couldn’t you buy another note (at a discount of course) and substitute collateral with John. For example, buy a $50K note for $40k and substitute this $50k note for the one that Dan paid off early. Then you would actually pocket an additional $10k (remember the initial $21k profit you mentioned). Of course, you would need to have a clause in your note with John that would allow this.
I’m sure there are other techniques, but this seems to be the easiest one for my peanut to grasp.
After Studying the boot camp video course, I believe
one of the most powerful techniques in discount paper
is purchasing partials. After studying that section a
couple of times in the video course, I haven’t found a
satisfactory answer on how to handle early payoffs
if you use the note as collateral. I can’t substitute RE
because I just took out a home equity loan for 100%
of the appraised value of my home. Let’s use an
example: John sells house on Oak street to Dan
for $110,000 with $10,000 down and John carrying
a mortgage of $100,000 for 360 months @ 10% interest.
Doug buys the first 120 payments of $877.57 from John
for $33,289.53 giving Doug a yield of 30%. Doug turns
around and borrows $54,394.38 from George giving him
a note for 120 payments of $877.57, a yield of 15%.
Doug earns immediate cash profit of $21,104.85. One
year later Dan refinances and pays off the loan. The
payoff amount is $99,444.12 for the whole loan of 360
payments of $877.57 @10%. The payoff amount for
George is $49,063. How can Doug preserve his entire
profit of $21,104.85 and not payoff John early?
Posted by John Behle on March 30, 1999 at 09:01:04:
The reason I do partials the way I do - with the “Compensating Note” is for this very reason and many others.
Ideally, you use some other collateral for the note, but if you have to use the note you are buying, then you provide for a substitution later.
If there is an early payoff, you can substitute another note. Since there is an early payoff, you will have cash and can arrange to buy another note to use as collateral for John (and George too if you want).
I just got through with the tapes as well, but let me whack at this one as well . . .
Remember, the best option is a compensating note to the original seller, in this case John.
If you still use the original note, you’ll have to have it spelled out in the contract what the splits are - obviously an inferior solution.
That was part of what the discussion in the tapes was about the institutions and the 13% rate vs. 18% - I didn’t really follow it but that was the reason - no compensating note.