- September 24, 2019
- Posted by: august19
- Category: Podcast
What are partials? In this episode, Chris Seveney gives the answer and walks us through some reasons why should you use it to your advantage. He reminds everyone who wish to do partials that when buying notes, it is always ideal to understand the process before raising money. Chris also answers some questions on determining market value assets and the types of yields accepted on bids. Learn more about partials and why using it brings in better results as Chris dives deeper into the subject.
Listen to the podcast here:
The Advantages Of Selling Partial Of A Note
I can talk a little bit about partials. I can show you some creative things if people interested in that. We’ve already got some questions that have come through. Let’s start with the first one from Dean. He wants to know a little bit about nonperforming mortgages. How do they work? A reverse mortgage, I haven’t played too much in that realm. Reverse mortgage is when they go non-performing. It’s when the borrower is deceased. In that instance, you’re more than likely are going to be foreclosing. The interesting thing to look for on those assets when they are foreclosing is you have to make sure on a foreclosure you have an attorney that’s familiar with them because they do have the name, the IRS as well as the state and several other entities as part of the foreclosure to make sure, I’m not familiar with enough about it enough to know to get myself in trouble.
When I was doing some due diligence on some that weren’t foreclosure, I was advised that it definitely needed to be looked into. There’s not a lot of them out there, but the reality of it is you’re not going to get the borrower typically on those re-performing. Your real exit strategy on those is to get the property. I’m allowing the ability to allow people to register until the rest of the year. I’ll pop some new calendar. I had a lot of people ask about it. That’s something now when you go to register. You were putting your information once and it should register you for all the webinars now until the rest of the year. I’m glad you enjoy that. I’m also still working on doing some text messaging to allow people reminders as well. I haven’t gotten there yet because I’ve been busy. I acquired a lot of assets. It’s been a little crazy busy.
Determining Market Value Assets
A new question came through from John, “What steps do you need to determine the assets for your market value and how do you establish a ballpark value and have confidence in this?” Confidence is very difficult on pricing assets simply because you don’t know what the inside looks like. You’re doing it based on the outside. I have changed up things a little bit in how I’ve done my BPOs. What I mean by that is I’ve been having a preservation company go out and do inspections. I showed up in a webinar inspection report they provide. You can get a very detailed inspection report from the preservation company. The key is getting them out there in time because it might take up to a week and it cuts it close with the closing period.
If you can get a preservation company out there and short money with $225 and $50 instead of getting something like week or look, but we’d go look for good company, a preservation company, and they’ll do a very detailed report. If you want, feel free to shoot me an email. I can send you a copy of the report to show you what they provide. They talk about if it’s occupied, if the exterior is being kept along this mode, they do a pretty thorough analysis and get you a better condition of the property. It doesn’t give you the price for the property. They do put a ballpark estimate in there, but the reality of it is I wouldn’t go by that. From there, I will do my own BPO or if I don’t have an agent, what I’ll do is I’ll send them the photos and have them run a CMA.
They’ll do that for nothing because they don’t have to go out and do anything. If they do that for me, usually now I can get them to take it back or whatever. Shoot me an email, just a reminder, and I’ll gladly send you a sample of a report on a preservation company. That’s one way because what I found is, with some of the agents, and Gail had the challenge with this, they don’t get out of the car in many instances. There was a major foundation crack on one of her properties that caused some damage to the property. The property was nearly not worth what everyone thought it was because the person didn’t get out of the car. These people, they do a pretty thorough report that I’m happy to share with you.
A question came through from Sylvia, “Talk about what types of yields or otherwise are being accepted on bids and what’s realistic bidding.” Let’s start with first because I don’t deal with the second. I’ll start with the first, you’ve got notes in CFDs. You’ve got the performing and nonperforming. Let’s break down first the performing aspect. For a performing note and CFDs, if you’re buying a one-off, meaning you’re buying one asset, maybe two or three assets. Typically, on a note you’re going to see the yield somewhere probably between 10%, 13%. Some people will sell them down to 6% to 8%. I would say you’re looking at 10%, 13%. People say that’s not that great of a yield.
