Since purchasing partials is the preferred method of many Note Buyer, it would be wise for the broker know what to expect should the note sellers want to sell more payments before the end of the partial period. In other words, say your Note Buyer purchased 72 payments of a note that had payments of $2097.64 @ 7.5% for 348 months. Assume also the Note Buyer will receive a yield of 12.5%. Here is what the partial purchase would look like:

N = 72
I/YR = 12.5
PV = -105, 881.81
PMT = 2,097.64
FV 0

Two years have gone by and the note sellers are in immediate need of cash. They want to know if they can sell 72 more months of payments. This is a common scenario when brokering partials.

Note Buyers will be happy to prolong their cash flow on a note they already own, assuming the payors have been making their payments on time, the property value will support the additional investment and nothing else has decreased the value of the note More often than not, the note sellers are expecting to receive the same $105,881.81 they received the first time.

However, the note sellers are about to get "sticker shock" when they discover their prior offer has been discounted approximately 40%. As the broker, if you are not aware of this principle of Time Value of Money, you are also going to be "shocked" when the Note Buyer gives you a quote for the additional payments due in the future which will be much less than the original offer.

Moreover, how are you going to explain the huge decrease in price to your note sellers if you do not understand it? As a professional broker, you should be preparing the note sellers from this first conversation as what to expect prior to requesting a quote from your note investor.

Before you can explain to the note seller what to expect, you are going to have to know, as well as understand, how to calculate buying payments in the future. This problem can be divided into two parts. The first part is to calculate the PV of 72 payments at a 12.5% yield, the same way as above. The next part is to calculate what this PV will be in the future.

To determine what the PV will be at a future date, we must first calculate how many pay periods, in this case months, will it be before the Note Buyer will start receiving payments. Remember, the Note Buyer originally purchased the right to receive 72 monthly payments. 24 payments have been paid.

Subtracting 24 from 72, we come up with a difference of 48. In other words, unlike buying the first 72 payments where the payments will be received immediately, the Note Buyer will have to wait 48 months to receive the next 72 payments. This is going to affect the price enormously, as we shall see.

The last step is to calculate the PV of 72 payments of $2097.64 @ a 12.5% to begin in 48 months in the future. But how do we calculate payments due in the future? EASY. First we calculate the PV of 72 payments as we did originally. The answer was $105,881.81. Keep in mind, the Note Buyer will not realize his/her investment until 48 months in the future.

The next step would then be to place $105,881.81 into FV; 48 into N; 12.5 into I/YR, and since no payments will be received for 48 months, we insert 0 into PMT. Now all we need to do is to solve for PV. Here are the calculations:

N = 48
I/YR = 12.5
PV = -64,386.87
PMT = 0
FV = 105, 881.81

WOW!! This was a big drop in the original purchase price. Why the big difference? Because in the second 72 month period, NO PAYMENTS WILL BE REALIZED UNTIL 48 MONTHS IN THE FUTURE.

Remember, the Note Buyer is purchasing cash flow. The 48 month period where the Note Buyer is receiving no payments, there is no cash flow. Therefore, PV decreases proportionally to the time period where payments are not being made, and there is no cash flow.

As a side note, did you notice the balance of the note never did come into play when calculating the purchase price of the future payments? Although the balance of the note is not necessary to calculate the PV of payments due in the future, as a professional note broker, you should have an amortization schedule available to show your note sellers exactly what the balance of their note will be at the end of the second 72 month period, as well as the Schedule B in the event of early payoff or default.

This is where I find programs like Tvalue to be invaluable. By instantly being able to devise an amortization schedule, which will reveal balances of the note at all levels of payments for the payors, you will also be able to show the note sellers exactly what they will receive in the event of early payoff or default. Proper preparation makes educating and explaining partials much easier. (Contact Me to Learn How to Get a $22 Discount on TValue)

To summarize, buying future payments of a partial is a common scenario for note brokers. However, to avoid "sticker shock" when you receive a quote from your investors, you should be preparing the note sellers of the fact that the value of payments in the future will be less than the original offer.

I like to offset any negative with a positive. After preparing the note sellers of the lower offer they will receive, I point out they can get their lump sum of cash in only a couple days after signing a contract. Remember, all the due diligence and title work have already been completed from the prior purchase. All that is left is to sign the new agreement.

