Selling a Partial Note

What is a Note Partial?

A partial note or “note partial” sale is an excellent way to raise cash without selling a whole loan or note for a steep discount.

When you sell a property using seller financing, you’re given a promissory note by the buyer. It’s a promise from the buyer to pay you back. The promissory note typically includes terms whereby you are to receive periodic payments.

Folks needing cash may choose to sell the entire note to an investor. However, this approach usually requires offering a discount, sometimes a steep one.

And what if you don’t need the full amount?

You might be interested to learn you can sell just a portion of the note, known as a note partial.

If you need cash for medical bills, emergency vehicle repairs, a child’s college tuition or a wedding for example, you can either borrow the money or sell assets.

However, borrowing can have its drawbacks:

  • The application process may be too slow.
  • Your credit may be poor.
  • Interest rates may be too high.
  • You may not be able to borrow all the money you need.
  • Borrowing puts you further in debt and risk of financial ruin.

Because a promissory note issued to you is a real asset, like any asset, it can be sold for cash.

How a Partial Note Sale Works

In a partial note sale, you sell a portion of future payments for a set period of time, at a fixed interest rate. You sell only part of the value of your note.

Say you hold a note valued at $200,000 and you’re receiving monthly income from your borrower’s repayments. Suddenly, you need to raise $50,000.

You could discount the note 10-20% and receive $160,000 to $180,000 upfront, or you could sell just enough payments to get the cash you need,

With a partial note sale, you could get $50,000 in cash up-front, by selling a part of the payments to an investor, while you keep the remaining payments and any unpaid principal balance.

Because you are merely selling a portion of the payments in a partial note sale, you may still receive a substantial portion of the remaining balance of the note when it’s due.  For example, if you need $50,000, you might sell just the next 60 payments. But even after five years, the principal balance of the note might still be higher then had you sold the entire note upfront, for a discount.

Partial note sales can be structured in many ways. An experienced investor can help structure a deal to meet your needs. Here are just a few examples:

  • Say you receive $1,000 a month in loan repayments. You might sell the note buyer all of the $1,000 monthly payment for the next 60 months. After that, you resume receiving monthly payments. Or…
  • Maybe you still need some of the $1,000 for monthly expenses. In this case, you might sell to the note buyer, $500 of the $1,000 monthly payment, for the next 120 months. Or…
  • Suppose there’s a balloon payment of $150,000 due from a borrower at the end of 10 years. You might sell the note buyer part of that balloon payment and part of your payments.

The opportunities are endless. First, determine what YOU need. Then, let the note buyer help structure a creative deal for you.

Advantages of Selling a Partial Note

By selling a partial note, you gain several advantages:

  • You can get cash in hand immediately.
  • You have future income from the note to look forward to.
  • You can get the exact amount you need without having to give up the whole note.
  • You lose less of the value of the note. The less of the note you sell, the less you forfeit to the note buyer.
  • Partials may reduce a buyer’s risk, making it easier to find a buyer.
  • You open the market to many more investors who can afford to buy a partial, because the amounts are less than a whole note or loan.

When to Consider Selling Your Whole Promissory Note

To be fair, a partial note sale has some drawbacks over a whole note sale. For example:

  • In a whole note sale, you get all of your cash upfront for the entire note and your risk is eliminated.
  • When selling a whole note, you stop dealing with monthly paperwork and recordkeeping.

No matter the reason, selling a whole note is similar to selling a partial note. The amount of money you’ll receive in a note sale, depends on how much you need.

Ready to Sell Your Note?

If you’re thinking about selling part or all of your note, start by gathering the relevant documents. Having the documents ready before you begin speaking to buyers will dramatically increase the speed to cash.  Some of these documents include:

  • The deed of trust
  • The real estate contract
  • Promissory note
  • Title policy
  • Proof of payments
  • Information on escrow payments and disbursements
  • Proof of tax and homeowner’s insurance payments.

After you have gathered the relevant documents, you can begin your look for a reputable note buyer and expect a brief underwriting process. If you prepare ahead, you can often get through the process and have cash in hand within days.

Later, we’ll dive more into the numbers and where to find buyers.  For now, if you have a note that you are considering selling, can help you analyze your options including selling a note partial.