It’s still double digits. Depending on the asset, if it’s got a lot of security behind it and stuff, it’s a pretty safe risk. That’s one of the things that people forget to do is they forget to measure the risk involved in the return. If you can get 10% with no risk or 12% with high risks, I take 10% every day. That’s a personal preference. For CFDs, you’re typically going to be between 12% to 15% for performing. It’s where you’ll see those from a yield perspective. Now this is when you’re buying one, two or three Zs and so forth. I’ve bought several pools and I was able to get them at a steeper discount. There’s going to be opportunities where you can also get them at steeper discounts that typically they’re going to need a little bit of work.A partial is essentially selling a part of a note, cutting it into a segment and selling that off. Click To Tweet
What I mean by that is they might be missing an assignment. They might be missing in a launch. They might have the satisfaction of mortgage that for some reason was not satisfied many years ago. You may have to chase some of that paperwork down. I’m seeing that more and more common with CFDs because when the paper was written several years ago, it wasn’t as clean. You’re going to see that a lot with CFDs. It doesn’t mean that typically that’s fatal. We need to understand what the ramifications are because they’re very different. In regard to nonperforming assets, it is dependent upon state the risk and everything involved.
For me personally, I try to target between 24% to 30% yield on nonperforming assets, whether it’s saying no or CFD. I don’t think I’ve ever gone below 24%. Typically, my numbers are usually based on 30%. If I get it, great. If I don’t, I don’t. The key is, when I talked to about yields for some ROIs, there is a difference and the key is again, garbage in, garbage out. What you put into your calculator is very important to make sure that the information is accurate. I can take a note and probably show you anywhere from 5% to a 95% return by changing one number or changing a period of time. If you got a deal that’s going to make say put $30,000 into a deal and we make $3,000, we make $6,000. You make that 20% in three months. All of a sudden you made 80% yield. Essentially, if it takes you three years to get it, all of a sudden you made about a 5% yield.
One of the things, not only about putting the numbers in and accuracy of how much it cost to foreclose and other information, is the time period. Let’s say note and bolt, it’s not only the numbers you put in but the time. When you see things like the Fannie Mae foreclosure timelines, in the best-case scenario, and that’s assuming the day something is available, your attorney can file it the next day. The court does everything lining up during that time. It’s not going to happen. You’re starting to look at this stuff if you have an attorney to review the collateral, ask them and say, “Can you spend five minutes to walk me through the process? I have the Fannie Mae guidelines. Here’s the outline of how it goes in this state. I understand it but realistically, if it’s something uncontested, what’s it going to take? It says five months. Is it six months, eight months for me to get the deed because you may foreclose? It may take four months to get the deed from the judicial hold foreclosure. That’s another big component to look at as well.
What Are Partials?
I’ll talk about partials. First, do people understand what a partial is because I’ve seen people sell them in a variety of different ways? I’m curious if people understand what a partial is from that standpoint. What a partial essentially is you are selling a part of that note. You’re cutting it into a segment, half or whatever is and selling that off. Now there are many different ways people do it. I’m going to explain the way that I do it. It could be completely different than way other people do it. I’m going to tell you how my contracts raise are written and explain the process. Typically, I won’t do it on a performing note with a very good history of performance. Property has a good amount of equity in the deal as well. It’s something that provides a lot of protection from that standpoint.
With that protection, it gives you a sense that borrower will either keep staying in the property or if they default more than likely they’d probably end up filing bankruptcy and you getting that physical property back, or if you do have to go to foreclosure, the costs that you put into it are covered. The three key things are pay history, equity and deal and length of time that they’ve been paying. One of the things that I’ll first start out with partials and say is when you’re new in this business, you want to get into the business, but you don’t have the experience. How many people on here want to go out, raise some money, start buying some assets, but they also might not be comfortable because of the experience.
If that’s the case, we also want to make money. How can I do that by also reducing the risk of my partner because of maybe a little bit of lack of experience? First, I always tell people I believe you should do this yourself meaning buy notes and understand the process before you ever raise money. If you want to look and taking on some type of partner, and try and do it in an approach that reduces risk, but also provides a valuable return to each other, partials can be extremely powerful. I took five assets that I own right now. I was going to send this to an individual because they were looking to do some deals with some partials on people. I’ve got five properties with values ranging between $35,000 and $65,000.
