A buyer prices a partial from the payments being bought and leaves the balance of the note out of the sum. They set the yield they need, work out what those specific payments are worth today at that yield, and the result, less any costs, is your price.
The pricing on one note
Here is a note that pays $1,140 a month with 168 payments left, priced by a buyer who wants an 8% yield. Yield on a note is the yearly return a buyer requires on the money they put in.
| Payments sold | What those payments add up to | Price today | Difference |
|---|---|---|---|
| 36 (3 years) | $41,040 | $36,400 | $4,640 |
| 60 (5 years) | $68,400 | $56,200 | $12,200 |
| 84 (7 years) | $95,760 | $73,100 | $22,660 |
Illustrative example at an 8% buyer yield. A real price reflects the note, the payer, the property and the costs of the transaction.
The difference column is what the buyer earns for waiting and for carrying the risk. It grows faster than the number of payments, because each added year sits further away and is discounted harder.
How the buyer gets from payments to price
The buyer starts with the list of payments on offer: how many, how much each, and when each one is due. Each payment is then discounted back to today, which means reducing it to reflect the wait and the risk. A payment due next month loses very little this way, while one due in five years loses a good deal more.
Add up the discounted payments and you have the price. This is how note buyers calculate a price for a whole note as well, applied here to a shorter list.
Where the balance comes in
In a full sale people compare the price with the balance owed. That comparison breaks down for a partial purchase, because the buyer is purchasing a fixed number of payments, each of which contains both principal and interest.
The balance still does two jobs. It decides what you get back: after a 60-payment partial on this note, about $94,950 is still owed to you. It also decides how an early payoff is divided, since the payoff amount is the balance at that date. With no single balance to set the price against, whether the discount is lower on a partial has one answer in dollars and another in rate.
What moves the yield up or down
The payments are fixed by your note. The yield is where buyers differ, so it is the figure you are really negotiating, and a higher yield gives a lower price for the same payments.
- Payment record. A long run of on-time payments lowers the yield a buyer needs. Late payments raise it.
- Equity in the property. The more the property is worth compared with what is owed, the safer the buyer is.
- Lien position. A first lien is repaid first if the property is sold. A second lien is priced at a higher yield.
- Length of the partial. A shorter commitment is easier to judge, which can help the yield.
- The partial terms. A buyer who gives you buyback rights or a generous payoff formula may ask a slightly higher yield for it.
- The buyer’s own cost of money. Two buyers looking at the same file can need different returns.
Costs that come out of the price
The figure from the yield calculation may differ from the amount wired to you. Title work, recording, a property valuation, servicing setup and a broker’s fee may be paid by the buyer, by you, or built into the yield. Ask for the net figure and for a line showing each cost. If you ask us to price a partial on your note, the worksheet that comes with an offer lists the payments, the yield, the costs and our fee on separate lines.
Checking a quote you have been given
- Ask for the yield used and the exact payments being bought.
- Ask for the same partial priced at two other lengths. A buyer working from a consistent method should be able to produce those without difficulty.
- Ask what the buyer and any broker earn, and where it appears.
- Check the result against a note pricing worksheet.
The second request is the most telling. On the example note, one 8% yield produces all three prices in the table, so a buyer whose 36, 60 and 84-payment quotes imply different yields has changed something between them and should be able to say what. Once the answers agree with each other, the quote can be set against another buyer’s on the same payments.
Related questions
Does the balance on my note affect the price of a partial?
Not directly. The price comes from the payments sold and the buyer's yield. The balance decides what comes back to you and how an early payoff is divided.
Why does selling twice as many payments not double the cash?
Because the extra payments are further away. A buyer discounts a distant payment more than a near one, so each added year raises less cash than the year before.
Can I negotiate the price of a partial?
You can compare yields between buyers, which is where prices differ. Asking more than one buyer to price the same payments is the practical way to do it.