Note Partials: A Powerful Economic Stimulus Plan for Noteholders

In real estate investing, there is property and there is paper.

An investor who owns a building or house or piece of land views property as their asset. But if they borrowed money, and most do, then whoever owns the loan views “paper” as their asset.

To eliminate confusion: Note = Promissory Note = Loan = Paper = Mortgage or Deed of Trust = Land Contract or Contract for Deed. Without drilling into specifics, when you hear these terms someone is talking about essentially the same thing.

What if an investor needs just a little cash? Although possible, most investors won’t sell a partial interest in a property they own. It’s complex at the time of the transaction and can be complex again down the road.

But it’s simple to sell a partial interest in a note. Still owed 100 payments? Sell the next 12, 18, 30, 42… whatever. Then keep the rest. Down the road, you can sell more.

Here’s an example. Wendy owns a note:

• Remaining Balance: $75,000
• Remaining Payments: 120
• Interest Rate: 9%
• P&I Pmt: $950.07

Because of the COVID-19 pandemic, Wendy is uncertain about finances for the next 18 months. An extra $20K cash would help her sleep at night. So, she reaches out to Bill, a Note Investor, who offers to buy the next 24 monthly payments she’s owed for $20,500. Bill will collect $950.07 per month for 24 months. Beginning on month 25, payments will revert back to Wendy. There will be 96 payments remaining and the outstanding balance will be $64,850.18.

What just happened? 

• Bill received the right to payments (24 x $950.07) he’ll receive in the near term and took on little risk because his small investment was secured by the full value of the property. Therefore, he had great equity protection. Investors love to get their money back quickly and absolutely love equity protection.

1. Wendy received a lump sum of cash and was still owed $64,850. Actually the 96 remaining payments she’ll receive (96 x 950.07) equals $91,206.72. Add that to the $20K lump sum plus whatever she’d already been paid by her borrower in down payment plus monthly payments to calculate her income on the deal.

You can see how partials turn notes into ATM machines – giving Noteholders the ability to take “withdraws” as needed. For those needing cash and holding notes, now is a good time to give partials a closer look.