You could be ranging anywhere from $13,000 to $30,000. Five assets with $114,000 UPB, they’re all at a 10% rate. I put in how much payments there are remaining. These five assets are paying almost $1,500 per month. Calculate it, but eventually, I’ll be sharing at some point with people. I haven’t figured out what I should offer up on this one. I’m seeing everyone left great reviews. Thank you very much for everyone that left a review. If you left a review on iTunes, it was for the bank assets where you can download all the data for the banks. On this one I’m going to do, leaving us a review on YouTube is probably what I’ll end up doing with this one. What you can put in your servicing costs. This is where I want to show the power of a partial.
Let’s take this top point, the UPB of $21,000. You have somebody who is interested in and has around $20,000 to invest. They were looking for an 8% return. Can you make money on this deal? A lot of people will look at it from a GV opportunity and be like, “There’s no money in this deal. I can’t make anything.” When you look at a $20,000 deal and look at it from a perspective of, “If we each made 12%, that’s call it $2,400.” Now let’s look at it from a perspective of a partial and the risk involved with the money you’re going to make. We’ve got $60,000 property at 21,000 UPB. It’s got 126 payments remaining. They’re paying $275 a month. If you bought this at a 13% yield, you will pay less.
Let’s say you buy it at a 13% yield. You were buying it for $17,500. You’ve got a partial partner on here that when you sell off a partial, your goal is to cover what you bought plus some additional money in case the borrower stops paying or you have to go through some type of foreclosure. Where my partials work is if the borrower stops paying, I can stop payments during a period of time to go through a foreclosure process, but it’s a moment of time that either I have to start paying again or pay off the partner their full amortization back. The reality of it is, in most instances, if I have somebody that’s $275, I’d probably keep paying them. This is why that buffer is important. Now, what is that buffer?
Typically, I use six months of payments, which are partial sale price number of payments held, which is the reserve. I’m taking six months of $275 plus its price, but I have a calculation in here so it can never be above the UPB. If I went to twelve months, you’ve got a bigger reserve. If I want the 20 months, 200 months, it never goes above the UPB. At six months and again this is a loan at the borrower has been paying very well and consistent, that should be more than adequate. Again, you always want to look at what the value is as well. You’ve got a partner who on this asset, I put in somebody who’s looking for 6%.
Let’s you’re looking for 8%, which is probably more in line. I’ve seen it up to 10%. You’re selling them 104 of 126 payments. You’re getting 22 payments at the end plus you’re getting a bump at the front. You are deferring payments, but when you look at it, a $20,000 investment on a nonperforming note, if you made 12%, you’re making $2,400. On this performing note with a partial, you’re making $1,650 right off the bat. You’re losing $800 in essence. Think of the risk and think of the amount of time you have to spend on a performing note versus a nonperforming note. To me, $800 overcall it a year’s time, it’s definitely worth.
Here’s the other kicker to it. Years from now, you’re also getting another $5,000 of revenue stream. Somebody like me who’s in my mid-40s, when I look at this, I can wait ten years and start getting this payment again. You’re looking at it of you get a bump now and you’d get a bump in ten years. Now people will say, “What happens if they pay off the loan early?” You run the partial price off of an amortization table. Based on that, in one twelve pays off, you’re paying whenever off that is. What happens is you still end up getting your initial acquisition number, but your revenue stream isn’t ten years down the line, it’s less, but it’s still something that has paid off at that time.
People talk about partials, I wanted to show this example because it’s unbelievable how powerful these are. The other side is the risk mitigation side, especially for people who were newer to this business. You may have bought a note or two and so forth, but you’re understanding still the servicing side, understanding and building relationship with the servicers. You’re building a relationship with your collateral review companies. Typically you’re probably not going to need an attorney, but if you do, you can always reach out. You’re getting that component out of it. You’re going off of payment stream. I was talking to an investor that has somebody that they think knowing that they can get between 6% and 8%.
