If the payer stops paying during a partial, the buyer stops receiving the payments they bought and your back-end payments are at risk too. Who acts, who pays for it and how any recovery is divided all come from the partial agreement.
Two partials at the same price can leave you in very different positions once a payment is missed. The sections below follow a default from the first missed payment through to enforcement, and mark what to settle before you sign.
Where each party stands when a payment is missed
In a straight partial, the standard kind described in the partial purchases guide, the note is assigned to the buyer at closing. They hold the original documents and the lien, and with those the right to enforce the note. You hold a contractual right to get the note back once the buyer has received their payments.
So both of you have money tied up in the same payer and the same property. The buyer is owed the rest of the payments they bought, and you are owed everything after that. A default threatens both claims, and the buyer, as holder, is the one with their hands on the controls.
What is at stake, in numbers
Suppose your note pays $1,140 a month and had 168 payments left when you sold the next 60 of them for $56,200. The payer makes 24 of those payments and then stops.
| Balance the payer still owes | About $116,800 |
|---|---|
| What the buyer is still owed for 36 unpaid payments, at their 8% yield | About $36,400 |
| What is left for you if the full balance is recovered, before costs | About $80,400 |
Illustrative example. A real recovery depends on what the property sells for, how long enforcement takes and what it costs. It can be less than the balance.
The buyer’s claim is small next to the balance, so they are well covered. Your share is what remains, which means a shortfall or a large legal bill lands mostly on you. Your protection is the equity in the property, meaning the gap between its value and what is owed on it.
The first weeks
A missed payment is not yet a default in the legal sense. The note itself sets what counts as default, and it may allow a grace period before a payment even counts as late. A payer who slips once may simply catch up.
What should happen first is plain: the servicer or the buyer contacts the payer, and somebody tells you. That second part is not automatic. Unless the agreement requires the buyer to notify you of a missed payment, months can pass before you hear of it, so ask for a notice clause and for access to the payment record.
How the partial is measured matters here. It should be defined by a number of payments received, with no end date fixed on the calendar. If the buyer bought 60 payments and the payer skips three months and then resumes, the buyer still collects 60, and the note comes back to you three months later than planned.
How it can go from there
The payer catches up
The missed payments are made, with any late fees the note allows, and the partial carries on. The agreement should say who receives the late fees.
A workout
The payer cannot catch up at once, so the holder agrees to something: a repayment plan, a lower payment for a time, or a longer term. A modification changes what your back end looks like, so the agreement should require your consent to any change in the note’s terms.
The payer sells or refinances
A payer in trouble who has equity in the property may sell it and pay the note off. That turns the default into an early payoff, divided under the agreement’s payoff clause in the same way as any payoff that arrives early during a partial.
Enforcement
If nothing else works, the holder enforces the lien. On a mortgage or deed of trust that means foreclosure. On a land contract it may mean forfeiture. The process, the cost and the time it takes differ widely from state to state, and this is a matter for an attorney in the state where the property sits.
Who decides and who pays
The agreement has to answer the questions below, and buyers answer them differently. If you send us the note details and say that default terms matter to you, we will set out how each partial offer that comes back handles a missed payment.
| Question | What to look for | A clause to question |
|---|---|---|
| Who chooses the course of action? | The buyer decides, with a duty to consult you and to act reasonably | Sole discretion with no duty to tell you anything |
| Who pays legal and holding costs? | A stated rule, with costs repaid from the recovery before it is divided | Costs charged to your share alone |
| Can you step in? | A right to buy the partial back at a stated formula | No right, or a price set later by the buyer |
| Must you step in? | No obligation | A recourse clause |
| How is a recovery divided? | Buyer receives what they are still owed at their yield, the rest to you | Buyer keeps everything recovered |
Recourse deserves its own mention. A recourse clause makes you repay the buyer, or replace the note, if the payer defaults. It hands the risk of the payer back to you, which is the risk you were paid a discounted price to pass on. Some buyers include one, so find out whether yours does before you sign, and read what to look for in a partial purchase agreement for the rest of the clauses.
Your own options
If the buyer is handling the default sensibly, you may have nothing to do except stay informed. Waiting is a reasonable choice when the property has plenty of equity and the buyer keeps you posted.
If the agreement allows it, you can buy the partial back. You pay the buyer what they are still owed and take the note back, which puts the workout or the foreclosure in your hands along with all of the cost and the risk. The price is the part to pin down in advance, because whether a partial can be bought back, and for how much, comes from the agreement.
You can also try to sell your remaining interest, to the same buyer or to another. On a note in default, expect the price to reflect the trouble.
Lowering the odds before you sign
- Be honest with yourself about the payer’s record. If they are already paying late, a full sale may serve you better than a partial.
- Check that property taxes and insurance are current, and that you would be told if they lapsed.
- Choose a size that returns the note to you sooner if you are unsure. A shorter partial leaves less time for things to go wrong on someone else’s watch.
- Get the default clause explained in plain words, with an example, and have an attorney read it.
Putting the questions to a buyer
Price is easy to compare and default terms are not, so ask for them in the same form. Send each buyer the questions from the table above in writing, before you compare prices, and keep the answers with the offer. Where an answer comes back vague, ask to see the clause it rests on and have your attorney read that clause first.
Related questions
Do I have to give back the lump sum if the payer defaults?
Not unless your agreement contains a recourse clause. Without one, the money you were paid at closing is yours. Check for recourse before you sign, because some buyers include it.
Does a missed payment shorten or lengthen the partial?
If the partial is defined by a number of payments received, a missed month pushes back the date the note returns to you. The buyer still collects the same number of payments.
Will the buyer tell me if the payer falls behind?
Only if the agreement requires it or the servicer gives you access to the payment record. Ask for a notice clause so you hear about a missed payment promptly.