty. No one knows how it will play out. I'm certain - unfortunately - that real estate loan defaults are going to increase and property values may take a hit. Note buyers aren't blind to this. 

Individuals, families, businesses, and investors are looking to raise cash now. SBA loans will only go so far. Same for IRS stimulus checks, mortgage forbearance, and unemployment. 

I'm encouraging seller-financed noteholders to consider small partials as a way to raise cash. 12 - 24 months on 60+ outstanding payments will result in a minimal discount because, in the most common partial scenario, the buyer is buying near term payments and taking less equity risk. Investors like getting money back quickly and minimizing risk. 

The challenge is educating noteholders to understand partials, which I often explain as a sort of ATM machine. Noteholders have the ability to sell small numbers of payments at a time. Imagining 72 outstanding payments - the noteholder could sell 24, then 24 more, then 24 more if they wished all spread out over time. I'd like to see a landlord try to sell the next 24 rent payments ;) 

Happy to riff on this topic some more. 

[Chris Seveney]

Partials are a great way for a passive investor to create cash flow. You just need to make sure you are in compliance with the howie test when selling a partial and how the deal is structured. As jamie just noted I did a webinar yesterday on this topic on showing investors how advantageous a partial can be for all parties involved. 

My concern with this strategy is I would consider it a little more advanced and you have to be very disciplined with how you manage your finances. How you structure them is of utmost importance on who manages what and who is responsible for what. 

Here are questions both sides will need to ask?

1. for example - if it goes delinquent do you keep paying the investor? What happens?

2. Who is responsible for legal costs if in default?

3. What is the actual agreement ? Are you recording a physical assignment?

4. who is managing the asset?

5. How does the sponsor get paid, by the investor or servicer?

6. do you provide the collateral to the investor?

Most of the time I find that the investor anticipates on being paid by the sponsor no matter what so if you in times like this (a pandemic), do you have reserves to pay your partial partners even if $ isn’t coming in the door? If you are not well versed in managing your finances and do bucket accounting, this will be very problematic.