I said, “Let me send you an example of five loans I have.” I pulled the first five loans out of a list that I own. It’s like, “If I sold these to him at 13%, he’s paying $93,000, he’s making $10,000 right off the bat.” He’s putting $10,000 into his pocket based on his reserve. Plus, he’s getting another payment stream down the line of $29,000. It’s down the road. What’s wrong with building money down the road that you don’t have to pay taxes on now? All that revenue stream down the line, he’s not paying taxes on that now. If it’s something that you’re looking for in your retirement, if you’re going to retire in ten years, you can start stacking all this money ten years from. This interest that is building up on this amortization, which is where that money’s coming from is literally growing tax free. The borrower’s loan, as getting paid down. The money that they’re going to owe you is there that is tax-free. Partials do rock.The revenue stream that you are building is for your future. Click To Tweet
People need to understand them. It lets people get a better understanding because when looking at $94,000, you’re hoping to make 12% on that deal. Your goal at the end of the day would be to make $11,280. Here you’re already making $8,800. You’re this far from what you’re going to make on a non-performer. What if somebody said and I said, “You’re buying on these at 14%.” Their acquisition price went down and their partial price also did go down because of the reserve price. You bought it at 14% yield, but you want to go to a ten-month reserve. You’re still getting at the end of the day a revenue stream of $25,000, but you’re getting $15,000 upfront.
You’re getting 16% right off the top. You say want to hold at eight months. There’s your 10%, 12% return versus dealing with nonperforming notes. I showed this to a good friend of mine who is a genius. I went to college with him. He’s a chemical engineer. He’s extremely bright. I was showing him this model. He said, “You can’t do this.” I’m like, “What do you mean I can’t do this?” He goes, “People can’t grasp this that they’re making money and arbitraging it. You’re buying low and selling high in essence.” Here’s one of the key things that I want to make sure I reiterate.
With this initial acquisition money, don’t go out and go on the next vacation with it if this is the only money you have. If one of these goes non-performing, hold the money. Five of them go non-performing, you bought five crappy performing assets. What are the chances? You’re probably going to have one in five that could and what’s it going to cost you? Maybe it costs you $3,000 to $4,000. If you do this once or twice, two, three times, especially buy like five, six, seven, eight assets, you’ve got this money, $12,000 sitting in a pool say this was $20,000. You can take that $20,000 now, go buy yourself a performing note that might be paying you $400 a month. if one of these stops paying, you’ve already got something that backs it up with your other note.
That’s your reserve. You can build that because now instead of keeping $20,000 in the bank, you bought your own self-performing note that’s 10% to 12%. Again, maybe you should have a lot of equity in it and is providing cashflow to you. You took somebody’s money, you’re paying a nice return that they’re happy with. You’ve taken their money to pay for these assets and taking the leftover to invest in yourself. I can get you on a note as well as these other partials. There are a few things to look for. Here’s the other selling point, somebody on these, and that’s why I put this loan to value on here. This one is a little high, 67%. I typically target on everything hereunder 50%.
If you target under 50% of the loan to value as well, that’s another selling point. Eric said “I’m not quite clear if the loan was paid off where someone buys 60 months of payment. The loan pays off at 24-month and the rest will be paid. Let me give you a great example of that. We’re selling it to him for $18,988.68. We’re selling it to him 8%. We’re paying him monthly payments of $255. What I do is I take the principle and interest and I subtract the service and cost. We are selling him for 103 months. On the schedule, yours is beginning balance. At month 24, you cut him a check for $15,808. What you would cut his check for and this is in the contract.
Let’s take that number of the $15,808 and 24. The UPB on the actual loan is $21,380.04. It’s at 10%. The payment is $275 because that’s their payment. I took out the service in which is 126 months. On Month 24, they paid it off. There’s $18,936. If I take that number into the delta, when this gets paid off, you’re getting $18,936. You’re paying this partner $15,800. You made an extra $3,000. It paid off instead of getting a revenue stream of $5,800, you still get your $2,200 upfront. Plus you’re getting $3,100. You’re making $5,300 in two-year time period on an asset technically you paid $16,788 that you get paid off.
If you do the math, it’s a 31% return and says it’s over two years. That’s a 15% return on a partial, on a performing asset when people target 15% on a nonperforming asset. There are many different ways that people can get creative on how to do this. Sometimes a person might want 10%. If they want 10%, you’re still doing very well. Even if you bought it at 12% and 10%. You put a six-month buffer on it. You’re still making $1,650 off the bat and that has a negative pay stream. That’s where you’ve got to be careful of. If you did a four-month buffer and make $1,100. You only get the last six payments. Now there are other things you could do as well, which is change your monthly payment, make their monthly payment lower so you have cashflow during this thing.
