If the payer pays the note off during a partial, the payoff is divided. The buyer receives what they are still owed for the payments they have not yet collected, and the rest comes to you. The agreement sets the formula, so read it before you sign.
For a note holder, a payoff ahead of schedule is welcome news. During a partial purchase that holds only if the division is fair, so what follows puts a fair one in dollars and sets the other versions beside it.
Why notes get paid off early
A note can end long before its last scheduled payment for ordinary reasons. The payer sells the property and the note is cleared at closing. Or the borrower refinances during the partial, once their credit or their equity allows it. They come into money, or their family pays the note off after a death. You control none of this and cannot rule it out for the years a partial lasts, so the agreement has to be written as if it will happen.
The payer’s payoff figure is the balance on the note on the day they pay, plus any interest due. A partial does nothing to that number: the payer owes the same amount whether you hold the note, the buyer holds it, or the two of you share it. What the agreement decides is how that one sum is divided.
A fair split, in numbers
The note here pays $1,140 a month at 6%, with 168 payments left and about $129,400 owed. You sell the next 60 payments for $56,200 to a buyer who priced them at an 8% yield. After 24 payments the payer refinances.
| Payoff the payer makes | About $116,800 |
|---|---|
| Payments the buyer bought and has not yet received | 36 |
| What those 36 payments are worth at the buyer’s 8% yield | About $36,400 |
| What comes to you | About $80,400 |
Illustrative example. Figures are rounded. A real split is calculated to the day of payoff.
The buyer has received 24 payments and a lump sum that stands in for the other 36, which gives them exactly the yield they priced for. You receive the rest of your note years ahead of schedule.
The 36 payments the buyer was still waiting for add up to $41,040, but they were going to arrive one a month over three years. Receiving them all today is worth less than that total, by the same reasoning the buyer used to discount them in the first place. At 8%, 36 payments of $1,140 are worth about $36,400 today.
That figure is also the price of a 36-payment partial on this note, because it is the same calculation used to price a partial in the first place: 36 payments, discounted at 8%. A fair payoff clause runs the buyer’s own pricing method on whatever they have left to collect.
Splits that cost you money
An agreement can use a different method, and the simplest alternative is easy to put a figure on.
| Method in the agreement | Buyer receives | You receive |
|---|---|---|
| Remaining payments at the buyer’s yield | About $36,400 | About $80,400 |
| Remaining payments at face amount | $41,040 | About $75,760 |
Illustrative example, same note and same payoff after 24 of 60 payments.
The face-amount method hands the buyer $4,640 for interest they never had to wait for. Other clauses can do more damage, and they are harder to put a figure on in advance:
- A minimum return. The buyer is owed a set profit however early the payoff comes.
- A prepayment charge to you. A fee taken from your share because the buyer’s investment ended sooner than planned.
- A percentage of the payoff. The buyer takes a fixed share of whatever is paid, which bears no relation to what they are owed.
- Silence. No payoff clause at all. This is the worst version, because the note is in the buyer’s name when the money arrives.
How you come out overall
The same early payoff leaves you in a different place depending on the choice you made at the start.
| Received before payoff | Received at payoff | Total | |
|---|---|---|---|
| You kept the note | $27,360 | About $116,800 | About $144,160 |
| You sold 60 payments | $56,200 | About $80,400 | About $136,600 |
| You sold the whole note | $115,000 | $0 | $115,000 |
Illustrative example. Totals are simple sums and are not adjusted for the value of money over time.
With a fair clause, an early payoff during a partial leaves you well ahead of a full sale and not far behind having kept the note, and you had the use of $56,200 for two years.
Extra principal and part payments
A payer does not have to pay everything at once. Some add extra to each payment or make an occasional lump-sum reduction, and the agreement should say where that extra goes. One approach leaves the buyer’s count of payments unchanged and applies the extra to the back end, which shortens the part of the note that returns to you. Another passes the extra to the buyer and reduces what they are owed. Either can be fair, provided it is written down.
What happens on the day
The payer or their title company asks for a payoff statement. Because the buyer holds the note during the partial, the buyer or the servicer issues it, receives the funds and signs the release of the lien. Your protection is in the paperwork:
- The agreement should require the buyer to notify you when a payoff is requested.
- You should receive a copy of the payoff statement and the calculation of the split.
- Your share should be paid to you directly from the closing, or within a stated number of days.
A payoff can also have tax effects, since money you expected over several years arrives in one. How it is treated depends on your situation, so speak to a CPA when you learn a payoff is coming.
The arithmetic to ask a buyer for
Of the things to look for in a partial purchase agreement, the payoff clause is the one you can test with arithmetic. Before you sign, ask the buyer to work it through at two points in the partial: say, a third of the way in and two thirds of the way in. For each point you want the payoff amount, the buyer’s share and yours.
If you are still at the pricing stage, send us the note details and ask for the payoff method to be stated on any partial offer that comes back.
A buyer whose clause contains a formula can produce those lines quickly, and you can set them against the tables above. A buyer who cannot produce them is working from a clause with no formula in it, and that is the thing to have fixed before you sign.
Related questions
Does the payer pay a penalty for paying off during a partial?
Only if the note itself contains a prepayment penalty. A partial does not change the payer's terms, so it cannot add one.
Who receives the payoff money first?
The buyer or the servicer, because the note is in the buyer's name during the partial. The agreement should require your share to be paid to you directly at closing or within a stated time.
Is an early payoff bad for the buyer?
Not under a fair clause. The buyer receives the value of their remaining payments at the yield they priced for, so they earn the return they expected over a shorter period.