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Pitfalls of Partials

We work with some note sellers that would prefer not to sell their entire note, that is, they want to sell only a part of the future payments.  The note holder may only need a smaller amount of money than the note is worth and wants to retain the option of receiving monthly payments in the future.  While this seems to be a reasonable request, a partial note sale is not without its share of problems.


Accounting mistakes, in transactions like these there are three parties involved, the note payor, the note seller and the note buyer.  Payments that are not documented properly by all three parties could lead to questions as to who really owes what. 


Another problem that could be encountered is early payoff.  Since the seller surrenders the note for a specified time, only the buyer’s interests may be taken into consideration when calculating the payoff amount leaving you the seller with little or nothing.  Will the payoff be used only to pay the buyer’s interest? What if the payoff does not even cover the buyer's investment?  Will the buyer be forced to share the buyout with the seller equally, partially, or not at all?  Who will enforce this? This problem must be addressed before the deal is made and the note is surrendered. 


Next problem to consider is default.  What happens if the payer defaults or skips payments?  Who has the obligation to contact the payer to correct the problem before legal action is taken?  Is that person the one with the most to lose? Who has the right to foreclose?  Who is going to pay for it?  Do you and the buyer own the property after foreclosure?  There could be many questions and few clear answers.


Lastly, what if the buyer goes out of business or into bankruptcy before he releases your note back to you?  What will you do without the note?  Are the courts going to take your interest in the note into consideration or will the note become just another asset to bulk together with the rest of the assets of the company or buyer that went bankrupt or is no longer in business.  What will it cost to get it back?  Is it going to be worth it?  Did the payor make all the payments to the buyer of your partial?  How will you prove this?  Again many questions and few clear answers.


Azua Capital Investments recommends that if you are considering selling your note to raise money, then you should sell the whole note and step out of the picture completely.  Use the portion that you were going to get from the partial sale and invest the other in a new venture. This way if problems with the payor or buyer arise, you are no longer involved. 


We have just seen the tip of the iceberg and you should always ask a lot of questions and put the answers in writing.  Which ever route you take full or partial make sure all your questions are answered.



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