Selling Part of Your Note With a Partial Note Sale
By Sierra Davis, Principal & Fund Manager, Essential Income Fund IPublished Last reviewed
Short answer
A partial note sale is when a note holder sells a set number of upcoming payments, such as the next 60, to a buyer for a lump sum and keeps the payments that come after. The buyer prices the partial by discounting only the payments it's buying to its required yield, so the seller gets less cash than a full sale but keeps the back end of the note. Essential Investment Group is one example of a buyer that quotes partials.
Not every note holder wants to sell everything. Maybe you need $20,000 now, not $40,000. Maybe you like the income and just want some of it early.
That's what a partial is for. You sell a slice of the payments, take the cash, and the rest of the note comes back to you when the slice is paid.
How a partial works
In a partial, you assign a set number of future payments to a buyer. For that period, the borrower's payments go to the buyer (usually through a servicer). When the buyer has received the payments it bought, the remaining payments revert to you.
The borrower's loan doesn't change. Same rate, same payment, same property. Only who receives the payments changes for a while.
- Front end: the payments you sell. The buyer pays you a lump sum for them.
- Back end: the payments you keep. They resume after the front end is satisfied.
- Structure: the terms of the assignment spell out what happens at payoff, at default and if the property is sold. Read them carefully.
How a buyer prices a partial
A partial is priced the same way as a whole note, except only the purchased payments count. The buyer works out what those payments are worth today at the yield it needs. The payments you keep sit behind the buyer's, which gives the buyer an extra layer of protection.
The usual factors still apply. Interest rate and remaining term, seasoning (many buyers want at least 12 months of consistent payments), payment history, the payer, LTV and ITV, paperwork, property type and state all move the yield a buyer needs.
| Sell the next 60 payments | Sell the whole note | |
|---|---|---|
| Payments sold | 60 of about 165 | All of about 165 |
| Cash now at a 12% buyer yield | About $22,480 | About $40,350 |
| What the seller keeps | About 105 payments of $500 starting in year 6 | Nothing |
| Balance when payments revert | About $37,750 | Not applicable |
| Who carries default risk on the back end | The seller | The buyer |
What happens at payoff or default
This is the part to understand before you sign. Terms vary by buyer and by agreement, but these are common patterns.
- Early payoff: if the borrower refinances or sells, the payoff is commonly split so the buyer receives an agreed amount first (often enough to reach its yield or recover its unpaid investment), and the seller receives the rest.
- Default: the buyer often controls collections or foreclosure during its term, and the payoff waterfall usually pays the buyer first. That means the seller's back end carries more risk than the front end.
- Servicing: payments are commonly collected by a third-party servicer, which keeps a clear record for both parties.
Partial vs. full sale
| Partial sale | Full sale | |
|---|---|---|
| Cash now | Less | More |
| Future income | Resumes after the front end | None |
| Default risk after closing | Seller keeps the back-end risk | Transferred to the buyer |
| Best when | You need a set amount and like the income | You want to be done with the note |
How partials work with Essential Investment Group
We help note holders find a path to liquidity, whether that means selling all, part or none of the note. Submit your note details through our quote form, mention that you're interested in a partial, and we'll evaluate it and send a quote, typically in less than 48 hours. There's no pressure and no obligation. If you accept, we close and you receive your cash.
When a partial makes sense, and when it doesn't
A partial may fit if you need a specific amount, want to keep long-term income, or think the borrower will keep paying. It may not fit if you want to be completely free of the note and its default risk, because a partial leaves you holding the back end. Selling any part of a note can have tax consequences, so talk with a tax advisor before closing.
Frequently asked questions
What is a partial note sale?
A partial note sale is the sale of a set number of a note's upcoming payments for a lump sum. The seller keeps the payments that come after the sold portion.
How much is a partial worth?
It depends on the payments sold and the yield the buyer needs. In a hypothetical example, 60 payments of $500 discounted at a 12% yield are worth about $22,480 today. Rate, history, equity, paperwork and state all affect the yield.
What happens if the borrower pays off the note early during a partial?
It depends on the agreement. Commonly the buyer receives an agreed amount from the payoff first, and the seller receives the rest. Read the payoff terms before you sign.
Is a partial riskier for the seller than a full sale?
Usually, yes. In a partial the seller keeps the back end, which is typically paid after the buyer in a default. In a full sale, the default risk transfers to the buyer.
Can I sell a partial on a land note or contract for deed?
Often, yes. Partials can be structured on mortgage notes, land notes and contracts for deed. The documentation differs, so ask the buyer how the assignment would work.
This article is for educational purposes only and is not investment, legal, or tax advice. It describes general characteristics of real estate debt investments; individual investments differ, and all involve risk, including the possible loss of principal. Essential Investment Group, LLC is not a registered investment advisor, broker-dealer, or bank. Any offer of securities in Essential Income Fund I, LLC is made only through its Private Placement Memorandum to verified accredited investors under Rule 506(c) of Regulation D.