Say I was buying it at fourteen and giving them nine. Instead of giving them $255 a month, say I was giving them $200 a month. You couldn’t do that because the return of the payment goes negative. If you did a $225, in example, you’d almost wipe out all the payments, but you’re also getting a payment stream after servicing of $30 a month. It’s not a lot, $30 a month, but when you think about it, you did this on free loans, that’s $100 per month. Again, you’re never going to get rich off of one deal. I want to say that again. You’re not going to get rich off of one deal. It’s all about building increments and increments.
You do this the first time. You made $1,100 plus a payment stream of 9%. Again, I would never go more than 10% because the level of risk is so low. The first time you do it, you make $1,100 off the bat, you keep that in reserves and you build over two years of payments of $250. Do it next time again, another $1,000. You get 38 payments at $284. Do it again. You made little under $1,000. If you do this every single asset and make $1,000, nothing wrong with that because you do it ten times. There’s $10,000 plus. You’re building that revenue stream for the future.
Now if you’re 65 years old, depending on certain aspects of when you’re looking for the funds and so forth, you may not want to wait 20 years. My grandmother is 99. She would have done this when she was 65. She wouldn’t care. She’s going to be 100. It’s something that, people, if they’re looking for, what I meant by that is if you’re at a retirement age and want to supplement your income, partials is the way you might want to look at this is by doing arbitrage in the interest rate, but not giving them as much money. You’re balancing out. They get a portion of every remaining is how that would work. So you might get $50 per every payment or $100 per every payment, but the loan, if there are 100 months left, you’re giving them 100 months and just a reduced number. In that way you’re getting the cashflow coming in the door now, or you can look at it later.
Again, it depends on who you know and where you’re located because a lot of people look at it, if I can get six, 8%, they’re excited. Most known investors, they’ll look at you and say, “Give me 6%, go pound sand.” Most investors, when they think of investing in a CD or an asset, they put in $20,000 and that is growing. You were giving them principal. Let’s take an asset. If we’re selling it to them for $17,688, we’re paying them $255 a month, let’s say 9%. We’ve got 100 months on this. They’re getting a payment of $255. Now that payment is principal and interest. When people think of this on CD, I’m putting something in a CD for eight years at a certain interest rate at $18,000 every year. It’s growing at that rate.
On a partial, that’s not the case. The reason why is because if you’ll put $18,000 in the bank and we’re going to use this 0.9%. The payment of $255, they are getting a $135 a month. You’re giving them an extra $120 because you’re paying down that principal. The cumulative interest during this time is $7,600. Now if this was interest only, they will be getting $135 times 100 would be about $6,000 more. People were like, “I’m losing out. My return isn’t 9%.” Yes, it is because you’re getting your principal back. After the first year, your $18,000, I’m only paying interest now, it’s like a car loan or your mortgage. You’re getting more money back so it reduces their risk. Also it’s lowering your balance.
Eventually, instead of giving a lump sum at the end, you’re paying it down periodically per month. That is the way I recommend you do it because when you try and get into interest only, you’re paying them the interest, but the principal you’re keeping and you’re throwing it away. If you’re getting a $120 a month in principal, what can you do with it? Nothing. You’re paying somebody 9% on the principal that sitting there doing nothing for you. Give it back to them. That way they’re getting paid back faster so they get their investment back faster. When you look at it, this $18,000 investment, I’m trying to write $255 after seventeen months, everything beyond that is gravy for them. I see another thing that confuses people and partials is that component of them not understanding that it’s principal and interest.
A loan like some people say it’s hypothecation. It’s somewhat is in a sense because we’re hypothecating it where you’re getting a loan from somebody to buy this note that somebody else was paying. In essence, you are hypothecating it and so forth. A few things that I’ll comment on as well as if there are legal fees, I pay them. If there is other fees or costs on something, I pay them. This person when they invest, they are getting that. There is no deduction from any of their payments or anything. That’s what I’m giving them. Distinct to your account for it and that’s why again, I always recommend that you go back to that buffer, have some reserves and go from there.Confidence is very difficult on pricing assets simply because you don't know what the inside looks like. Click To Tweet
Advice For New Note Investors
For people who are newer to note investing, they’re trying to get their feet wet and learn a lot of the ins and outs of the business with taking on some reduced risk, you have some people who have money that you know, but you might be nervous. Taking it from them because you haven’t done enough deals and so forth, this is where I would tell you to start. Again, a lot of people look at this and be like, “I can’t JV on a performing note that I’m buying at 14%.” No, you don’t JV on it, it’s on the partial. You give them a percent and people say, “I don’t want a 10% or 12%.” It’s all about the risk. Why would I give somebody a 12% return on an asset that has a 30% loan to value?
