Depends. John teaches you to buy them with a mirroring note for the balance in other words, you would get cash
and a note for the balance of the 300 hundred payments, therefore your concern wouldn’t be whether the note pays off early. But, most commonly the person your selling to just buys the first part and they are given a seperate amotization schedule with the Note purchased.
So the answers for 1 & 2 are they get paid first according to the amortization schedule. The answer to 3 depends on how you structure the note. You could opt to make the payments yourself and foreclose to protect your interest. Or you could let the buyer handle it and then it would be handled as 1 & 2 minus legal fees, etc.
Ok, I just finished reading a book about note brokering and it mentioned that note partials were considered by some institutional buyers to be “fraught with legal peril.”
Other than that it wasn’t specific. I’d like anyone’s input on what would be likely to happen if you had a note that you bought the first 60 out of 360 payments and:
The note gets paid off within 90 days.
The house burns down and the insurance settlement comes in.
The person stops paying and a foreclosure is necessary.
Posted by John Behle on April 13, 1999 at 13:11:05:
One of the major reasons I use the “Compensating Note” structure is to deal with these problems. If there is an early payoff, and I have used other collateral or have a substitution of collateral clause, then I can keep the early payoff and keep the “Tail” of the note intact. I just need other collateral. One approach is to take the cash proceeds to buy another note as collateral. It can be the same size or a much larger note as you will have extra cash and profit to deal with.
Sean,
Good question, as David mentioned, John suggests using the “Compensating Note” technique. Search for that phrase in the archives and you will quickly get the picture.