MODULE FOUR
DEALING WITH PARTIALS
In
the last lesson, we introduced the idea of how to deal with unrealistic
expectations, and how to offer the partial as a solution to the unique problem
posed by the prospect with unrealistic expectations.
We
pointed out that you never offer the partial up front. Note holders will not
understand what a partial is, and partials involve some complex mathematics
that might be hard to understand.
Instead,
you change the discussion to a problem that they may have. (Benchmark #4). You
find a new problem, or find a different way of looking at an old problem.
Once
you know what the problem is, you move on to the proposal about partials by
saying something like, “With a note like yours, it might be possible to get
money out of it without selling it. It’s kind of like getting an advance
payment on future interest. If I could do that for you, would you be
interested?”
This
is how you move on to Benchmark #5, introducing partials.
Partials
are very complex mathematics. As a broker, you have nothing to do with the math
of it. Your job is to find a problem, and post the problem to the Internet. The
investors will determine how to spend that money. They will look at the problem
and then determine what kind of partial will solve that problem. After they
present the partial to you, you can discuss the offers with your coach, and
then you present one or two different offers to the seller for him to choose.
Today,
I will give a mini-interview to show how different partials are chosen. I will
be using examples of notes that either I have purchased, or one of my tax
clients has purchased. These examples will illustrate how you go about finding
a problem and then offering a partial as a solution to that problem.
The
most common type of partial is buying the
front end of a note. More than half of the partials that I do are this kind
of partial. This is a standard with most investors in the industry.
Here’s
an example of a note deal that my wife and I purchased a couple of years back.
This
involved an acquaintance of mine that I knew through other business dealings.
He
sold his house off, and carried back a small second. This was a $52,000 second
(10% of the sales price). There was a big down payment of $150,000, so this was
a safe second—this is the kind of thing we like to buy into sometimes.
He
called me up and said, “Talmadge, I remember you buy these kinds of notes. I
just sold my house, and I got this note here. It’s a $52,000 second, with 10%
interest.”
I
don’t remember what the term of the note was, but as you’ll see, it becomes
irrelevant.
We
went through the interview, just as we’ve taught you in all of the other
lessons. Finally, we get to the critical part of the interview where I asked
him, “Victor, how much would you really need to have for this note to make it
worth your while to sell it at this time?”
At
that point, there was a moment of silence and Victor responded, “Well, after
talking with you and seeing how good this note is that I have here, maybe I
shouldn’t sell it after all.”
You
can imagine that after spending 10-15 minutes going through the interview
questions, that wasn’t the most pleasant response I wanted to hear.
Let
me give you some background on how to deal with this “I don’t want to sell my
note”—it’s the most common response you’ll get.
Always,
in today’s economy, when someone says that they don’t want to sell their note,
you have to agree with them. To do otherwise would be disingenuous.
The
fact is, a note is a pretty good investment. A few years back, perhaps that
wasn’t the case. While the stock market was doing well, a mutual fund might
have made the best investment, but that is no longer the case. The stock market
has been flat the past few years, and while it’s been doing better lately, it
still can’t beat a good note.
Consider
that most of the people who carried back a note did not do so because it was a
good investment, but because it was the only way they could get their property
sold. Most will recognize that it’s a good note investment, so don’t try to rip
the note apart. Otherwise they’ll say, “If you think it’s such a bad note, why
are you trying to buy it?”
When
somebody says they really don’t want to sell their note, what they’re really
saying is “I would not rather have this big chunk of cash now and give up all
these monthly payments that are going to be coming in the future.”
However,
that is only one way to buy a note. There are a couple of dozen other ways of
buying the note that these prospects are unaware of. Therefore, they are not
saying ‘no’ to these other methods, because these don’t know what they are.
So
always keep that in mind and realize that there are other approaches to buying
the note that might fit their needs better.
But
as I said, you must begin by first agreeing with the prospect’s assessment.
So
I said:
“Well
I can certainly see where you’re coming from Victor, this looks like a darned
good note—10% interest. This is exactly the kind of note that I’d like to buy.
I can see why you’re smart enough to want to keep it. I wish you weren’t as
smart as I was—I could have gotten your note!”
We
laughed, and that helped to defuse the situation a little, take the pressure
off him.
But
then I said, “But I’m curious, Victor. You called me initially, so you must
have had something in mind. What was the reason you called me for initially,
and what made you change your mind about the note?”
