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.  

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

I'm talking 50k-100k discount just because of where we live. 

Melissa Hi Melissa, welcome to BP - some great questions, I've actually published an 11-part (soon to be 12-part) series here on BP on all about DSCR Loans, linking below - hopefully this will help!

Check out too this 12-part series published here on BP on the topic, hope it helps!

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

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.

purchased it deeply discounted What was the outcome?

You may have to take a discount.