EP69: Mortgage Note Partials - The How & Why

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In this episode, we talk about "mortgage note partials" Rick breaks down all of the details of how and why you would sell and purchase a partial. 

If you're new to the mortgage note space, a partial could be a great entry point to investing in mortgage notes. 

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Transcript

ep69-mortgage-note-partials-the-how-why 
 

Announcer: Coming to you from Sunny Orlando, Florida. Welcome to the Paperstac Podcast, where we cover current topics in the note industry, give you tactics for your note business, and talk with industry leaders to make you a better note investor. And now your hosts, Brett Burky and Rick Allen.[00:00:00]  
 

Rick Allen: Coming to you from sunny Orlando, Florida, welcome to the paper stack podcast, where we cover current topics in the note industry, give you tactics for your note business and talk with industry leaders to make you a better note investor. And now your hosts, Brett Berkey and Rick Allen. Welcome back. 

Rick Allen: Another episode of the paper stack podcast. It's been a couple of weeks. We've had lots of fun. Do  

Brett Burky: you like our new office? 

Rick Allen: We were,  

Brett Burky: oh man, we were moving offices.  

Rick Allen: We were this close. We had a an office set we were going through and, they were, we were negotiating, they wanted a triple net lease, which is. If you don't know what a triple net lease is, they want us to pay part of the property taxes, part of the tax, the insurance on the property, and then fees, like maintenance fees. 

Rick Allen: And, we're renting two rooms. So it's, I'm like it's not a whole [00:01:00] building. It's not, we're not renting the whole building. And, we're not going to do that. So we renegotiated with them and got them to like, look, we'll do, 1500 bucks or whatever the rent was going to be. 

Rick Allen: Plus we'll pay three quarters of the utilities for the floor and agreed, gave the lady money for the background checks and all that stuff. And then they send over lease terms and it's they totally just. Bait and switched it and now they were like you're going to have to pay for three quarters of the maintenance on the property and any repairs. 

Rick Allen: And I'm like you already told me there's more, there's a leaky roof and mold. Like I'm not ordering an inspection. That's no, that's not the way this is going to work. So yeah, we had to divert our attention or divert where we're going. And now actually I  

Brett Burky: think it's going to work out better. 

Brett Burky: I'm excited. There's a lot of really nice places to eat around there.  

Rick Allen: We got a, we have a loft, so it's, it's a one bedroom. It's not a loft, it's a one bedroom  

Brett Burky: apartment. Yeah, that was a, that has the gym, has the pools. Yeah, it's  

Rick Allen: it's a whole thing. So [00:02:00] it's going to wind up being probably less money, but it's in a, it's in a great  

Brett Burky: area. 
 

Brett Burky: Fridge and everything. Shower. Yeah, I like, it's a condo. It's a, yeah.  

Rick Allen: Hot water heater. Closets so we can hang clothing and anything else. There's a washer  

Brett Burky: and dryer. Garbage  

Rick Allen: disposal. No, so it'll be great. We'll be able to, it's going to meet our needs. We'll have a whole new studio, some new set design. 

Rick Allen: Can't wait. Leave in the comments, what would you do if somebody did the old bait and switch on you? Would you? Trying to renegotiate or my thought was it's Hey, this is what you're doing now. We're not even under contract with you and you're already changing things up. I'm not, that's not who I want to do business with. 

Rick Allen: So we just said, I'm pulling the rip cord because they were going to start working backing into our numbers again. But I was just like, now we're just going  

Brett Burky: to change course. Yeah, no, I think it's for the better. I like the idea of, I was like, why can't we go to a loft? Why can't we stay here? 

Rick Allen: That was Brett's idea. Full credit. Yeah,  

Brett Burky: we'll just get a condo, yep. And so it was fun. So anyhow, besides [00:03:00] that, so what we have today, dme. DME is on the Verizon. Yes. DME is, we are a  

Rick Allen: couple weeks down.  

