 President's
Corner
This
week I thought I would talk about two of the most popular
note purchase options, the Full Purchase option and a
Front End Partial Option.
Note
Example:
-
Single Family Home – owner occupied
-
$95,000 Sales Price
-
$90,000 Face Value Note
-
10% Interest Rate
-
15 Year Term (180 Payments)
-
$967.14 Monthly Payments
-
24 payments have been made. The current
-
Balance owed is $84,257.19
-
Loan To Value = $84,257/$95,000
= 89%
Possible
options from a note buyer:
1
- Full Purchase:
$ 66,229.74
2 - Partial Purchase –
Front End Payments - Sell the next 5 years of payments (60
payments). Then receive the last 96 payments.
Note
Holder Gets:
$ 40,653.53 CASH NOW
+ $ 63,736.27
Note Balance in 5 years
$104,389.80
Total Cash to Note Holder
Explanation
of Options
Full Purchase
-
As we know, when the entire
note is sold, it is always sold at a “discount” off the current principal
balance of the note. One reason for this is that the face interest rate of the
note is seldom as high as the market yield required in the secondary mortgage
money market of our note investors. In the example above, the discount is
$18,027.45 ($84,257.19 minus $66,229.74) assuming the secondary mortgage money
market yield is 15%. The discount could be more or less depending on the current
yield requirements of our funding sources in the secondary mortgage money
market. This is the most recognized option, the most used and the most
competitive.
Partial
Purchase— Front End Payments
-
As a note broker you already know that partial sales are
very attractive from the point of view of a note holder because the note holder
does not have to take a big discount. The main reason for the discount being so
large for a Full Purchase option ($18,027.45 in the example) is that the
payments due in the distant future are worth much less in today’s dollars than
the payments that are due soon.
In a full purchase, the note holder is
selling all the payments, and not getting much for the ones at the end of the 15
year term—thus the large discount. In a partial purchase, where the front-end
or near term payments are sold, most of the payment is interest. This means that
the note holder gets a sizable amount of cash now ($40,653.53 in the example)
and when the note holder gets the note back after 60 payments, the balance of
the note is still fairly high ($63,736.27 in the example) and that doesn't count
any future interest that may be received as well. The note holder then
gets the remaining 96 payments of $967.14.
A partial sale of the front-end payments
is like having your cake and eating it, too. The note holder gets a sizable
chunk of cash now, and when he/she gets the note back, it has a high remaining
principal balance and lots of payments left to collect.
In the example above, the cash the note
holder receives now plus the remaining loan balance the note holder receives in
5 years is more than $20,000 higher than the current principal balance of the
note. In many cases, note holders
prefer this type of an arrangement rather than selling the entire note for a
large discount off the current principal balance.
These are just two of the
many options that we can give to note holders. Once you have these in your
arsenal and are able to find the sellers need it is easy to present yourself and
your services to note holders in a positive light.
Next month we will look at a couple more of the different ways we can
purchase a note and the different options we can give to note holders. Remember, Success Demands
Action! Keep on marketing, it’s going to
work! TWITA!
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