Should You Accept A Full Purchase Offer For Your Note or Not?

Posted by By Frederick Webb on: 2005-07-12 00:36:08

You could be facing a dilemma when considering payout options on selling your mortgage note!

To accept a full purchase offer or a partial purchase offer is not always an easy decision.

Sure, to take the full purchase option is an easy decision to make if you're holding a second position note on a property that doesn't have any equity after you add the first and second mortgages, but what if that's not your situation?

Full purchase payouts can be good if your primary concern is to just get out of the note and be done with it. But if getting top dollar for your note is your main concern, a full purchase sale may not be the thing to do.

Before I get too far into this, perhaps you, the reader, would be better served by a brief revisiting of the different payout options and what they entail. Agreed?

The 5 most common ways note purchase transactions are structured:

1. Full Purchase. This is when a note investor buys the entire note. The note seller is no longer responsible for collecting payments and is 100% free of ownership of and responsibility for the note.

2. Straight Partial. Here, a note investor purchases a predetermined number of payments in order to meet the seller's cash requirements. After the last of the predetermined payments, the balance on the note reverts back to the seller.

3. Reverse Partial. The seller, in this scenario, gets a lump sum and continues to receive the full payment amount for a specified and agreed upon period of time. This kind of arrangement is most fitting when the seller needs a large amount of cash at the closing but still wants to receive the monthly payments for a while.

4. Split Payment. This is when the investor purchases half of the seller's monthly payment and the seller continues to receive income from the other half.

5. Balloon Only. The note investor, in this case, only purchases the balloon due at the predetermined date on the promissory note. This option works when the seller needs some cash at closing but doesn't want to wait 30 years to collect the balance.

Now, let's use this hypothetical situation:

Mr. Jones holds a note on a property with a balance of $103,865.68. It is amortized over a period of 360 months (30 years), 10% interest with a monthly payment of $943.83.

Now Mr. Jones gets an offer of $87,613 for the note on a full purchase option and is very disappointed. He objects to this offer. So then the note investor offers Mr. Jones $73,165.82 for a partial purchase of the note where the investor buys 150 of the 300 payments remaining on the note.

Mr. Jones is pleased with this offer because he got a better price for selling only half of the note. Do you see that? In the full purchase offer, half would only be a little over $43,000 using the full purchase offer of $87,613.

Mr. Jones got a much better deal this way and he is still the owner of the 150 remaining payments due to him from the note.

So, as you can see, deciding whether to accept a full purchase offer over a partial purchase offer is not always an easy decision to make if getting the most money for your note is your primary concern.

Frederick Webb is a Certified Cash Flow Consultant and is President & Co-Founder of Webb Funding Group, a small debt brokerage agency he runs with his wife, Kashita Webb.

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