Brett Burky: Two. Two or two weeks. Two or  

Rick Allen: three weeks out. Yeah. DME check out this video that put together sponsoring the D M E event. 

Rick Allen: Over the last year and a half. Low interest rates and trillions of dollars in government support Has fueled record home price growth. The highest stock market in history and inflation rates higher than we've seen in decades. But as history shows us, what goes up also comes down. Clark Street Capital, one of the leading loan investment firms, recently said they believe the credit picture for banks is not as pristine as the numbers suggest. 

Rick Allen: As they put it, excessive stimulus has a way of covering up problems. 2022 is shaping up to be the year this all unfolds, which is why on March 10th and 11th, 2022, over 175 investors, private lenders, and industry experts will be meeting in St. Petersburg, Florida to network and learn at one of the top note investing conferences of the year. 

Rick Allen: The Diversified Mortgage Expo, or the [00:04:00] DME. This two day event will have speakers like industry expert Marina Walsh, the vice president of analytics at the Mortgage Bankers Association, and over a dozen experienced hedge fund managers and investors who collectively have managed billions of dollars worth of mortgage notes over the last decade. 

Rick Allen: Whether you invest in performing loans, non performing loans, first or second, a massive opportunity is coming and the Diversified Mortgage Expo can help you prepare to profit. To learn more about the event or register, visit diversifiedmortgageexpo. com. Again, to register or learn more about the DME. 

Rick Allen: Visit diversifiedmortgageexpo. com. So that's pretty good. It's a great event. You should come back, check it out. If you're planning on it, there's a nice, if you have the time and the ability, you can go to DME and then follow it up three days later with a trip down south, to South Florida to see, go West Coast. 

Rick Allen: St. Pete area, East Coast [00:05:00] down to, was it Fort Lauderdale? It's going to Palm Beach. Palm Beach, IMN. So we're going to be at both of those events.  

Brett Burky: So many people doing it too. I think we just might get a party bus. We probably  

Rick Allen: won't. We probably won't. But at least you come on down there, hang out, say hello, come, grab a beer with Brett and I. 

Rick Allen: It'll be fun.  

Brett Burky: Yeah, it'll be fun. Yeah, DME, I'm really looking forward to DME. There's some people I have never seen in person, so it'll be cool to meet everyone there. Some good speakers, gonna be a lot of good booths, and it's a good atmosphere. That's a nice location, so I hope, Florida will be warmish by that time soon, you know if so? Who knows? Whatever,  

Rick Allen: 40, 42 degrees last week, or, bleh. Tuesday of this week and then we're gonna we're gonna hit like 82. Yeah, so it's just been it's like this is a florida winter In february is you if you fluctuate 40 degree fluctuations And you know just a week and a half ago. We had freezing temperatures. 

Rick Allen: So yeah, it's nuts But yeah, usually by march [00:06:00] You hit That's when it's pretty. That's when it's real nice. It's 72 to 77, 78  

Brett Burky: and it's just perfect. It's the best time of the year. Worst time of the year. September for sure. Oh, yeah. But anyhow, so the topic of today is something that I get quite often for people that are maybe just getting the space, but also on the opposite end where people are wanting to sell one of these, they are called partials. 

Brett Burky: And so if you don't know what a partial is. It's basically a certain number of payments on a mortgage that you are purchasing. You're not purchasing the whole, let's just pretend it's a 30 year. You're not purchasing all 360. You've agreed to purchase 100  

Rick Allen: and that original... Or sell. You've agreed to purchase or sell  

Brett Burky: a partial. 

Brett Burky: And you keep that for a certain period of time. Somehow with the servicer that is divided, only certain servicers do partials. But as someone getting into the space... It is nice knowing that you have a pro that maybe already has the note and if there was something to go wrong, to go non performing, that person steps in, takes over. 

