Most people think selling a note is all or nothing. It isn't. With a partial note sale, you sell a set number of payments for cash today. When those payments are done, the note comes back to you and the checks start again.
This article walks through a real example with the math, so you can see what you give up and what you keep.
Short version: A partial sale gets you less cash than a full sale. But you keep the back end of the note, which can be worth more than the cash you gave up.
How a partial note sale works
Your note has a stream of payments left. In a partial sale, you split that stream into two pieces:
- The front piece. The next set of payments. You sell these to a note buyer for cash today.
- The back piece. Everything after that. You keep it.
During the front piece, the payer sends their payments to the buyer. When the front piece is done, the payments go back to you. Nothing changes for the payer except where they mail the check.
The example note
Let's use one note for every scenario:
| Detail | Amount |
|---|---|
| Balance owed | $62,000 |
| Interest rate | 8% |
| Monthly payment | $592.50 |
| Payments left | 180 (15 years) |
| Total you'd still collect | about $106,650 |
For the math below, I'll assume a buyer wants a 12% return. Your number will depend on the payer, the property, and the paperwork. These figures are before closing costs (property value check, title search, and attorney), which come out of a real offer.
Option 1: Sell the whole note
At a 12% return, the whole note is worth about $49,400 today. That's about 80% of the balance. You get one check and you're done.
Option 2: Sell the next five years
Now say you sell only the next 60 payments. Those 60 payments add up to $35,550. At the same 12% return, a buyer would pay about $26,600 for them.
Here's what happens next:
- You get about $26,600 now.
- For five years, the payer pays the buyer.
- In year six, the payments come back to you. There are still 120 payments left, about $71,100 more.
Put that side by side with the full sale:
| Full sale | Partial sale (60 payments) | |
|---|---|---|
| Cash today | about $49,400 | about $26,600 |
| Payments you get back later | none | about $71,100 over 10 years |
| Total over time | about $49,400 | about $97,700 |
The partial sale gives you less cash now. But over time, you collect much more. That's the trade.
Option 3: Sell just enough for what you need
Maybe you don't care about five years. Maybe you need $25,000 for a roof or to pay off a card. Then you work backward.
In this example, selling the next 56 payments gets you about $25,300. After those 56 payments, the note comes back to you with 124 payments left.
That's the beauty of a partial sale. You tell the buyer the number you need, and they tell you how many payments it takes.
Why the cash is less than the payments you sell
You're selling $35,550 of payments for about $26,600. That gap bothers people, so here's why it's there.
The buyer pays you today and waits years to get paid back. They also take the risk that the payer stops. The return they need for that wait and that risk is the discount. The further out the payments, the bigger the discount. That's why payments due soon sell for closer to face value than payments due years from now.
You don't have to choose up front
When you ask me for a quote, I send two offers side by side: one for the whole note and one for a partial. You can compare them with real numbers before you decide. Try both on the note value calculator.
When a partial sale makes sense
- You need a set amount of cash, not all of it.
- You still like the note and trust the payer.
- You want income later, like in retirement.
- A full sale would put you in a higher tax bracket this year. Ask your CPA.
When a full sale is better
- You want to be done with the note for good.
- The payer has been late, and you'd rather not deal with it later.
- You're settling an estate and the heirs want to split cash.
- The property is far away or hard to keep an eye on.
What can go wrong with a partial sale
Partials are simple, but ask about these before you sign:
- What if the payer pays off early? Say they refinance in year three. The buyer gets paid first, out of the payoff, until they've received what they were promised. You get the rest. Your agreement should spell out exactly how this is figured.
- What if the payer stops paying? The buyer usually handles collection while they own the payments. The agreement should say who does what and who pays for it.
- Who services the loan? Many partials use a licensed servicer so both sides see the same records. That protects you.
Get all of this in writing. A good buyer will walk you through it.
Frequently asked questions
What is a partial note sale?
It's when you sell a set number of future payments on your note for cash today. After those payments are made, the note goes back to you.
Can I sell more of my note later?
Usually, yes. As long as the payer keeps paying, many buyers will buy another piece later.
Does the payer have to agree to a partial sale?
Usually not. Check your note or land contract for a clause about selling or assigning it.
Is a partial sale better than a full sale?
It depends on what you need. A partial gets you less cash now but more money over time. A full sale gets you the most cash now and ends your involvement.
How do I find out what a partial sale would pay me?
Tell me how much cash you need, or how many years you want to sell. I'll show you the numbers both ways. Get a free quote here.
For a rough feel for the whole note, try the note value calculator. If you're weighing whether to sell at all, read should you sell your note or keep it.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.