BiggerPockets

Partial Partial Note Purchases

Tuesday, January 04

 You are probably aware the sub prime mortgage market has not being doing well. This subject is discussed daily on the major news stations. Also articles are written in well-known newspapers. Unfortunately, in regard to note purchases underwriting criteria has gotten tougher and pricing has been downsized.

 A lot of note deals we come across have negative factors such as down payments of less than 20%, continuing sharp decreases in property values, high loans to values (above 80%) , low credit scores and or Mobile Homes with 30 year terms. Also, very rarely is there private mortgage insurance securing the loans. Note buyers (just like banks) have investment to value limits. (Investment to value simply means how much money is being funded in relation to the current property value.) Please keep in mind banks require prime credit buyers who put down less than 20% (loan to value above 80%) to purchase the private mortgage insurance – thus securing the loan - in order to get approval for a mortgage or deed of trust.

 In situations where we see the above-mentioned negative factors, the discounting can be steep on full note buyouts. Partial purchases you might come to think are a smart alternative. An example of a partial is where there’s a note that has terms of 9% at 360 months. An offering range would be 45% to 50% of the remaining note balance for 10 to 15 years of the remaining time.

 In seller financing, private note holders generally don’t report their buyers’ mortgage payments to the 3 major credit bureaus. After note deals are completed, this should start to occur. Thus sub-prime credit buyers have an opportunity to establish or rebuild good credit.

 Probability factors on partial deals…After sub prime credit buyers’ credit ratings improve, they would be in a position to refinance the high interest rate they’re paying or when the need arises, sell the property (and buy another without seller financing). IN EITHER CASE, THE NOTE WOULD BE PAID OFF EARLY. Please consider that most Americans do not live in the same home for 30 years. Statistics show most long term notes do get paid off early. The average is 5 to 7 years. (Please keep in mind too that seller financed notes generally do not have early payment penalties.) THUS, MOST LIKELY YOU WON’T BE FORCED TO RECLAIM THE NOTE PAYMENTS IN THE FUTURE.

  In the probability of an early note payoff, (against the total remaining note balance) the relating note purchaser would be paid the outstanding principal amount due them and thus you’d receive the remainder. For example, there is a note that has a face value of $100,000.00, terms of 9% at 360 months with monthly payments of $804.62. Six years after purchasing the property, the borrower either refinances the note or sells the property. The remaining note balance after 72 payments would be $94,810.71. If you were to be funded $45,000.00 now, via partial purchase, the note purchaser would consequently receive their remaining balance due. You’d then be entitled to the remainder.

 Yield wise on partial deals instead of full purchases, (yield is the average annual rate of return) note holders typically can get higher yields as opposed to the interest rates they’re receiving on their notes.

How to Attract Business

Thursday, March 26