THERE ARE FOUR
ways to structure the form and paperwork related to partials.
There are some distinct advantages and disadvantages to each
format. Only the first form is commonly used and has the most
disadvantages. It is the most common because some of the
institutions use this format. The least common is the
"compensating note" structure that I developed. It
suits my needs the best, but would not work as easily with a
This method of structuring a partial involves a form of
joint ownership spelling out the interests of both parties.
The note is assigned to the purchaser and then re-assigned to
the original seller at the end of a certain term. The
advantages are that it can be easier for an institution, but
has potential risks (see the "Industry White Paper on
Partials" published by the National Mortgage Investors
One of the risks is that the note seller seldom understands
their rights, liabilities and responsibilities and unhappy
clients and their attorneys don't lead to a large referral
business. You can and should cover your liabilities with some
very explicit disclaimers signed by the seller of the note if
you choose to use this method.
- Note splitting
Another technique is to actually split the note into two
(or more) notes. The seller can take a subordinated interest.
For example, you split a first trust deed into a first and a
second. Squeeze the payments down into the first and have the
second begin paying when the first is fully paid off. The
problem (or challenge) here would be because the payor would
need to be brought into the picture and possibly compensated
or enticed in some manner. Still, this may be a much better
option than the contractual agreement method. I would rather
solicit the payor's cooperation now than try and deal with the
potential problems of a failed "contractual" method.
- Compensating note
This involves buying the "Whole" note, not just a
partial. The terms look the same and my yield is comparable or
better. How this works is that I pay part cash and give the
note seller a newly created note for the balance. It mirrors
or reflects the portion of the note that I am not paying cash
for. To buy a $10,000 10-year note, I pay $5,000
cash and give the seller a $5,000 note that begins
payments in 5 years.
The note I buy is:
$10,000 at 10% payable $132.15 per
month for 10 years (120 months)
I want to buy one-half of the note or 60 payments
for $5,000. The last 60 payments will be
reflected in a $5,000 note to the note seller. It is
structured with no payments for 60 months and then will
begin payments and totally amortize in months 61 through 120.
This note that I give the seller can be unsecured or
secured by any agreeable collateral. I can use hard-to-finance
real estate equities, land in Nevada, another note, my
personal home, personal property or even the note I am buying.
I prefer to use collateral that is hard to finance. That
way I am keeping the note free and clear and getting a loan
that may be on much better terms than I would get at a bank.
An example is a $10,600 note in Idaho where the
seller needed $4,000 cash real quick. I didn't want a
note in Idaho at the time and we didn't have a branch office
in that state yet, so I called two of my students from a
recent seminar I had given. Both Rick and Tom said they were
interested, but Tom moved quickest (You snooze - you loose,
The note was in Idaho Falls, Idaho. We structured a deal
with the seller where she received $4,000 cash up front
and a note for the balloon payment of the balance in 6 years
secured by a condo Tom owned in Sun Valley. (Real estate
exchangors might notice we just made the condo more salable at
the same time.) The note that was purchased is free and clear
of any financing or quasi-partnerships like we would have with
the "contractual" method. The "compensating
note" to the seller is secured by an entirely different
asset - the Sun Valley condo.
- Top Secret!
How cruel. I'm supposed to tell you everything right?
Sorry, but this one is not in place yet. It will be shortly
and we will announce it to students. You'll love it. I can
hardly sleep at night thinking about it. Besides, it would be
way beyond the scope of this article and is not possible for a
small company or individual to do without the outlay of
tremendous financial resources.
Consider the compensating note technique as an alternative
to the contractual method. We haven't even discussed the
issues of early payoff, restructuring notes, financing notes
and trading notes for real estate. The profits available
through using the compensating note far exceed the small
hurdle of learning about the proper procedure on how to use
it. In addition, once you fully understand this technique, it
can be much easier to explain and negotiate than any of the
About the Author . . .
John D. Behle is one of the foremost educators and
practitioners in the field of discounted paper investment. His
innovative strategies and techniques have shaped the industry.
With over two decades in the industry and an extensive
background in real estate and finance, John Behle adds a
wealth of knowledge and experience to his creative
John holds an National Council of Exchangors "Gold
Card" and an EMS designation. He is also listed in Who's
Who In Creative Real Estate. John Behle is the author of
several hundred articles published in national magazines and
newsletters and of several ground-breaking real estate paper
* The Paper Game Trilogy
* The Paper Game 5-Day Video Training
* Millions Of Mortgages In Minutes