Join our mailing list for special offers & resources:

Selling a Promissory Note: What is a Front End Partial?

selling a promissory note front end partial

Property owners who offer seller financing and carry back a promissory note can easily maximize their wealth by selling off a front end partial. This is often preferable because the discount required to sell the entire note can be painful.

I hear ‘Designer Babies’ will be a thing before long. You can basically order up the type of human you want in your family… you can have test tube babies, lab grown children, that you design yourself.

I was horrified by this, but then I realized I want to do this with notes secured by real estate, in utero, before they’re born through the closing of a seller-financed transaction! Yes, I want to buy Genetically Modified designer note babies 🙂

Why??

If I know what the parties actually want and NEED before they agree on the terms, I can influence the DNA of the note to make sure it’s healthy when it’s born. No congenital defects. I can help the ‘owner will carry’ property seller create a note that is strong, secure, and worth as much as possible.

Basically, a note worth holding or selling.

Having some professional help is critical if the seller knows that they would like more cash at closing than the buyer has for a down payment. If I am brought into the conversation early enough, I can help optimize the payment terms of the note in a way that provides the best financial outcomes for the note seller.

In fact, with a little planning, it is possible to sell part of a promissory note (a front end partial) with almost NO DISCOUNT!

When I buy a front-end partial, that means that I am only buying the first few years of the payment stream. The note holder keeps the lion’s share of the remaining payments.

Let’s say we have a seller willing to do owner financing and carry paper for a buyer:

  • Sales price: $400,000
  • Buyer’s down payment: $80,000 (very nice 20%)
  • Seller carry first: $320,000
  • Interest rate: 6.5% (a little below market to maximize sales price)
  • Term: 360 (30 years, fully amortized)
  • Monthly payment: $2,022.62 (principal & interest)

This is a well engineered transaction and a very solid note for the seller to keep in portfolio. If this was an investment property, then they have also likely saved themselves several thousands in capital gains (Installment Sale: IRC 453).

But what if the seller really likes the idea of receiving the monthly mortgage payment to supplement their retirement income, but MUST HAVE $50,000 more at closing and the buyer doesn’t have it?

Let’s see how I can buy a front end partial to solve this problem:

  • Note seller trades 44 payments for: $50,000
  • After the note buyer has received 44 payments, the payor starts sending their payments to the person that sold them the property instead
  • The balance of the note at that time will be: $305,670

The note holder got $50,000 in cash and only gave up $14,330 of the principal balance of the note!

So this is what the seller will receive for his $400,000 house:

  • $80,000 down payment from buyer / borrower
  • $50,000 from partial note sale (selling 44 payments)
  • $305,670 remaining principal balance when he get the note back
  • $435,670 TOTAL

To calculate based on the possibility that the loan goes the full 30 years, seller would net:

  • $80,000 down payment from buyer / borrower
  • $50,000 from partial note sale of 44 payments
  • $639,147 (316 payments of $2,022.62)
  • $769,147 TOTAL!!

Selling a promissory note front end partial a seller can: 1) meet his cash needs without a nasty discount, 2) keep most of the payments for retirement income, and 3) leave a great inheritance.

And I and my investors get is a VERY SECURE note, a payment stream that has almost no chance of becoming a problem or a loss. That helps our retirement portfolios as well.

Resources to consider:

Share this article