Notice
what I did: I agreed with him, and then I brought up my perspective.
When
you do that, it’s more conversational.
If instead I had said, “Well what did you call me for then?”—then it becomes more confrontational.
But
by agreeing with him and then offering my perspective, it’s a conversation.
It then
becomes easy (since I agreed with him) for him to be up-front with me.
He responded: “Well, this note is 10%, and that’s a pretty good return. If I had taken most of the money from the note and put it into the bank, I’d get only a 1-2% return. That doesn’t seem like a smart financial decision.”
By
listening to his answer, I was able to key into his difficulty: he spoke of
putting most of the money into the
bank.
But
again, I agree with him first.
So
I say: “Well, of course Victor, I’d see
no reason to kill off a 10% return just to put most of the money into the bank
where it would get 1-2% return, especially if you weren’t going to do anything
else with the money.
But
I’m curious, Victor, you spoke of putting most
of the money into the bank. What were you going to do with the money you
didn’t put into the bank?”
Notice
I am using the same strategy: agree with him, and bring up my perspective.
Recognize
that most people are rational. If they object from their perspective, it
usually makes sense.
The problem is that their perspective is not as broad as yours. So here’s what I did.
Victor
said, “I had just visited my accountant, and he said I was going to have a tax
bill of $10,000 more than I had budgeted. I need $10,000 on Jan. 15 to pay taxes.
[Victor is self-employed, so he pays estimated tax payments] But I realize that
I could go down to the bank, and borrow $10,000 against my business
line of credit at 7-8%. So rather than lose 10% on $52,000—I think that would
be a better idea.”
This
is a common objection that you’ll hear, that it’s better to borrow the money
than to sell the note. You might especially hear this with senior citizens who
are relying on the note as part of their retirement package.
Here’s
how you handle that.
First, notice that again I agree with him.
“Well that makes perfect sense, Victor. I mean if you could get the money for 7-8%, why kill off a 10% income? However, there’s something you ought to know. You see, with a note like yours, sometimes it’s possible to pull cash out of the note without selling it. It’s kind of like getting a cash advance on some of that 10% interest that you spoke of. Would you like me to look into that and see if I could do that for you?”
Then address why your proposal his better than borrowing, in this way:
“If you borrow the money from the bank, you have increased debt, it changes your debt to income ratio, and so if you need to borrow money in the future you might not be as credit-worthy and be able qualify.
Worse, if you take the money out of your business line of credit, you’ve already used $10,000 out of your credit that you can’t use in the future. But if you could take it out of your note, it would be much better.
First
of all, it’s not a loan, so it won’t show up on your credit report.
You
won’t even have to make the payments—the person living in the property is
making the payments for you.”
So
remember to point out the problems of borrowing money when that is brought up
as an alternative to partials. Borrowing is not a good idea because:
·
It affects your credit.
·
It increases your debt load.
·
It may make it difficult to borrow money in the future.
·
If you pull the same money out of your note, it’s not a debt and it
doesn’t show up on a credit report, and someone else is making the payments.
Recall
that I am using the catch phrases we introduced in the last lesson when we
spoke about partials. These are phrases like “get cash out of your note without
selling it” and “getting an advance on your note against the interest without
touching the principal.”
Those
are the keys in talking about a partial.
Like
most people, Victor is taken aback. “How can you get money out of a note
without selling it?"
So
I said, “Here’s how it would work, Victor. If all you really want is $10,000,
then I could give you the $10,000 now, and in return all you would do is give
me the next 23 months of monthly payments. At the end of 23 months, you get the
note back and continue receiving payments on the note.”
The
payments were about $500 on this note, so at 23 payments it came out to
$11,500.
Victor
did the math and told me, “Oh I see how you’re making money. You give me
$10,000 and then you get $11,500 out of the note.”
“That’s
right,” I told him, “that’s how I make my money.”
But
then Victor adds, “You’re only making $1500 on this deal? At 5 years that’s
only 7.5% interest. I thought you guys made a lot more than that.”
Actually,
Victor is thinking strictly in terms of simple interest, but that’s not how
these transactions work. Without getting into all the technical details, if you
crunch the numbers through a financial calculator, it’s more like a 14% yield.
I
tell Victor, “Victor, that’s kind of how I make my money, if it works for you
it works for me.”
Then
I add, “Victor, you will be making a profit on this deal too. Remember that
most of the payments over the next 23 months will not be principal, but
interest. As a matter of fact, at the end of 23 months, I will have received
only $1800 in principal. That means your note will still be worth over
$50,000.”
