If the amount paid to purchase an existing note is below the principal balance or more correctly, the unpaid balance, the investor will benefit from an early payoff to the tune of the discount.  

What we have learned is that most people avoid these properties entirely, which allows us to purchase them at a significant discount.

They are still at a discount to the 10 year treasury bond (i.e. market trends indicate they will continue to escalate).

Definitely a discount but I don't see a third or a half at all.

Option 2 with second lender is, get an FHA loan at 3.5% and use the concession to buy discount points and bring a 6.2% interest rate down to a 5.4% permanent buy down, putting me at around $3,450.00 monthly PITI and also adding 8k to the top of the loan for mortgage insurance.

Purchase price: $8,500,000 Cash invested: $3,450,000 This property was acquired from a motivated seller at a 20%+ discount to market value.

Purchase price: $8,500,000 Cash invested: $3,450,000 Off-Market Acquisition Overview This property was acquired from a motivated seller at a 20%+ discount to market value.

This math implies that the property is being purchased at a 14% discount to current market value. 

purchased it deeply discounted What was the outcome?

The house I am looking at is a private sale from an older family friend moving into senior living (discounted).