You sold your
property and agreed to finance your buyer (carry back paper) for some or most of the purchase price, you've done
your "due diligence" your buyer appears to be a good credit risk and promises to make all the payments on time.
Life is full of changes, the old proverb "the only consistent thing is change" is as true today as ever. Some
changes we control, others are beyond our control; changes in health, job transfers, loss of employment, divorce
etc. there are three common outcomes:
The buyer/payor makes all payments;
the note goes "full-term".
The buyer/payor sells or refinance
The buyer/payor defaults; the seller
or investor must foreclose.
The first scenario is easy, no further explanation is
needed the seller receives all of their payments as agreed.
The other two scenarios however require some explanation.
The biggest factor is the amount of time that has passed since the sale of the "partial".
Let’s discuss an early payoff first; as the payors makes
their regular monthly payments their principal balance reduces according to the original amortization schedule,
the investors principal balance reduces likewise however at a different rate because the note was purchased at a
discount (please refer to amortization schedule).
We'll assume the payors sells or refinance the property
24 months later, the payoff balance according to their original amortization schedule is $196,519.89, the payoff
balance on the investors amortization schedule (for the partial purchase) is $90,852.74 that means the investor
is paid off and the original note seller receives the difference = $105,823.48. It's that simple!
The buyer has the same payoff balance they originally
agreed to, the investor earned a good rate of return; the note seller received the cash he needed now plus the
balance when the note was paid off.
In the event of a default or foreclosure, the scenario is
identical with one caveat. We will make "best effort" to service and collect the account. In the event we are
unable to collect the payments the note seller will be contacted and given numerous opportunities to "step in"
to assist in collecting the payments.
Remember: This is still your note, you are in
1st place, and we have an "assignment" but like any other lender (mortgage, auto or otherwise) we
never want the collateral. The real estate is merely the security to assure repayment. We don't want the real
estate; we want the payments that we purchased.
So what are your options?
Make the payments on behalf of the payors and YOU
handle the foreclosure; cleanup, repair and resell the property possibly at a profit. We receive the
small payoff on the partial, you keep everything above that.
The possibilities are too numerous to consider, but
again; remember we never want the real estate.
In the event the note seller does not wish to exercise
any options to mitigate the situation we will foreclose; the property will be sold at a foreclosure auction for
the current balance on the original note (in our example $105,823.48) the note seller will receive all proceeds
over the outstanding balance.
In all fairness; it must be said in the unlikely event
the note seller refuses to participate or pay off the partial, we must foreclose on YOUR note to recoup our
investment. If the property does not sell and becomes an REO; proceeds from any future sale or purchase money
mortgage will not benefit the note seller.
And that's how a "Partial Purchase" works. You truly can
have your cake and eat it too.
PS: let's talk
about the "discount"; contrary to popular belief and unlimited misinformation on the Internet a discount on a
payment stream of any type (seller financed note, lottery annuity payout, disability annuity payout) is NOT a
result of gouging or someone taking advantage of the seller! The DISCOUNT is a result of the difference in the
interest-rate being charged and the required "yield" or rate of return for the buyer. In this economy the cost
of money is high so minimize the discount and sell only what you need to.
Download This Entire Document with an Amortization Schedule Here.
Trust Deed Investments
Several Important Factors to
Click Here for a FREE No Obligation