You’re the first one in. When you look at this first position that you acquired, you’re breaking into a one A and one B. They’re in a position with one A. The way my contracts are written is if I have to go after legal. I go for a close and say the UPB is $21,000, say this thing goes, forecloses and sells for $18,000. Which is their price. They get all their money before I do. Another comment on that. Patty, “Would I be able to share this calculator?” Both of these I will share with people. Again, I give stuff away for free. I do not charge people for it. This is stuff that I think is powerful and helpful for people. I do want to run you on another quick check with some of these partial calculators. Make sure it was nothing incorrect in it. I quickly ran some things and that has checked out. These can be extremely powerful tools for people on the partial side. People have questions about partials. Was this helpful? Is this beneficial? I love to get some thoughts, opinions from people. What do you think?
This is something where I also I heard people post on Facebook, what are some things that people have. People will say, “I’m having trouble finding deals.” That’s one thing that can be challenging and so forth. Patty has done many deals. She may have some people sitting on the sidelines that have this money. It’s like, “What should I do with it and stuff.” It’s like, “I can’t find any deals.” I’m using your sample. I’m not saying you can’t find deals. I know you can. You get to experience and so forth as Patty has. All of a sudden it’s like, “Somebody has got these ten performing assets that I can buy these and buying them at this price and this person’s looking for this type of return.” Again, I can arbitrage this all day long. Again, I always go back to reiterate the fact that want to make sure there’s equity. You want to make sure you have your own money set aside, in case an asset does go performing. You want to make sure that happens. You can continue making sure that individual keeps their payments for me. With the parcel that I’ve had, my contract is one thing.
If a borrower has missed a payment, I’ve still paid the partner because it’s a $300 payment or something. I don’t feel like getting a phone call saying, “I didn’t see anything this month.” The payment goes through. Patty mentioned creative field, but it’s also very fluid and diverse because things come in waves. How many of us out there twiddling our thumbs trying to find assets that were very difficult. All of a sudden it’s like a massive influx that I’ve seen of assets come through and you’re going to see that now. Now what’s going to happen is in October, your problem has a little bit of squeeze or slow down. November is going to be busy as hell and end in November and December, you’re going to see sporadic stuff.
A lot of stuff you see at the end of the year has been stuff that you’ve already seen. Maybe one to ten times that you didn’t buy at first nine times. You’re probably not going to buy for the tenth time. By keeping the note in your name when they sell partial and servicing your company. For me, yes I do. The way I do it. Say you did a partial with me, we have an agreement that it’s one agreement that is a partial asset purchase and a sub-collateral assignment. It’s all one thing that says Ken is buying 100 payments at $255 a month. In exhibit B, this is exhibit that I had on that amortization table that’s attached. You have that agreement and the servicing stays in my name. I don’t split the payments with the servicer because as many of us know, servicers have sometimes enough trouble paying one person.
What happens is the service pays me, I pay you. I said within my bank account that the check goes out. I set a year of payments in advance to the partner that the check goes out the same day every month. If the borrowers early or late, mostly it takes us there. Usually right on time, but sometimes it might be a day or two late. I’m not waiting for that payment to come in because again, for me to go check if the payments come in and to chase down on what I put in the system, it’s easier to send you your payment by the first of every month. That’s why, with this buffer or reserve you have, for payments missed. It’s almost like you had the partner or the partial buyer prepay you any delinquency. That’s not the way I look at it.
Shopping For Yield Using Partial Strategy And Other Questions On Partials
Somebody mentioned, this person’s giving me an extra $1,100, they gave me four months of delinquency payments that if somebody if they miss a payment, I’m pulling from that reserve payment. I know you do the same thing. You’ve been rocking it as well as some of these things as well. Christina said, “Have you tried using partial strategy, does this mean you’re still shopping for yield?” Yes. I am still shopping for yield because what I’m trying to do is buy it at the best yield I can and also sell the partial at the lowest yield that I can get somebody on. There’s this one where the $14,009 yield, at the end of day gives $7,700 in profit over a lengthy period of time. All of a sudden, let’s say if I was buying it at $15,000 and brought this down to seven and a half, all of a sudden, my acquisition is a set number of by how many months of reserve I hold. All of a sudden now I’m up to $10,700.
