Sell the smallest number of payments that raises the cash you need. Each payment you add after that brings in less than the one before it, because buyers pay less for payments that are further away.
You set the size of a partial. A buyer can price 36 payments, 60, 84 or any number in between, and the tables below show what each of those raises on one note and what it costs. If the structure itself is new to you, start with the partial purchases guide and come back.
What each size raises
The note in this example pays $1,140 a month. It has 168 payments left and about $129,400 still owed, and the buyer wants an 8% yield on the money they put in.
| Payments sold | Cash today | What those payments add up to | What the cash costs you | Total you receive |
|---|---|---|---|---|
| None (keep it) | $0 | $0 | $0 | $191,520 |
| 36 (3 years) | $36,400 | $41,040 | $4,640 | $186,880 |
| 60 (5 years) | $56,200 | $68,400 | $12,200 | $179,320 |
| 84 (7 years) | $73,100 | $95,760 | $22,660 | $168,860 |
| All 168 | $115,000 | $191,520 | $76,520 | $115,000 |
Illustrative example. “What the cash costs you” is the payments sold minus the cash received. Totals add up payments as scheduled, assume the payer keeps paying, and are not adjusted for the value of money over time.
Read the cost column before the cash column. Raising $36,400 costs $4,640 in payments given up, and raising $115,000 costs $76,520. Going from the smallest size to the whole note brings in about three times the cash at more than sixteen times the cost.
Why each extra payment raises less
A buyer discounts every payment for the time they wait to receive it. A payment due next month is discounted for one month, and a payment due in year twelve for twelve years, so the further out you sell, the less each payment brings in. Breaking the same note into slices shows it.
| Slice of the note | Cash it adds | Cash per $1,140 payment |
|---|---|---|
| Payments 1 to 36 | $36,400 | About $1,011 |
| Payments 37 to 60 | $19,800 | $825 |
| Payments 61 to 84 | $16,900 | About $704 |
| Payments 85 to 168 | $41,900 | About $499 |
Illustrative example, worked from the figures in the table above.
In the last seven years of this note, a buyer pays less than half of each payment’s face amount. Keep those payments and wait, and you collect all $1,140 of each one, which is why it pays to stop selling once your target is met.
Work back from the amount you need
Asking what the note could raise invites you to sell more of it than you have a use for. Ask what the money is for and how much that takes. A roof, a tax bill, a down payment or a debt you want cleared each has a figure attached. Write that figure down, add what you expect closing to cost you, and treat the total as your target.
The sizes in the table are only examples. If your target sits between two rows, ask for the partial to be priced to that amount, which is the idea behind using a partial to cover a specific cash need. A buyer can work backwards from the cash to the number of payments, and the answer does not have to be a round number of years. Ask to see the result on a worksheet with the yield stated, so you can check that the same yield was used as on the other sizes.
Reasons to move off the smallest size
Selling a little more
The smallest size is the cheapest, and there are still cases for going a step above it. If the cost you are covering is an estimate, a small cushion can be cheaper than going through a second transaction later. Fixed costs point the same way: title work, recording and document charges do not shrink much with the size of the deal, so they take a larger share of a small partial. Ask what they will be before you choose.
Unease about the payer is the other reason. The payments you keep are the ones at risk if the payer stops, and selling more of them moves more of that risk to the buyer, though never all of it. If the worry is serious, put a full sale beside the partial.
Selling less
A straight partial stops your monthly payment until it ends, so anyone who relies on that income should lean toward a shorter one, which brings the income back sooner. Cash with no job to do is another reason to hold back. Money that sits in a bank account after you gave up payments to get it has cost you for nothing.
A partial also leaves the rest of the note intact. If the payer keeps paying on time, a second partial later may be possible. Treat that as a possibility only, because it depends on the payer’s record and on what buyers will pay at that time.
Limits a buyer may set
Buyers have their own floor and ceiling. Below a certain size the work of checking the file is not worth it to them, so the smallest partial you can sell differs from buyer to buyer. At the other end, a buyer may decline payments beyond a certain number of years, or want a higher yield to take them. Size is one reason to put the note in front of more than one buyer, since a size that one declines may suit another.
Working it out for your note
- Write down the amount you need and what it is for.
- Ask for a partial priced to that amount, plus one size smaller and one larger.
- Compare the cost of each as well as the cash.
- Check when the note comes back under each size and whether you can manage without the income until then.
- Put a full-sale offer and the option of keeping the note beside them, as in the partial vs full sale comparison.
The second item needs a buyer’s worksheet, and the figures on this page will not stand in for it because your rate, your payer and your property will move them. Tell us the amount you are trying to raise and we will ask for partials priced at that amount and at a size either side of it, with the yield shown on each so the rows can be compared.
Related questions
Does a partial have to be a round number of years?
No. A buyer can price any number of payments. If you need a set amount, ask for the partial to be priced to that amount and the buyer will work out how many payments it takes.
Is the buyer's yield the same for every size of partial?
Not always. Some buyers want a higher yield for longer partials because they carry the risk for longer. Ask for the yield used on each size so you are comparing like with like.
What if I sell too few payments and need more cash later?
You may be able to sell a second partial or the rest of the note. That depends on how the payer has paid in the meantime and on what buyers are offering then, so it should not be relied on.