Buying Notes: Reverse Partials

Here are some more financial calculator techniques for building profits buying notes and real estate.

In this Strategy, you will learn how to give a note seller cash plus payments for their note.

Just understanding how to use the term “reverse partial” should make you a pretty boring person at a cocktail party. Reverse partial is a way of buying a note such that the first 12 to 24 payments go to the note seller along with cash for the remaining payments. It is an excellent purchase strategy for sellers who need some cash now and need to retain some of the payments.

Sally Seller has a note to sell but needs the next 12 payments to pay child support to her ex- husband. After that, he will have graduated from medical school and won’t need her payments. The $40,000, 7.75% real estate note is amortized over 15 years. Calculate the parameters on the original note:

#1: Clear your calculator and calculate the Pmt Here is the original note.
N I/Y PV PMT FV
180 7.75 -40,000 $___ 0

Your offer to buy the note using a “reverse partial” in which the next 12 payments will flow through to Sally. You require a 16% yield (I/Y) and will sell the note to an investor at an 11% yield (I/Y). Neither you, nor the investor, will get the first 12 payments, so only 168 payments (N) will be purchased. First, calculate your purchase price:

#2. Calculate the PV
N I/Y PV PMT FV
168 16 $____ 376.51 0
This is your purchase of 168 Payments at a 16% yield.

However, the payments won’t start for 12 months, so we must discount the value of the future cash flows back to the present. Move the PV to FV, make payments 0 and calculate the new PV.

#3. Calculate the PV
N I/Y PV PMT FV
12 16 $____ 0 25,187.24

Pmt is $0 because the payments are imputed in the PV calculated above. This is the value of the cash flow if it were to start immediately. PV is what you will pay for 168 Payments that start in 12 months.

Sally agrees to sell you the note for $21,485.85 cash now. She will also receive the next 12 payments of $376.51 or $4,518.12 for a total of $26,003. If the investor will buy the note for an 11% yield, you have to go through all the steps again using an 11% yield. The difference between your buy price and the investor’ buy price equals your profit.

You will give Sally Seller $21,485.50 for her note now. She will receive the next 12 payments and the 168 payments that begin after 12 months. You will sell the same note to the investor for $28,866.03. Your commission is $7,380.53. Prove the answers are correct on your own. If you can do so, you are an expert.

WHAT YOU HAVE LEARNED: A REVERSE PARTIAL CAN SOLVE A PROBLEM FOR SOME NOTE SELLERS BY LETTING THEM HAVE SOME OF THE CASH FLOW PLUS CASH NOW.
BOX #1: PMT = $376.51
BOX #2: PV = –$25,187.24
BOX #3: PV = –$21,485.50

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