Because of that, I could change this to eight. My overall profit goes down on, but my yields are probably higher because I’m getting more money upfront. I want to buy low, the name of the game in this or in any business. With this, again, you look at this aspect, fifteen and not eight, you’re not going to get that a lot. I’d say, comfortably buy thirteen and eight. You should be able to buy a note or even CFDs. It’s great for this deal because again the forfeiture process is usually much quicker than the foreclosure process. I’ve done these with CFDs as well in Indiana and certain states because if they stopped paying, they’re done in three, four months. If you did a 13% and 8%, again, you’re making $2,200 upfront on a $17,000 acquisition, you do that math. That’s 13% right back to you. What are you targeting on JV deal? It’s 12% to 15%. You made the same amount of money essentially right off the bat, but you’re paying yourself day one, you’re paying yourself, but you should keep it in reserves again.
That money was being made at a loan-to-value to the partner of 33% in an overall loan to value UPB versus value of getting or what you paid. It’s 30% something. “Do you mind telling us who your mentor for partials is? I only know one person that teaches it.” Georgetown University is where I learned a component to this because I’m getting a master’s in real estate finance there. One of my professors who was in this, we’re doing what’s called a bifurcation of a yield. We are doing a case study on an office building in determining whether the yield was better to hold the asset for a longer period of time and or sell it. We’re determining where the money was being made because in a lot of commercial deals you don’t make a lot off the cashflow, but you may end up getting a little bit. It bumps up the cap rate so you can make a lot of money at the sale.
Other instances you might be making a lot of the cashflow but not much off to sales. You want to know, “What am I making my money? Am I making on cashflow or making on the sale.” That got my head spinning and I was looking at the notes and saying, “Where do you make your money on even non-performers that turn performers. From there, it ruled into when I was looking at some of these things, gave me a lot of ideas with partials. I’d say pretty much I’m self-taught. I deal with math and crazy spreadsheets all day long. In situations like this and get stacking of on commercial deals where if we’re putting in 10% equity, we want a 20% equity partner and 70% financing, 40% equity, 50% financing. What are those magic numbers? With partials it was pretty simple for me of getting creative in the sense. I’ve heard very good things about training on partials. I haven’t taken it. I can’t give any feedback or opinion.
I know Eddie does teach partials on a webinar that he gets all his money or he sells them all, like 5% and 6%. I said, “Can I not pay for the training and pay for your list of people who you’re getting supply from if you’re flipping these at 5%e to 6%?” Eric asked, “How many years do you typically sell to investors?” It depends on the note and the asset and how long they want their money tied up. For you what you want to do is try and time it. They paid for the whole price of the asset. This first one I’m talking about is 126 payments left. It’s not worth selling them 36 payments because if you sold them 36 payments. Now they’re giving you probably don’t have that in this calculation, but they’re not giving you a good amount of payment stream. You’re probably getting about $7,500 in 33 months. You’re paying $7,500. Is it worth it?
You’re using your own IRA, you can use these with your IRA where say you have $10,000 in your IRA and say, “I want this one. I need $9,000 from somebody, so I’m going to sell him $9,000. He gets 40 months and then my IRA gets the next 86 months.” You can do that way yourself. Typically, again, I wouldn’t go less than three of what your goal is. They’re trying to sell it for the purchase price. A lot of times the people who invest in these are using IRA money. They’re not using their cash and they’re looking for that long-term growth of keeping something in a safe, secure asset for five, ten years. Christina, “If I’m doing this myself, what’s the difference in yield? I would get in comparison to what my investor would get or is it the same?” Again, it depends on the yield to investor on these is what you agreed to.
They get no upside. If this loan gets paid off in month 24, they don’t get the added benefit. You do. That’s a component. A greater example to that is let’s say you were able to pick something up like 18%. You’re paying $14,000 for this. Eight months reserve is giving them $16,000. If this thing got paid off early in month 24, this loan had a balance of $18,000 left roughly on it, whereas this partials in month 24 would have probably a balance of $13,000. You would make $5,000 split, which on JV you split the profits on a partial, no. They get paid off what’s left on the amortization schedule. That’s another big thing to note as well. Their risk is minimized. Their upside is capped because you’re alone. Think of it as car loan, “I’ve got this loan I need to pay.”
