If you buy and sell partial interests in notes, you can always try to buy the remaining interest from the original note seller later. These remainders can be an excellent source of extra revenue, a special kind of repeat business. This is the story of how one broker got burned doing exactly that.
Buying remainders as repeat business
As part of his marketing, the author contacts these note sellers periodically to see if they want to sell the remaining interest in their notes. If they agree on a price, he contacts the original note buyer, who usually wants the rest of the note. The practice had worked well with several institutional note buyers.
How the remainder deal slipped away
In 1990 he bought a partial interest in a note: all of the remaining payments plus a portion of the balloon due in June 1995. In May 1993 he tried to buy the rest of the balloon from the estate that held the remainder interest, because his original customer had died.
He and the estate agreed on a price, with a deadline to close in September 1993. He submitted the package, with his signed contract as required, to the original note buyer for approval. It was turned down, and he had to pass on the deal and at least a $5,000 commission. His plan was to wait until just before the balloon date and try again if the payor was having trouble refinancing.
When he reviewed the file in June 1995, he found that the note buyer had already bought the rest of the balloon, in March 1994. Six months after his contract had expired, the note buyer had bought the remainder directly from the estate.
The note buyer’s explanation
The note buyer said the payor had contacted them in early 1994 to restructure the note, and to restructure it they had to buy out the remainder interest. Legally they didn’t have to involve him: when you sell this company a partial, you sign over all future rights to the remainder interest, whatever your contract with the note seller says.
Normally the main office sends such a deal back to the branch that handled the original purchase, which then contacts the broker. But the branch that bought this partial in 1990 had closed, so the main office handled it without regard to the broker.
The note buyer apologized. Dealing with so many files, they said, things like this are bound to happen occasionally, and they would need a whole new department to track deals that fall through the cracks. They said they had done nothing wrong.
The author’s main objection: they could easily have called him. His name was all over the file, from the 1990 purchase and from the 1993 submission through another branch that was still open. They had to look through the file to find the note seller’s name and the executor. They could have found his number the same way.
Later, the estate’s executor told him he thought the broker had been part of the 1994 deal. He also said what the note buyer paid for the remainder: $4,000 less than they had quoted the broker in 1993. Did they use his May 1993 contract price to arrive at what they paid the estate?
Why trust matters with institutional buyers
It all comes down to one word: trust. This business depends on all parties being able to trust one another. When you work with an institutional note buyer, you should expect to be treated as fairly and honestly as you treat your note sellers. When a mistake is made, it should be recognized and put right so it doesn’t happen again. That didn’t happen here.
The note buyer apologized but said it would not change how it operates. “Things like this are bound to happen occasionally” does not bode well for other brokers, and claiming it would cost too much to track their own transactions contradicts their claim of the best broker service in the industry.
Protecting yourself on partials
The author’s advice: stay very much on top of your partials. Once a year is not enough, as this case shows, if you don’t want to fall through a $5,000 crack.
He also argued that individual note brokers have no leverage with major note buyers, and that an association of brokers could negotiate better purchase agreements and working relationships for everyone.