Victor
replied, “My goodness! That means you’ll turn my $52,000 note into $60,000.”
I
play along with this when I hear it.
“Oh,
how do you figure that?” I reply.
He
says, “I’m getting $10,000 now. In 23 months I get the note back, it’s still
worth around $50,000 then. Worse case, I cash out at $50,000 and don’t get
anymore payments—I’ve just made $60,000!”
That’s
called buying the front end of a note.
These
notes have most of their interest front-loaded, so when you buy the front end
of a note, you’re buying mostly interest, and the seller is surprised to discover
that after the note returns to them the note still retains much of its worth in
principal.
Now
let’s consider a scenario involving buying the back end of a note.
Let
me reiterate that you do not introduce a partial until you meet a problem that
the prospect has. So, I have to find a problem that buying the back end of a
note would solve.
This
was a transaction we did several years back with a fellow in his twenties. He,
like most young men, had only a few things on his mind: girls, cars and sports!
We
met at a sporting event—we were coaches at a little league event for the kids.
A number of us men were coaches then and spoke about note deals, and this
fellow overheard us.
He
came up and said, “You know, I got a note just like you guys are talking about.
My grandfather gifted it to me. I haven’t decided what I am going to do with my
note, but I am sure not selling it to one of you old guys!”
We
ignore the objection, and then go on to ask him, “Great, what are you going to
do with your note?”
He
had visited all of these “monster truck” dealers and there was one vehicle in
particular he had his eyes on.
For
this truck, he figured all he needed was an $8,000 down payment, and then he
wouldn’t have to come up with anymore money. The reason is that the payments on
the note would match the payments on the truck.
As
he saw it, with $8,000 down payment, his note would buy his truck.
Eventually
as we kept talking, I discovered that he didn’t have the $8,000.
This
seemed like it could be an opportunity where I could help him, so I asked him,
“When are you going to get the $8,000?”
His
face went long, and he calculated that it would be way into the autumn (this was
spring) before he had saved up $8,000 for the down payment.
You
could tell, especially for a young fellow like this that was going to be a
difficult task indeed.
So
I said, “How about this? What if you could get that $8,000 and not sell the
note outright?”
He
was certainly interested in that.
He
met with me later, and here’s how we worked it out.
This
was a note that had payments of about $400 per month, and it was a twelve-year
note. He was planning to pay off the truck with the payments on the note.
I
proposed this. “How about I give you the $8,000 for the note—you’ll have it
right away. Additionally, I’ll let you keep the payments for the next 5 years
on the note as well. In return, all I ask is that you give me the payments for
the remaining 7 years on the note.
So
he tried to figure the discount on the note. This is how he figured it out.
“Ok,” he said, “You’re giving me $8,000 now,
plus 5 years worth of payments after that, that’s 60 months. 60 times 400 comes
out to $24,000. Added to your $8,000 the total comes out to $32,000.
In
return, you get the remaining 7 years, which comes out to around $34,000.
Are
you really giving me $32,000 to get $34,000? Because that’s not the kind of
steep discount I hear you guys talking about.”
I
said, “Well, if it works for me it works for you.”
He
completed the deal. He got the truck immediately and spent the rest of the
summer having fun.
From
his perspective, he lost $2,000 on the note. In fact, I’ve often heard him say,
“Look at that truck. I got it brand new for only $2,000.”
Let’s
look at it from my perspective.
I
invest $8,000 and receive no payments at all for five years. For the remaining
seven years, I get nearly $34,000 in total, more than 4 times my initial investment
of $8,000. I had to wait 5 years to start getting payments. If you crunch all
these facts into a financial calculator, it turns out to be more than 18% on my
money.
So
you see, it’s win-win-win all around. He got his truck immediately, plus got
the payments for it while he spent the summer having fun. I got a very good
investment out of it.
What
I’ve just described is called buying the back end of a note, sometimes called a
“reverse partial.”
We
can also buy the middle end of a note. This tends to be more rare but I’ll give
you an example from an acquaintance of mine who did this. He was a real estate
broker who bought and sold notes from time to time.
One
day, a young lady came into his office and said, “I understand that you loan
money against notes.”
Actually
we don’t loan money against notes, but that’s how some people see it. He
replied, “Well, I can do something like that.”
She
said, “Well, here’s my note and I need $5,000.”
