During the pre-qualifying interview, you learn that your client is holding a $125,000 note, secured by a commercial building that he sold along with his auto body business. The note is earning a 10% interest rate payable over 30 years. Although the buyer came in with $50,000 cash, that amount only covered the purchase of the trade fixtures and the business. There was no equity applied toward the building purchase.

Further, his business has been doing well and he has made timely payments ($1,097 per month) for three years now. Today, the remaining balance on the note is $122,690, or 98% Loan-to-Value (LTV). In testing the waters, you learn that $91,832 would be the approximate sales price for your client's note, a discount of $30,858!

High Loan-to-Value

However, because of the high LTV of 98%, the most your client will be able to sell his note for now is $81,250, which is an Investment-to-Value of 65% (ITV). That's an additional $10,600 discount, or a total loss of $41,458. Whew!

Your client does not like the sound of that. He only needs $55,000 for his business opportunity and he was counting on some of the monthly note payments to help pay some of his daughter's college expenses.

Your local note broker suggests a partial purchase arrangement. By selling half of each monthly payment for the next 50 months, your client can get $20,000 cash today. That would leave him with a monthly note income of $547 to help with those college expenses. To get the remaining $35,000 your client needs, your local note broker would sell another 131 full payments, which the investor would begin to receive 50 months from now.

The Solution

From an investor's standpoint, he put up $57,500 ($2,500 to cover the note broker's fee), representing only 46% ITV. Because of the equity cushion and payment history, he accepts a lower return than he would otherwise.

By buying only a part of this note, the investor enjoys a 13% yield on a well-secured 15-year investment. In working the numbers, you show that your client receives the $55,000 he needs right now, plus a $547 monthly income ($27,350 total) for the next 4.17 years, to cover his daughter's college years. He also holds an interest in the note, which will have a balance of $91,460 when he starts receiving the monthly payments again in 15 years.

The three above figures represent $173,810 in cash benefits to your client. Even though your client fully understands the time-value-of-money, the realization that he is receiving $48,810 more than he sold the building for (not counting the $39,490 in monthly payments he has already received) sure sounds a whole lot better than selling the note outright!

No Additional Debt

Another benefit is that your client has avoided taking on any additional debt obligations that would have occurred had he borrowed the money from the bank. In addition, he still has a large asset (the remaining interest in the note, plus the partial monthly income) listed on his balance sheet. This leaves his financial statement much stronger should he have some long-term borrowing needs down the road.

Your client achieves his objectives, you close a sale, and you have created the potential for more business -- both with your client and his referrals!