Partials, partials, partials...

17 Replies

Hi everyone! I am at least ankle deep (but more like knee deep!) in my education in note investing. I am interested in dipping my toes in by perhaps buying a partial. I have up to $10,000 to begin with, and from what I can gather that is not a good starting point for purchasing a full note. That being so, what is the basic structure for buying a partial? 

For example, if I buy a group of payments; do I have to wait for those payment numbers to arrive before I get paid back for them?

If so, why would someone buy the last 5 years of payments on a 30 year note?  

Thank you all so much for your help!

-Nehemias

Hi Nehemias,

"if I buy a group of payments; do I have to wait for those payment numbers to arrive before I get paid back for them?"

If you bought a partial and the first payment you bought starts in the future, of course you will have to wait for them.   That is done, but most people buy the next X number of payments.  For example, you might buy the next 60 payments of a note with 120 total payments.  Then you get the next month's payment and continuing for the remainder of the 60 months of payments, every month.  Then the payments go back to the person who sold you the partial.

To use your example, it is certainly possible to buy the last 5 years of payments on a 30 year note.  Those payments would be deeply discounted because of the time value of money.

That is why I recommend that when you sell or broker a note, sell or broker a partial and keep the last few years of payments for yourself.   You will make almost the same amount of money, but you will have income years from now with nothing invested.  Do that over and over again and you will never have to worry about retirement.

Feel free to PM me if you would like more about how to do this. -- Bill Mencarow

@Nehemias Ponce Do you have a source for buying Partials? I am also interested in partials -- I have a 2nd that is currently in payoff, so I'll have funds coming free that I want to invest. I'm not familiar with purchasing partials, but it seems like a good option while in the process of expanding your bankroll. Sounds like it would also be easier to diversify with partials.

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@Nehemias Ponce Only one note so far. It was a great experience -- I was lucky in that as soon as I purchased it (at about a 7k discount), the house went on the market and sold a few months later. So I captured the kicker within 5 months. I know that's very rare.

For my next note, I'd like a 1st, whether it's a full or partial. I don't like the idea of holding a 2nd if there's going to be a market correction, unless there's a lot of equity in the property.

You'll need to find yourself a note investor who can sell you a partial from their own portfolio. 

$10,000 isn't very much in the way of a partial, definitely not enough for a full note (though I have seen some $16-18k notes recently), so the partial that you buy would have to come from someone who may have bought the note with intent to just keep it.

As Bill mentioned, when you buy a partial, you're buying the front end payment stream. So if a 30 year note had 200 payments left and you bought 60 payments, then those 60 would come to you right now and the last 140 back to the original owner.

A seller will give you a contract to sign and they may have their servicer handle the closing. I wouldn't recommend buying partials on notes that aren't 3rd-party serviced.

The contract should spell out exactly how many payments you're buying, for how much and the estimated return you should expect (no guarantees).

Hi Nehemias,

Up until a few hours ago I was all excited about partials, as my perception of them was shaped by the wow factor, that this is a great method of investing in notes for those like you & me who have little capital.

However after reading this excellent thought provoking & pre-warning article by veteran note investor Lorelei Stevens, has prompted to have a  very serious rethink.

If anyone reading this has addressed all the issues in the above article? Maybe you Mr @William 'W.J' Mencarow? Then please share that information. Thankyou.

@Sue Bishop   the note experts on this site do not like partials as there is a debate whether these are securities.

I have hypothecated notes to my bank.. of course I was the note holder and the bank the investor and these work well.

I notes are kind of the wild west really.. who knows who needs to be licensed what states.. etc etc.

probably nothing comes of it until you do it and you end up in a big embroilio  

@Jay Hinrichs - curious to your opinion on if this is legal as I have seen other investors who bought a partial at one time where the holder of the note had a schedule A with the borrower. They created a schedule B for the investor (which I believe was not a loan) and it provided the payment terms of receipts. The original note owner also had a schedule C for the remaining payments they would have at the end. The original holder guaranteed the initial investment amount and the ROI was a target based on performing note. If the note went into default The investor had the option to get their original funds back or keep the money in the deal for a percentage split of any fees from a foreclosure sale.

I think if the deal is communicated and spelled out clearly you can avoid a mess later on. Of course communicated and preparing for every situation and getting involved in a good investment is always key.

If your doing a partial on a non performing second with negative equity and it goes into BK then shame on you for taking that risk.

@Nehemias Ponce  with only 10k and looking to get into note investing had you thought about something diversified like micro loan investments?   I have an account around that size with Lending Club and am seeing 9-12% year over year returns. I have a strict filter and have to search right at the time loans are put onto they market but I have done well and love it. Plus your investment is diversified into hundreds of loans. 

Originally posted by @Com M. :

@Nehemias Ponce  with only 10k and looking to get into note investing had you thought about something diversified like micro loan investments?   I have an account around that size with Lending Club and am seeing 9-12% year over year returns. I have a strict filter and have to search right at the time loans are put onto they market but I have done well and love it. Plus your investment is diversified into hundreds of loans. 

With peer-to-peer, I worry about another economic downturn. I believe Prosper nearly went out of business in 2008ish due to the amount of defaults. Since the loans aren't backed by anything, it's more risky than real estate backed notes.

Full disclosure -- I too, have money in Lending Club and Prosper, but I'm nervous about it.

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@Todd Krzeminski I was more worried about the company solvency over the economic downturn but agree another huge hit like 2008 and the first to go are unsecured loans. I was in love with micro lending until the account hit 5 digits and I started to get nervous, so I opened a Prosper account to build that and when that hit 5 figures I started saving for my first rental. 

I wouldn't consider them the only method for investing, but in the short term have found them to be more lucrative in returns than all of my other paper assets consistently.  This wasn't automated though. The best loans are gone within 1-2 minutes of hitting the market so I have 4 daily alarms so I'm ready and buy a few on each offering but this cherry picking has really helped me get decent returns. I work in front of a computer all day so this was fun and easy for me to do but wouldn't be everyone's cup of tea. 

@Com M. , no I had not considered micro-loan investments. However I am not really sure what they are truth be told. The idea of getting hourly alerts makes me think that it is a fast-moving game and I am probably too green to be that decisive. But it sounds like you have had some good experience?

I think what I need to be doing is reassessing my goals. I am becoming very intrigued with the idea of notes and want my goals to reflect that. Here shortly I am going to post some note-buying goals to try and get everyone's feedback.

@Nehemias Ponce Lending Club and Prosper allow you to bid on partial notes for non secured high interest loans. Both are the leaders and allow $25 micro amounts. My alarms are for the 4 times that Lending Club puts new loans on the market because I am looking for very high interest loans that meet a very tight criteria (cherry picking a few out of a few thousand a couple times a day. They claim a historical 6-10% ROI range but I've been over that the entire time. It was to save up to have more for REI.

@Chris Seveney  I did not invest in notes, I was placing the money in accounts building up for a down payment on a longer term buy and hold property.  Your comment is going to leave me scrambling to research returns and note investing. Do you have any 3rd party partial note brokers that you suggest?

@Nehemias Ponce It's not a requirement to monitor it -- there are automated tools like Lending Robot that will buy the notes for you within seconds of when they're released.

@Chris Seveney You can probably get close on peer-to-peer if you're dealing with the risky loans (E+). Believe it or not, the interest rates people are paying for the high risk loans is up to 30%. But you also have to factor in the default rates that are going to occur with a percentage of the portfolio. I'm getting net returns between 16-20%. But once again, I'm not that comfortable investing this way. Another collapse and I'm gonna lose a lot of the money I put in. 

You also don't get the kicker that comes with discounted notes.