He
looked at it. It was a 10-year note and the payments had about $265 coming in
on it.
He
said, “Oh, this should be no problem, I’ll give you the $5,000 in return for
the next two years of the monthly payments.”
But
she said, “I can’t do that. You see, I need the monthly payments. Your take on
them would have to be a lot smaller than that. See, I need the payments to buy
a computer while I complete college.
He
asked her how long it would be before she completed college.
She
said three years.
So he
did the calculations again, and said this. “How about we do this. I’ll give you
the $5,000 plus the three years of payments while you complete college. How
does that sound? Then, after you complete college—and because I’ve had to wait
three years to get my money—I get the next three years after that instead of
two. However, after that there will still be four years left on the note, and
you get those remaining payments.”
So
obviously she accepted this. She got her computer, completed college. He got
three years and then she got the remaining four years.
You
can crunch the numbers, but as you’ll see, it worked out very good for the
investor.
Beyond
buying the front, middle and end of a note, we can try another
technique—splitting the payment.
I
use this one sometimes.
A
gentleman came in recently and asked for $5,000. He said that he had a note he
would put up as collateral for it. The note had $500 payments on it.
So
I proposed giving him the $5,000 up front, in return for the next 12 months of
payments ($6,000).
At
first glance, you might think that’s a 20% return on my investment, but if you
punch the numbers through a financial calculator, it comes out to 35% return.
But,
he said, “You can’t take the payments off the note for this, because I need the
payments to pay off a house boat.”
I
asked, “How much are the payments?”
He
said, “$350.”
So
I replied, “Ok, why don’t we do this instead. I’ll give you the $5,000. Then
every month, since you need the payment, you take $350 and I get the remaining
$150. And since I’m only getting $150, I need to get the payments for a lot
longer.” (It was 44 months).
That’s
a split payment. He gets the money up front, then he gets part of the payment
and I get part of the payment.
You
will find that this is a very good strategy for elderly people who have kept
back part of a note on the last home that they sold, and now they have a nice
big monthly payment that they use as part of a retirement package. Maybe the
payment is $3,000 or more per month.
They
may need money for any number of reasons. You can give them part of their
monthly payment (say $500), and they can keep the rest. Eventually the payment
reverts back to $3,000.
You
can split the note as well.
We
used this some time ago with a fellow who came to us with a note, and he needed
some money to start a business.
When
we looked at the paperwork, we realized that his sister’s name was on the note
as well, but she wouldn’t agree with him to sell the note. She didn’t want to
get hit with a tax bill, and she liked the payments coming in from the note.
She
refused to sign the document, so it looked like a dead deal.
Here’s
how we solved the problem.
We
formed a new partnership consisting of the brother and the sister, where they
now made an offer to buy the note from the old partnership of the brother and
the sister.
In
return, the brother would get cash for his share of the note, and the sister
would get a partnership share where she would get half of the note (half of the
payments).
The
end result is that the brother now has cash, and the sister still has payments
coming in, except now she’s splitting it with the investor.
So
this is an example of a way to make a deal work, when there seems to be no way.
This
technique is a powerful tool to use to buy a note. Let me give you an example.
A
couple of years ago an elderly couple approached us with a small note, $20,000.
They told us, “We need $20,000” for this note.
This
is after we’ve gone through the interview and we’ve asked them what they wanted
for the note.
If
the note is worth $20,000 and they want $20,000, then obviously you can’t make
a profit.
So
that’s an unrealistic expectation.
In
talking with them, however, I discovered that the reason they wanted this
$20,000 was to help a granddaughter through college. This was mainly to cover
room and board. They wanted to give her $5,000 for the next four years.
Knowing
what their problem was, I was now better positioned to help solve it for them.
Really what they wanted was $5,000 per year for the next 4 years.
So
I told them there were two ways I could buy their note.
I
told them I could give them $18,000 in one lump sum.
Or,
if they prefer, I could give them $5,000 each September, for the next 4 years.
Obviously,
they chose the latter option. It fit their problem perfectly.
Now…where
was I making a profit?
I
give out $5,000 for the first September, then I own the note.
After
that, I get the payments coming in…$200 per month for the next 20 years left on
the note. Twelve months later, I pay them $5,000 again. But, since I’m getting
the payments on the note, I’ve received $2400 already (12 x $200). Only the
remaining $2600 will be out of pocket. The same with the remaining two
payments, only $2600 comes out of my account.
