Who the Players
The first thing to remember when considering selling all or part of your note is to understand
"who the players are". There are usually three individuals
ü The note seller, this is usually the seller of the property as
ü The payor, obviously the property buyer.
ü The investor, who agrees to buy the income stream from the note
It's helpful to remember that unlike the seller and the property buyer, the investor has no
“Emotional Involvement” in the property. That’s only the collateral to secure repayment of the debt in the event
of a default. But it’s often expensive and time consuming to convert the collateral back into cash that is all
any lender wants they don’t want the property… they want the cash.
The Biggest Secret: "THE TIME VALUE OF MONEY"
What we, the note buyer, do when we look at the value of a series of
payments (also called an income stream), is to calculate the present value of the receipt of money in the future.
We do this because dollars today will buy more than dollars in the future.
For a simple example, suppose
I have $10.00 in my left hand and $5.00 in my right.
Which one do you want? $10.00 right? (Of course)... Cash Now
vs. Cash Later
But wait a minute. Suppose I say that, though you can have the $5.00
now; if you want the $10.00, you have to wait 1 year.
Which one would you rather have now? Most would want the $5.00.
$5.00 now vs. $10.00 in a year… that's the time value of money.
Some of us can remember when gasoline was 31 cents a gallon? People were horrified when it
shot above $1.00? Now, if we can get a gallon of gas for less than $3.00 we feel fortunate. Put another way,
twenty years ago the value of a dollar was a good three gallons of gas. Today it is less than one. If someone
had been buying the future value of gasoline then, he or she would have had to take into account changing
values over time.
Selling a Portion of the Remaining Payments (Known as selling "A
Sellers, such as you, who understand the time value of money, can see the big
advantage in selling a part of the note. This part is commonly referred to as a "partial." Assuming you don't need
a total cash out at the moment; this arrangement gives you the very best of both worlds. The powerful advantage to
this type of arrangement is that, due to the minimal effects of the time value of money, the required discount is
The value of a 30-year note diminishes rapidly as you move further out in time.
However, if you only sell 5-10 years worth of payments, you've sold the valuable part, the part that an investor
will pay most dearly for.
To illustrate this principle (look at the attached amortization schedule), let's say
there's a $200,000, 30-year note at 8% interest, with monthly payments of $1,467.53 with the first payment due
February 2010. An investor might offer $154,099 for this note. This is approximately an 11% investor yield. As
the seller, you end up with $154,099 cash today.
However, if you don't need that entire amount, you can strike a much more favorable
deal. Let's say that you only need $95,000, because you have a business opportunity.