Most amateur note investors will only make an offer to buy the whole note. But, if you find out exactly what the note seller needs (i.e., maybe they only need to free up x amount of cash and really aren’t otherwise motivated to sell off their note), you can structure a partial offer designed specifically to give them just that amount, while letting them keep the future payments on the note. That way, you’ll get way more offers accepted because it’s been borne out that sellers really tend to like these kinds of offers.
These are called “partial offers” that would enable the note seller to receive some immediate cash for several upcoming payments without selling all of the future payments due. By selling these earlier payments, the seller receives more cash value, per payment, than they would on the later payments (time value of money).
If you learn how to meet the exact needs of the note seller in this way, you’ll have a tremendous advantage because you can tailor offers to accommodate most any given situation.
Let’s take an example of how you might approach this: take a $80,000 note written at, say, 7% for 15 years, monthly payments of $719.06. You talk to the note seller and uncover the real need: he needs to free up $50,000 in order to meet some kind of demand or goal that he has.
What we’re going to do here is make him an offer for the whole note but also formulate an alternate offer that will get him only the $50,000 that he needs. We’re going to accomplish that by purchasing only some of the upfront payments while letting him keep the backend payments on the note to be collected in the future.
Here’s how we’ll do that. We work the numbers on the financial calculator (I use the BA 2 Plus) as follows (the “N” key denotes number of payments, I/Y= interest per year, PMT= payment amount, PV= present value):
Let’s say we want a 12% return. First, we’ll make an offer for the entire note like this (the number in parenthesis is the number we are solving for):
Where we solve for present value:
N=180 I/Y=12 PMT=$719.06 PV=($59.913)
Next, we construct a partial offer and figure the exact # of payments we need to buy to give us a 12% yield and get him the $10,000:
N=120 I/Y=12 PMT= $719.06 PV=($50,119)
So, we would offer him $50,120 for the first 120 payments, after which the payments revert back to the seller.
Point out to him (and make sure you also spell it out for him in the written offer) that he will collect $50,120 plus the 60 backend payments totaling $43,144 so that he will ultimately collect a total of $93,264 which is over 55% more than he’d receive if he were to sell off the entire note. In fact, he’s not losing any of his principal.
Meanwhile, what do you get? You’re getting a nice return of 12% on your $50,119. Over 120 months, you will collect a total of $86,289.
I find that a great many more offers get accepted when you take this approach and also your degree of safety just went up because you now have less $ in the transaction than if you did the full purchase.
And, if you want a lump sum profit yourself on the transaction instead of waiting for the individual payments, you can flip the note.
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