Module 4 · Pricing & Negotiation

Give Note Sellers What They Want and Still Make Money

How a reverse partial gets a stubborn note seller his number: cash now plus the next payments, with two worked examples.

5 min read · Lesson 4.5

How many times have you lost a note because the seller needed or wanted more money than the quality of the note justified? If the seller wants cash equal to 75% LTV, but the property or the payor supports only 60%, the deal probably won’t happen.

That’s one case where a reverse partial can work. It gives the note seller a substantial amount of cash at closing and the rest over the next year or so.

How a reverse partial works

In an ordinary partial, the buyer purchases the next run of payments and the seller keeps the rest of the note. A reverse partial flips that: the seller keeps the next run of payments, and the buyer pays cash now for everything after them. The seller takes the risk that those near-term payments get made.

A residential note the seller won’t discount

You’re negotiating with a seller who holds a note on a single-family home in a stable market. The home sold 18 months ago for $75,000 with $5,000 down, at 10% interest with monthly principal and interest of $636.09. The balance is $68,980.03, and the note holder says he won’t take a penny less than $55,000. The 18-month pay record is good, but you discover the payor has poor credit.

You talk to your investor, who says the most they can pay is $45,000 because of the credit risk. You suggest a partial and the seller isn’t interested. He wants $55,000 and won’t budge.

So try this. Ask the seller if he’ll accept $43,551 cash now and then receive the next 18 monthly payments of $636.09. Those 18 payments come to $11,449.62. Added to the cash, the seller receives $55,000.62.

The seller takes the risk that the next 18 payments are made, but he’s comfortable with that because of the 18-month pay record.

Worked example: reverse partial on a $68,980 residential note

Item	Amount
Sale price	$75,000
Down payment	$5,000
Interest rate	10%
Monthly payment	$636.09
Payments made	18
Payments remaining	282
Current balance	$68,980.03
Cash to seller at closing	$43,551.00
Next 18 payments to seller	$11,449.62
Total to seller	$55,000.62

Note broker’s commission

Item	Amount
Investor’s buy price	$45,000.00
Cash to note seller at closing	($43,551.00)
Net to note broker	$1,449.00

The seller gets his $55,000; the broker still nets $1,449.

Why reverse partials suit commercial notes

A reverse partial can be especially useful on a note secured by commercial property. Mortgage financing for commercial property isn’t always available, and in some areas it doesn’t exist, so many commercial sales are put together with seller financing.

Say you’re negotiating with a seller who holds a note on a well-located office/warehouse building, with a payor who has good credit. He sold the property 28 months ago for $400,000 with $75,000 down and financed the $325,000 balance at 10%, with monthly payments of $3,136.32. A balloon of $273,234.84 is due seven years from the sale date. The principal balance is now $311,565.57.

Your investor can pay only $190,720 for the whole note, because part of the sale price was allocated to personal property. You don’t even present that offer. You know the seller won’t take a discount of more than $120,000, and he has already told you to forget a straight partial because he doesn’t want to wait almost five years for the rest of his money.

So offer a reverse partial. Your investor will pay $133,170 now for the balloon due in 56 months, take a full assignment of the mortgage, and pass through to the seller the 56 payments up to the balloon. Those payments total $175,633.

You offer the seller $126,500 for the balloon. His total payout is $302,133, which doesn’t look bad for a $311,565 note on commercial real estate. It may be one of the few offers he gets at any price. A large amount of cash now, plus large monthly payments continuing, should appeal to many holders of commercial mortgages.

The commercial deal in numbers

Item	Amount
Sale price (28 months ago)	$400,000.00
Down payment	$75,000.00
Original note balance	$325,000.00
Interest rate	10%
Monthly payment	$3,136.32
Balloon due in 84 months	$273,234.84
Current balance	$311,565.57
Payments remaining before balloon	56
Cash to seller for the balloon	$126,500.00
56 payments to seller	$175,633.00
Total to seller	$302,133.00

Note broker’s commission	Amount
Investor’s buy price	$133,170.00
Cash to note seller at closing	($126,500.00)
Net to note broker	$6,670.00

Showing the seller his total cash from the sale

Another selling point is to show the seller the total cash he’ll receive from selling the property:

Source	Amount
Down payment	$75,000.00
84 payments at $3,136.32	$263,450.00
Sale of balloon payment	$126,500.00
Total cash received	$464,950.00

Even when the seller understands the time value of money (and many don’t), realizing he’ll receive $64,950 more than his sale price can ease his concerns about discounting.

The reverse partial is a creative way to buy a note that might not otherwise sell.

Key takeaways

Sellers often want more than notes justify
Seller keeps near-term payments
Buyer pays cash for the rest
Works well on commercial notes

Try it yourself

A seller wants $40,000. Your investor pays $36,000. The seller would keep the next 12 payments of $500. What cash at closing gets him to $40,000, and what do you net?

Show answer

12 × $500 = $6,000, so $34,000 cash at closing brings the seller to $40,000. You net $2,000 ($36,000 − $34,000).

Give Note Sellers What They Want and Still Make Money

How a reverse partial works

A residential note the seller won’t discount