Food For Thought: Are you contacting your note sellers who have sold partials to ask them if they would like to sell more payments? If not, why?

It is also important for those who sell properties utilizing Seller Financing to at least know the concepts of selling back ends of your notes. It is even better if you are aware how the calculations are made.

This is only one Wealth Building Technique Tom Will Be Teaching in Detail in his June 25, 2016 workshop Tricks of the Trade and Taking the Mystery Out of Partials. At a $79 Pre Door Registration, THIS CLASS WILL FILL UP QUICKLY
ACT NOW to Be Assured a Seat. If you have any questions or comments, please CONTACT ME.

If you have a topic you would like Tom to discuss, Contact me. It is from your comments I get many of my topics.

Remember, if you know of someone who has a note to sell, I do pay referral fees and you receive the benefits.

To forward this email to friends or business associates who have an interest in time value of money, click the "Forward this newsletter" on the front page. Tom Henderson /a.k.a. THE NOTE PROFESSOR .

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Other products are also available, including HOW TO MAKE OBSCENE PROFITS with SMALL MONEY, and GUIDE FOR SECOND LIENS. There is also a FREE download of CHECK LIST FOR OWNER FINANCING.

Simply go to the NOTE BUYERS STORE. I can think of nowhere that you can find such information packed products at such incredibly low prices. We are still working out the bugs, so if you have any problems, be sure to contact me.

Many of us have been expecting that it is only a matter of time before the Consumer Financing Protection Bureau would start targeting seller financing. It appears it has begun. In a New York Times article indicates federal regulators have seller financing in their cross hairs. As we know the a contract for deed is a form of seller financing, differs from a note and deed of trust or mortgage is the method of foreclosure.

While this article concentrates on contracts for deeds and one particular firm in Dallas the entire seller financing industry might not be far behind. From the article:

"The regulator's interest in seller financing was prompted by discussions between members of the commission staff and one of its advisory boards, the people said. The advisory board began raising questions about seller-financed home transactions in the wake of reports on the subject, including a front-page article in The New York Times on abuses in a marketplace that targets lower-income buyers."

The Wall Street Journal also has its regulators investigating seller financing.

For those of you who have a business model of purchasing properties "subject to", then selling on a wrap, you should be very cautious. This is another area that encompasses little "land mines" that generate attention of regulators, no matter how many disclosures and documents were signed.

These type of transactions are also drawing the scrutiny of the underlying lender. Although the common wisdom is the lender will not call a performing note via the due on sale clause, in the past week I have received two wrap notes where the bank is calling the note due. What position does this put you, the wrap holder. The owners is going to lose their homes when they are making payments. The original borrowers is going to have a foreclosure on record. Do you see a law suit in your future?

What also found interesting in these articles was the quotes of a University of Texas Law Professor and Activists commenting on the dangers of contracts for deed, when in Texas the contract for deed is already regulated and stiff financial penalties can be accessed if not performed correctly and converted to a deed. The point is, rightly or wrongly, activists from across the country are examining seller financing, as are attorneys looking for cases to get their name in the paper. Be on the alert.

From a note buying standpoint, many investors and institutional funders are turning away owner financed deals of investors who use seller financing more than 3 times a calendar year. In the past, when the note was sold, the note buyer would not be held responsible for the actions or inactions of the note seller. With Dodd Frank, the note buyer will be held responsible. Not a risk many want to take.

Many Note Buyers are concentrating only on mom and pop notes, or non-owner occupied notes. Does all of this mean not to sell property using owner financing. Heavens, NO.

It only means make sure you are not inviting the ire of regulators, and have dotted your "I's" and crossed your "t;s". For example, the have a Residential Mortgage Loan Originator prepare a package, and make the terms easy for your borrower to pay and do not have complex transactions such as buying subject to, then wrapping that note, or even "double wraps". These are bugs looking for a windshield. Good notes still sell and have a good market.

Act out of knowledge, not out of fear.

On a positive note, there is a movement to eliminate the Consumer Financial Protection Bureau.

If you have questions or a topic you would like me to discuss at the workshop. CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR. It is from your comments that I receive many of my topics.

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