Posted by John Behle on June 20, 1999 at 12:52:18:
If I am using the most preferable method and securing the “compensating note” by equity in another property, I will just create a trust deed and note. There is no tie or reference to the note I am buying. I could sell, trade or restructure the note I purchased the next day without affecting the compensating note.
The terms don’t have to mirror the “un-purchased” part of the note (tail) and in some cases definately shouldn’t. One example is if there were a 5 year balloon. If you were going to pass that balloon on to the note seller, your note should have some cushion. Your balloon might be 6-12 months later to give you time to collect or deal with any problems with the payment coming in to you.
The “loan” issue with partials is mostly with the contractual method that most of the industry uses. Some funding sources are so worried about the loan issue that they no longer do partials. If it is construed as a loan, then it can be dragged into a bankruptcy, considered usurious, or have tax consequences. There have even been a couple court precedents where the court has said a “contractual” partial is just a loan.
I doubt my method of doing partials would successfully be challenged that way, but it can’t hurt to be cautious and structure the note a little differently. As I mentioned, that may happen to build a cushion into the balloon, but it can also happen through spreading the loan over equities in a couple properties. It’s always nice to find the note seller’s needs and structure the note in a win/win way. You might start with discussion of a note that mirrors their own and then alter it as you find more about their needs. For example, with a balloon, they might not really want or need that. An increased payment in 5 years might suit them just fine or a series of “bubbles” instead of balloons.