Understanding The Partial Purchase

I often give out partial purchase options to brokers when we’re uncomfortable with a Note’s LTV. I suspect a fair number of those offers never make it to the noteholders, either because the broker doesn’t understand the concept of a partial, or they simply don’t know how to sell it.

Do you ask your noteholders what their needs are when giving a quote? It’s possible they will be receptive to a "cash now, payments later" scenario. Don’t let fear of the unknown keep you from maximizing the potential of every deal that comes across your desk. Besides, how many of your fellow brokers are seeing that same Note and shopping it to the same investors, paring down their commission in the hopes they will work skinny enough to sign up the deal? I sense there are a lot of nodding heads out there right now.

I think everyone will agree that the ability to offer several options to a noteholder increases the chances of a deal getting done. Full purchases are the easiest to understand and clearly the most common, but how many commissions can be made on a full purchase? ONE AND DONE. What if your noteholder came back a year after selling a partial and decided at that point to sell the remainder interest? A partial purchase can indeed be the gift that keeps on giving, offering the opportunity to make a second commission.

A single-family residence sold 5/1/06 for $174,000. Payor put $5,000 down and seller took back a Note for $169,000 at 6% interest (P&I payment $1,013.24) over a period of 30 years. Payor has a credit score of 578 and the Note has been seasoned three months, making the current balance $168,492.75, and the LTV on the Note almost 97%.

With that kind of exposure, minimal seasoning, and subpar (at best) credit, most investors are going to steeply discount the full purchase to make themselves comfortable with their ITV (Investment to Value). However, let’s propose buying the next 120 payments, leaving the remaining 237 payments to revert back to the seller in late 2016. What is the present value of those 120 payments? On the HP 12C the calculation looks like this:

120 n (number of payments)

$1,013.24 PMT (principal and interest

payment)

6 i (interest rate divided by 12)

Solve for PV (present value)

Your number should be $91,266.03

With that information at hand, you give your noteholder the full purchase option, which has likely been discounted severely because of the high LTV, poor credit, and minimal seasoning. THEN you offer a partial, buying 120 payments with a much smaller discount (since your investor’s LTV is a much more palatable 52% ($91,266 / $174,000)). Better yet, you inform the noteholder that the balance on the Note when it reverts back to them will still be $140,506.05! (120 payments amortized off the current balance of $168,492.75) That may be exactly what they want to hear.

This article only scratches the surface on partial purchases, but hopefully it will get you thinking during your next discussion with a noteholder – wouldn’t it be nice to offer trout AND steak???