If you get the money from somewhere, if the borrower paid off early, you pay them what’s left on the amortization schedule. You’re buying it in a discount and the UPB on the loan is higher than the UPB of your partner. You get that delta. Quincy does teach a lot about this as well. He’s done a lot of good things about this on podcasts and webinars and stuff that I’ve seen as well. What other questions can I answer about partials? I hope this was helpful to you. Christina, you are definitely getting the benefit of the backend. If you want, shoot me an email, I’ll gladly do a one on one with you, spend fifteen minutes and answer any questions you have as well on this to make sure you thoroughly understand it.If you're at a retirement age and want to supplement your income, partials is the way you'd want to look at. Click To Tweet
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If you want a quick fifteen minutes one on one where I can explain this to you more thoroughly in detail, please let me know. I’m hoping now you don’t have 50 people fill my email box. If you do, remember that I work a full-time job as well and have family and kids. I might say, “It’s not going to be until two Sundays from now that I can sit down with you and spend fifteen minutes with you.” Unless you’d like to do right at like 7:30 in the morning Eastern and you can get me early in the morning. That’s the best time to get me. You are getting the benefit of the backend on this. That’s one of the key things. For me, the way I started was I’m doing JV deals with performing notes.
What I was doing was I was picking an upfront fee to manage it and giving the partner essentially a preferred return. If it paid off early, we would split some of those profits. I would say after a while I realized they’ve got no risk in this. They’re getting all the cashflow. I’m managing it. Why am I giving away that upside? When I made the business decision to say, “I’m not going to do that anymore and I’ll do it as a partial.” I was giving away too much. That’s the reality of it. You may do that when you get started because you’re trying to grow your business and it’s not a bad thing by any shape. It’s done very well for me because of the people who I’ve worked with if invested with me again, so I’m not complaining by any means.
I learned that I can do this as a partial versus a GV split 50/50 profit-type thing or preferred return plus. I get 100% of that added benefit, but you are taking on the risk if it’s false. That’s the other thing I want to make sure I am taking on that risk. I haven’t seen Donna’s training. I’ve heard, again, good things about that as well. Dean, “Can we get a copy of your partial calculator spreadsheet?” Yes. I am going to get this out to people thinking of the best way to “bribe” you guys to promote us in some way, shape or form. As many of you know, stuff like this I’d give out. We do not take donations for them. If there’s anyone else that does this, curious if you do it differently or how you do it differently. I do it my way, but there are a thousand ways you can do as partials.
The way it’s taxed is, it’s taxed if they’re two different loans. On your profit and loss statement, you will have the interest from the borrower come in as a credit. The interests you pay to that person will be a debit. In essence, the payments are going to be the same, essentially the same outside servicing. You get $255 coming in and you’ve got $255 going out, but the $255 coming in will have higher interest than the $255 goes out. It’s very minimal. It might be $10 or $20. Whatever that number is, but you are getting more interest. Under profit and loss statement, you are going to be shown that you’ve made money even though technically you haven’t.
This $2,200 buffer, I keep that on my balance sheet side. I don’t take that as profit. I keep that there in case of reserves and so forth. On a profit and loss, the interest that comes in from the borrower goes on that statement and the interest that you pay somebody does go on the profit-loss as well. If you do this, you have the bookkeeper and you do JVs. If you do the partials, I said to Debbie Mullins, “This is what I’m doing.” You have to explain it to them because typically what they’ll do is they’ll put it in as a 50/50 JV. You explain this to them that you did the partial. That way they know how to allocate that principal and interest and know what the JV deal is. That it is partial, it’s not a 50/50 split.
Again, you will pay, but if the interest is $240 a year and you’re in the 28% bracket, you paid $67 in taxes that money technically you don’t have, but down the road, as this starts to get paid down and so forth, technically you’ve prepaid some of that already. There is that component that you would have to pay some of the taxes. I want to thank everyone for joining us on the Good Deeds Note Investing podcast. For those of you who have not already, I know most of you have left us a review on iTunes, Stitcher, Google Play or any of the podcast’s sites. We would greatly appreciate it if you do, leave us a review there. We will send you the program on how you can download all the bank data for free.
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