A closed partial cannot simply be undone, but it can be bought back if your agreement gives you that right. With a buyback right you pay the buyer what they are still owed and take the note back early. Without one, a buyback happens only if the buyer agrees to it.
Reversing and buying back are different things
People who ask this question mean one of two things. Reversing would be cancelling the deal: you return the cash, the buyer returns the note, and it is as if nothing happened. Once a partial has closed and funded that is not normally available, because the buyer has paid, the assignment has been recorded and the payer has been redirected.
Buying back means ending the partial purchase early by paying the buyer for the payments they have not yet received. Some partial agreements provide for it and some are silent, which makes it a term to look for before you sign.
What a buyback costs
A fair buyback price is the value of the buyer’s remaining payments at the yield they bought at.
Suppose a 60-payment partial on a note paying $1,140 a month was bought at an 8% yield for $56,200. After 24 payments, the buyer has 36 still to come.
| Amount | |
|---|---|
| Paid to you at closing | $56,200 |
| Collected by the buyer so far (24 payments) | $27,360 |
| Payments the buyer is still owed | 36 of $1,140 |
| Buyback price at the buyer’s yield | About $36,400 |
Illustrative example. A real agreement may add a fee or use a different formula, which is why the formula should be in writing.
Some agreements set the price another way, by a fixed schedule, a higher yield or an added fee, and any of those raises the cost. Ask for the buyback figure at two or three future dates before you sign, so you can see how the formula behaves.
When a buyback is useful
The use that matters most is a default. If your borrower defaults during a partial, buying the buyer out puts the note back in your hands, so that you decide whether to work it out or enforce it.
A buyback also clears the way for a sale of the whole note, since a buyer of the full note needs the partial removed, and the buyback can be settled out of the sale proceeds at closing. It helps when the payer wants a change to the note, because a modification is simpler with one party holding all of it. And sometimes circumstances just change: you come into money and would sooner have the income back.
If what you want is more cash and the note itself can stay where it is, look first at selling the rest of your note after a partial, since a buyback takes money out of your pocket and that route may put some in.
What the agreement should say
- That you have the right, stated plainly and without depending on the buyer’s goodwill.
- The formula for the price, with the yield named.
- When you can use it: at any time or only on default, and with what notice.
- How long you have after a default. A short window can make the right hard to use.
- Who prepares and records the reassignment, and who pays for it.
Buyers differ on every one of these, so compare the buyback wording as closely as the price, alongside the other terms to look for in a partial purchase agreement.
Before closing, check what you have signed
Until you sign the closing documents, a partial is an offer you have accepted in principle, and backing out of a note sale at that stage is a different matter from a buyback. Whether you owe anything for stopping depends on what you signed earlier, so read any commitment letter for cancellation terms and costs. Whether any right to cancel exists after signing is a legal question that turns on the transaction and the state, and an attorney is the person to ask.
If your agreement has no buyback right
You can still ask. A buyer may agree to be paid out, particularly if the alternative is a foreclosure they would prefer to avoid. Without a written right, though, the price is whatever they will accept and they are free to refuse. Start by rereading the agreement for any clause on early termination, then put the request to the buyer in writing with the date you have in mind.
If you have not signed anything yet, none of this has to be left to goodwill. Have your note priced and make a written buyback right one of the things you compare the offers on. A right written in before closing is the only kind the buyer cannot decline later.
Related questions
Can I change my mind after signing a partial?
Before closing, whether you can stop and what it costs depends on what you signed earlier. After closing and funding, the route is a buyback. Ask an attorney whether any right to cancel applies to your transaction.
How is the buyback price worked out?
A fair formula values the buyer's remaining payments at the yield they bought at. Some agreements add a fee or use a higher yield, so ask for the formula and a figure in dollars.
Why would I buy back a partial?
The strongest reason is a default by the payer, when you want control of the note. Another is a decision to sell the whole note, which requires the partial to be cleared first.