# Partials and LTV ratios - Posted by Joseph Turner

Posted by Sean on May 15, 1999 at 19:50:53:

So I should draft my own then submit it to an attorney. Suppose I wanted to buy 80-10-10 seconds all but the balloon payment. What types of risks should the contract address?

Partials and LTV ratios - Posted by Joseph Turner

Posted by Joseph Turner on May 14, 1999 at 21:12:58:

Hello,

I have another question regarding partials. Anyone who has spent a significant amount of time reviewing sources of information like this site will undoubtedly come across the 80% LTV threshold recommendation. My question concerns the following example with much of the information similar to that as my earlier post regarding the present value of a partial.

Assume the property is a single family home selling for 85,000 with the owner owning free and clear and offering to carry the financing.

A buyer puts down 5,000 for the downpayment with the owner carrying back 80,000.

360 payments
11.22%
775 monthly payment
FMV of residence = 85,000

I offer to buy the first three years of payments for 10,000. Would an institution or any investor be willing to buy this partial for more than 10,000 even though the LTV is really high? Would this partial really not be that risky since it would be first in line to be satisfied assuming foreclosure? I guess my question is, how does one calculate the LTV on a partial?

Thanks again,

Joseph Turner

ps-sorry for all the questions, my brain has been on overdrive since i learned about the world of discounted notes and mortgages.

pps-if I should be placing these questions in the general forum please notify me

Adjusting ITV through partials - Posted by John Behle

Posted by John Behle on May 15, 1999 at 14:38:20:

One of the main purposes of a partial is to be able to adjust the ITV ratio that we talked about down below. So you are on the right track.

Let’s say I have a \$100,000 note at 10% payable over 30 years. It is secured by a \$100,000 property. If I do a partial, I can buy this note safely. Let’s say I offer to buy the half of the note for \$50,000.

I have 50k invested and a 50% ITV. The seller of the note “subordinates” their interest to mine. Meaning that I am paid first in the case of default. My risk is minimal - on a note that most people would turn down. By the way, what’s the yield?

How about if I bought one third of the note for one third of the balance (33K)?

How about one fourth of the note for 25K? What are my yields? See a pattern? (you might call it the “inverse fraction” rule of thumb).

How about 1/10 of a 100k ten year note at 10%? I buy the first year - they keep the rest.

There’s also the “Rolling Partial”. I use staged funding to buy 1/4 then 1/4 … and so on.

Cash Flow - Posted by Sean

Posted by Sean on May 15, 1999 at 08:38:24:

First of all, you are placing your questions in the right forum.

Secondly many institutional investors would buy that partial although some won’t. I understand there are some institutions out there that won’t deal in partials at all.

Thirdly to make the math easy let’s say you go ahead and buy the whole \$80,000 note for \$60,000. Your first possibility is to get the payor to refinance. Contact him and tell him if he pays you \$68,000 right now you’ll consider the whole loan satisfied. If he refinances you’ve pocketed \$8,000 profit.

If he can’t refinance for some reason you can still find someone to loan you money using the note you have as collateral. This will provide funding for your next deal and the income from the note will make your loan payments for you.

But let’s assume you can’t finance your note for some reason. All is not lost because you can negotiate with the payor to split the note into two notes. Tell him, “I’ll fly you and your wife to Hawaii if you’ll agree to split this one note of \$80,000 into two notes of \$68,000 and \$12,000.” He agrees, and boom – you’ve now got an 80% LTV first (\$68,000) that you can sell and the \$12,000 will bring in monthly cash for you for years to come.

Forms - Posted by Sean

Posted by Sean on May 15, 1999 at 17:33:55:

What type of a contract should you use to have a subordination agreement such as the one mentioned previously?

Holy Cowabunga! Is this correct? - Posted by FJW

Posted by FJW on May 15, 1999 at 16:22:43:

Mr Behle

If I calculated right, this is amazing.

1/2 (\$50,000) = 19.984%
1/3 (\$33,000) = 30.313%
1/4 (\$25,000) = 39.906%

1/10(\$10,000) = 95.049%

When you say “rolling partial” do you mean into the same note as time “rolls” by OR do you mean 1/4 of the next note you buy?(if that makes sense)

Thank you.

FJW

One buyer for EVERY note - Posted by John Behle

Posted by John Behle on May 15, 1999 at 14:43:39:

Sean touched on something important that people over look. There is always one potential buyer for every note - no matter how bad or ugly it is. That buyer is the “Payor”. With bad notes or just ones that you can’t buy for some reason, there is always the path of getting an option on the note and “brokering” it or “flipping” it back to the payor.

Any serious note buyer or even note broker should have a good working relationship with several lenders to be able to run their payors in for a “Discount Refinance”.

What Sean brings up is what I call a “Leveragectomy” - take a highly leveraged note and split it into two notes. As he mentioned, some buyers will not do partials. Splitting the note cuts the unsaleable part off of the top of the note.

Re: Forms - Posted by John Behle

Posted by John Behle on May 15, 1999 at 17:57:09:

As I’ve mentioned, the best way to do partials is to use the compensating note technique.

In a case where you are using the partial to adjust the ITV and want the note seller to be responsible, then it is just spelled out in a contract that in the event of foreclosure, you will be paid back all of the money you have invested plus accrued interest first.

There are MANY issues that need to be addressed if you do partials in a contractual manner. Avoid it whenever possible, but if you need to, then gather forms from the different funding companies or other brokers and then have an attorney use those as the basis for drafting your form. The best bet is to draft it yourself and then have the attorney review and alter it as needed.

I don’t provide sample forms because of the liablility. No matter how many warnings you put at the top of the form, people still try to use them without the aid of an attorney’s review and approval. We did have an attorney draft some that I include in the video course. Since they were a part of the course, I can distribute them in that manner, but not just send them out to other people.

The challenge is weighing what clauses and information you need vs. the complexity of the agreement. For example, this same attorney drafted a 17 page option agreement. I’ve met very few note sellers that would sign an agreement that complex and lengthy. My option agreement I use is 3 pages.

Rolling partial - Posted by John Behle

Posted by John Behle on May 15, 1999 at 17:44:46:

A rolling partial is used like a rolling option is in real estate. In real estate, let’s say you want to develop a hundred acre parcel. A rolling option allows you to develop 25 acres and then buy the next 25, then the next, etc.

In partials, let’s say you buy the first quarter of the note. You then have an option or agreement to buy the next quarter (at the end of the first) and then the next quarter, etc.

It works well with short term notes. Once the time passes, the next portion of the note is worth the same amount as the first part you bought.