Follow Us on Social Media

email icon rss icon icon google plus icon twitter icon facebook icon

Selling Part of a Note: How Partial Notes Work

by Alan Noblitt on November 18, 2011 · 5 comments


There are all sorts of ways to buy and sell a mortgage note.  A common question that note sellers ask me is how a “partial” works.  A partial is simply when a mortgage note buyer like myself offers to buy part of a note.  Instead of buying the entire note, the mortgage buyer purchases just some of the payments or the payments and part of the balloon. 

Why would anyone want to do a partial?

Let’s say that you sold a house one year ago to a buyer for $100,000.  The buyer gave you a $5000 down payment, and you agreed to carry a note for the other $95,000, with payments amortizing over the next 30 years.  If you went to a note buyer about selling your full note, they would probably only be willing to give you $80,000 to $85,000, and that assumes that the payer on the note has good credit and that everything about the note is positive.  You may not want to take a $10,000 to $15,000 haircut on a note that you consider to be strong.

What if you only needed $30,000 to put your kid through a year of college, pay off bills, or make another investment?  It would not make sense to sell the entire mortgage note.  You could sell the next six years of payments to the note buyer instead to get that $30,000.  For you as the note holder, this solves your cash flow problem while allowing you to keep most of the note and taking a smaller discount than you would have if selling the whole note.  You could also sell additional payments in the future if you needed more cash. 

The mortgage buyer benefits because he is keeping a large equity buffer on the note.  Thus, if the payer ever defaulted, the note buyer would have a better chance of recovering his investment. 

The disadvantage of a partial for the note holder is that he is in a junior lien position and thus less protected if there was ever a default.  However, with most investors (including us), the original note holder has the option of buying out our interest and then pursuing whatever avenues that he chooses.  Even if that is not feasible, a reputable mortgage buyer will try to protect both parties during the default and foreclosure process.

In the current economic environment, and with real estate still getting pummeled, partials are often the only decent solution.  For my company, about three-fourths of our note purchases are partials.  Most of those notes would have been too risky to pay out a lot for the full note, so the partial saved the deals.  If you have questions about partials or note in general, feel free to contact me.

Email *

{ 5 comments… read them below or add one }

Joey Budka December 7, 2011 at 12:37 pm

Greetings Alan,

Can you explain how you structure a partial note sale? Is there a way to grant joint first position? Or must there be a junior and senior position? Do you pool money for a partial note sale into a separate entity, like an LLC or LP? Just curious as to how this works as my company may benefit from this technique.




Alan Noblitt December 7, 2011 at 5:34 pm

You could hold joint first position with the original note holder, but I don’t know why you would want to nor do I know of investors who will do that. When we buy part of a note, we are in 1st position to receive those x number of payments. After we have received the designated number of payments, then we assign the note back to the original note holder.

Most investors, including us, buy notes (partials or fulls) in the name of our corporation or LLC. We do not set up a separate LLC for each note. There could be some advantages to doing that, but it would be an expensive and time consuming way to go.

Hope that helps.

Alan Noblitt


Mike Hartzog July 2, 2014 at 11:19 pm

Hi Alan,

I realize this is one of your older articles but it is touching on an area of note investing that I would like to understand more completely. What I want to know, in the case of a partial, is how the remaining principal is divided between the front-end owner and back-end owner when the note is paid off early. When you buy or sell the a number of payments on the front-end of a note, is a principal amount designated for the purchase or is the principal due the front-end owner based on the amortization schedule of the note?

Mike Hartzog


Alan Noblitt July 5, 2014 at 6:15 pm

There are at least three different ways of calculating the split of the proceeds from an early payoff — often referred to as schedules A,B, and C. The details are too extensive to go in to here, but you can see the various calculations in a book called “More Calculator Power” by Jon Richards. Those pages would also answer your second question.



Mike Hartzog July 5, 2014 at 8:55 pm


Thanks for the response and the book recommendation. I will check it out. I found one example online. Schedule A is the note as purchased, Schedule B is the front half and in that example, they used the present value of the payments purchased as the principal due. Schedule C is the back-portion, and the principal assigned is the remaining principal from the original note, i.e., PV of schedule A minus the PV of schedule B. That approach makes sense to me.



Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: