12 Days Of Note Investing - Day #6 Buy A Full And Sell A Partial

6 Replies

Looking for residual income with notes? Does a future income stream of $1,000 per month for 10 years on just one deal sound too good to be true? While not typical on every deal, there are transactions where the Buy Full Sell Short strategy can be used to retain future or tail-end payments.

This technique is based on your purchase of the full payment stream from the note holder/seller with the resale of a shorter payment stream or partial to an investor.

This enables you to earn a fee on the initial sale of the partial to the investor AND keep a portion of the future payment stream. These payments remaining after a partial investment has paid off are also known as the tail-end or back-end of a cash flow note.

Sounds a bit confusing? Let’s look at an example of the strategy in action!

We were approached with a well-seasoned note secured by five retail strip mall type commercial units. The units had been purchased by a religious organization to use as meeting facilities.The particulars looked like this:

  • Sale Price: $135,000
  • Down Payment: $10,000
  • Original Balance: $125,000
  • Terms: 10% interest payable in 360 payments of $1,096.96 per month
  • Remaining Balance: $121,245.48
  • Remaining Term: 306 months

We negotiated to pay $92,804 for the full purchase of the remaining 306 monthly payments.We took a full assignment and purchased the entire note payment stream from the seller.

We then negotiated to sell a partial of 186 monthly payments for a purchase price of $95,046.

We realized an immediate profit of $2,242 on the sell of the note AND retained the right to receive 120 monthly payments of $1,096.96 each commencing in 15 ½ years.

To recap:

  • Payments bought: 306
  • Payments sold: 186
  • Payments retained: 120

A referral fee of $2,242 was made at closing but even better; we retained the rights to a future residual income stream totaling over $130,000 ($1,096 payment x 120 months).

All from harnessing the power of compounding interest using the Buy Full Sell Short strategy or the tail-end payments on the note.

Originally posted by @Martin Saenz :

Well played.  @Tracy Z. Rewey, you have a very nice professional writing style.  I have to throw you that compliment.  I enjoy the flow when reading your articles.  Did you smell desperation when you landed the deal at such a discount and did you anticipate selling the partial out of the gate?

Thanks for the kind words.  On this deal the issue was the ITV on a high risk payer/property use. Due to the property type and ITV maximums we knew the partial would be the best way to maximize the profit.  Yes, we did get partial options bids from other investors upfront so we best knew how to structure the purchase. 

Thanks Tracy, your recent posts have been very eye opening. Out of curiosity, how does this deal play out in the event that the note is paid off early, lets say 10 years from now.

Originally posted by @Nicholas W. :

Thanks Tracy, your recent posts have been very eye opening. Out of curiosity, how does this deal play out in the event that the note is paid off early, lets say 10 years from now.

 Great question Nicholas.  On a partial there are actually 3 amortizations running:

  1. The payer/borrower's full balance
  2. The investor's partial balance
  3. The residual or remainder balance.

The partial agreement spells out the terms in the event of early payoff or foreclosure.  For an early payoff the calculation is usually full balance #1 less balance #2 (the partial balance) and the difference equals the residual or remainder balance (#3).  We usually run these using TValue amortization so each party can see what to expect on any given date.  If you private message me I can send you an example of this.

Originally posted by @Bob Malecki :

Also, this is an excellent technique to purchase those back end "tails" in a self directed IRA when the partial period has ended, so your IRA gets the income at the back end and virtually for free.

Love the SD IRA for tax-deferred or tax free investing. Notes are more passive than owning real estate outright so definitely work well in retirement accounts!

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