Yes. The common route is a partial, where you buy a set number of a note’s upcoming payments, collect them, and then assign the note back to the holder who sold them to you. Your outlay is smaller than a whole note needs, and your position has an end date from the day you fund.
What a partial buyer owns
A note is a stream of payments. Buy the whole note and every remaining payment is yours. Buy a partial and you own a block of them, as a rule the next block of monthly payments, with everything after that still belonging to the seller.
Pricing works as it does on a whole note. You settle on the return you need on the money you put in, and pay the amount at which the payments you are buying produce it. The side-by-side comparison of a partial and a full sale prices one note both ways. It is written for the seller, but the amounts the seller receives in it are the amounts a buyer pays.
The seller stays behind you
Take a simple example. A note has $100,000 still owed and you pay $40,000 for a block of its payments, so your money is 40% of the balance. The seller keeps the right to everything that comes after your block and collects nothing until you have been paid. If the property ever had to be sold to recover the debt, a well-drawn agreement returns your money ahead of the seller’s share. The less of the balance your money represents, the further the property’s value can fall before you lose anything.
Example with round figures, to show the proportion only. It says nothing about what a partial on a real note would cost.
The arrangement also keeps the seller interested. Someone who is due to get the note back wants the payer to stay current as much as you do.
Clauses a whole-note purchase never needs
When one buyer owns every payment, nobody has to ask how money is shared. A partial agreement does have to ask, and it should give an answer for each of these events.
- Early payoff. If the payer refinances or sells the property, the note is paid off while you are still owed payments. The agreement should state how much of the payoff is yours and how much passes to the seller.
- Default. If the payer stops paying, the agreement should say who decides what happens next, who advances the legal costs and in what order recovered money is paid out.
- The return of the note. After your last payment the note is assigned back to the seller, a step called the reversion, and the agreement should say who prepares that assignment and when it is recorded.
Go through all three from the buyer’s seat in buying partials as an investor before you sign one. The person across the table has been reading the partial purchases guide, so it helps to know what a seller expects these clauses to say.
A partial divides a note by time. A split-payment partial divides it by amount: you buy a share of each monthly payment for a period and the seller keeps the rest of each one. Two or more people can also buy a note together and share the payments in agreed proportions, though an arrangement like that can fall under securities rules depending on how it is set up, so have an attorney look at the structure before money moves. The furthest step from direct ownership is a note fund, where you own a share of a pool and no single note.
What a smaller position does not save you
The checking is the same size as on a full purchase. The payer, the property, the title and the documents all matter to a partial buyer, so you do whole-note due diligence for a smaller position. The agreement is longer too, and buyers and attorneys word it differently, which means reading each one fresh.
The income also has an end. Once your block of payments is collected the position is finished, and you start looking for the next one. If you want partials sent to you as they come up, say so when you join the buyer list, and give the size and the term you are looking for.
Before you ask to see partials
Work out two figures: how much you want in a single position, and how many years you are willing to have it out. A partial changes what you own, while the purchase around it runs as it does for any note, along the steps in the investor guide.
Then expect to wait for a fit. Whether a note is offered as a partial depends on what its holder needs and on the note itself, so the block that comes up may be larger or longer than the one you had in mind. With your two figures settled, you can answer on the day it arrives.
Related questions
Is a partial safer than buying a whole note?
The risk has a different shape, and the work is the same. Your money is a smaller share of what is owed, which gives you a cushion. You still depend on the same payer and the same property, so every check a whole-note buyer runs applies to you.
What happens to my partial if the payer refinances?
The note is paid off and the partial ends early. The partial agreement should set out how the payoff is split between you and the seller. Read that clause before you buy, because buyers word it differently.
Can I buy a partial inside a self-directed IRA?
Some custodians accept notes and partials, and each has its own rules and paperwork. Ask your custodian before you make an offer, and check the tax side with a CPA.