So,
$5000 for the first payment, plus $2600 for the next 3 payments, comes out to
$12,8000. That’s what I paid to get the remaining 17 years of the note.
Obviously,
I make more money this way than I would have had I given them $18,000 in one
lump sum.
So
this is the staged purchase of note. It’s a technique that I use a lot with
farmers and ranchers in our part of the country. They usually have a dry period
in the winter when they’re making any money. We work a complex type of partial
with them where they get the payments during this time, whereas we get the
payments when they’re doing well and have plenty of money to live on.
Sometimes
you can help a person who needs the money a lot quicker. Perhaps someone has a
five-year note, and you can set up the note so that they get paid off in twelve
months. Or perhaps they have a 15-year note; you can set it up so that they get
paid off in two years instead of 15 years.
This
is a strategy where you might buy the note yourself. You can buy it and make
payments on it.
For
example, consider that a $10,000 note at 10% interest, paid over the course of
five years will have payments of $215 per month for the next 60 months.
You
could offer the note holder: “What if I got you your $10,000 in the next 12
months? Would that work better for you, rather than waiting for your $200+
payments each month for five years?
In
order to get you that, then I would pay around $835 per month.”
Often
someone will jump on a deal like that.
Ok,
now put this deal into perspective.
You
are going to be paying $835 per month for the next 12 months, and in return you
will acquire the note and receive payments of $215 per month for the remaining
48 months.
However,
you will not be paying out the full amount of $835 per month. For that first
year, they will still be getting $215 per month in payments. You will only have
to pay the balance of $620 each month for the 12 months.
If
you add it up, it will cost you around $7,400 for that one year in payments,
but in return you will be getting $215 per month for the next 48 months—about
$10,200 in return. If you put that in a financial calculator, you are making
about 13% return on your money.
This
is similar to a staged purchased of a note, except you are doing it in 12
little stages.
Q: On the back end deal, what
happens if someone pays off the note early?
A: As a broker you won’t have
to worry about this—that’s the investor’s concern. Investors will usually
receive a Schedule B, usually like an amortization schedule you get for the
mortgage on your house. This schedule indicates how much went to principal, how
much went to interest, and what the new balance is for that month. If the note
is paid off early, the schedule will indicate how much money goes to the
seller, and how much goes to the investor.
In
the early stages, the lion’s share of that money will go to the investor,
because he just put out a lot of money. Later in the contract, the seller will
get more and more of the money.
Q: How do you present to an
investor the idea that the prospect only wants a partial, nothing else?
A: You will post several
comments on the website. First state, “First I want an offer for the full
purchase of this note.” Do this even though you know the seller won’t go for
the full purchase. Then state, “Besides this I want x thousand dollars”—or, “My
client is willing to give up x years of the payments” (whatever they said).
Then add, “I need a commission of …[state your requirements]…” The investor
will take all of these factors into consideration, and even include your
commission in the partial purchase.
1. List the two things you must do when a prospect objects that he/she would rather not sell their note, because it’s such a good investment. ________________________________________________________________________________________________________________________________
2. A prospect tells you that he/she would rather borrow than sell their note. Remind them of the following three negatives about borrowing:
________________________________________________________________ ________________________________________________________________ ________________________________________________________________
3. A prospect tells you that he needs $10,000 up front on his ten-year note, and he needs to keep the payments on his note to pay off his five-year car loan. Which partial strategy would solve his problem?
A. Buying the front end of a note
B. Buying the back end of a note
C. Splitting the note
D. Splitting the payment
E. Staged purchase of a note
F. Buying the note and making payments on it.
4. A prospect has a five-year, $10,000 note that they need paid off quickly. What kind of partial would solve their problem?
A. Buying the back end of a note
B. Splitting the note
C. Splitting the payment
D. Staged purchase of a note
E. Buying the note and making payments on it.
5. A prospect has a $40,000 note and wants $10,000 per year to pay for his son’s education. Which kind of partial would solve their problem?
A. Buying the front end of a note
B. Buying the back end of a note
C. Splitting the note
D. Splitting the payment
E. Staged purchase of a note
F. Buying the note and making payments on it.
6. A couple comes to you. The man wants to sell the note, and the wife doesn’t. The note requires both signatures to seal the deal. Which partial would solve their problem?
A. Buying the front end of a note
B. Buying the back end of a note
C. Splitting the note
D. Splitting the payment
E. Staged purchase of a note
F. Buying the note and making payments on it.