Brett Burky: So it's it's nice. But [00:07:00] we have people asking. So if you are interested in partials, we do have a list. Just reach out to hello at paper stack and I'll put you on the list and when we get them, we'll send you that way. But Rick has had some experience with some partials. He's done them. 

Rick Allen: Tell us a little about them. So the question is why? Why? Why would you like, why would I buy a partial? Why would I sell a partial? What are the benefits? What are the cons? Pros  

Brett Burky: and cons. Yeah, start with the buys because I, when this sell is pretty cool too, but start with the buy. 

Rick Allen: We'll start with the buy. So what would be some of the reasons to buy a partial? One of them is you have limited funds available, right? If you have limited capital available, but you still want to get capital going, you want to start making an investment. How do you do it? A partial is a great way to do it. 

Rick Allen: And one of the reasons a couple of the reasons are you've touched on them is one you're buying a partial on something that's already performing right to if somebody is selling a partial they're probably they've got experience in the note space and they've gone ahead and they've got an asset that's performing and they're looking to recuperate a chunk of capital and if the [00:08:00] deal goes bad they're going to be highly motivated to keep the deal going or at least to step in and get a Get the borrowers paying again. 

Rick Allen: Like you said, it's a great way as your first sort of venture into the note space to do it with limited funds and also to do it with a professional backing you as a backstop should things go wrong. True. Yeah. And a lot of times you can get, if you start buying assets and you have a lot of funds is sometimes to get really, you can get really aggressive returns. 

Rick Allen: Very aggressive returns doing a partial as a seller or buyer as a buyer, okay, as a seller to, of course, as a seller, but as a buyer, if you're buying something from, say, it's a private seller who they don't do a lot of partials and they don't want to sell you the whole loan, but they want to sell you some of the loan. 

Rick Allen: You say have you ever considered bye. 

Rick Allen: Bye. You can offer and there's certain ways that [00:09:00] you can offer them to buy the partial where you can, what would be like a 12 or 13% return buying the whole loan starts looking at 30, 35% really buying a partial. Yeah, how does that work? How does that work? Oh, that's that's part of the training. 

Rick Allen: That's part of the training paper stack academy. I'll show you that. Okay. But there, there's ways to do it to where you can really turbo charge your returns. It's  

Brett Burky: yeah. So what is the amounts for so I guess this is like a loaded question, but like to get a partial, are you talking to your 5, 000 or do  

Rick Allen: you still, that's the great thing about it is you can buy 12 months worth of payments. 

Rick Allen: And if there's a three, or 400 payment and you're like, look, I'll give you five grand for the next. What is that? No, you wouldn't do that. You'd be losing there. You say, maybe I give you 4, 000 for the next 12 months in payments. You make 800, right? And so 4, 800 for, you're making 20% return. 

Rick Allen: And somebody is getting 4, 800 up or 4, 000 up front. It's really, it's a great way to get in there because Most of the time, if you have a [00:10:00] seller who's willing to sell you a partial, you can structure it with how much money you have available. So there's no  

Brett Burky: structure. There's no oh, these are always good for 5, 10. 

Rick Allen: No, there's no set way to do it. That's the beautiful thing about it. This is how much money I have and I can buy this many months. Exactly. And you can say I'll buy the next, the next 14 months and I'm looking, I'm trying to target this return. I'm looking for a 12% return or a 14 or a 20% return, right? 

Rick Allen: And I want to do it over the next 12 or 14 months. Interesting. And so you get somebody like, yeah, I'll take the four grand now. And so it's backed by real estate and such a great way to get in there as a buyer and start doing it with little to no money. So who pays for the servicing? It would come, it would be on the, as a responsibility of the person that buys it. 

Rick Allen: So you need to figure the servicing cost into, to the partial buyer  

Brett Burky: is paying for servicing. And then if it defaults happening and it goes non performing, who's  

Rick Allen: paying for servicing then? That's, it's all that all comes down to how [00:11:00] was the partial agreement written? Got  

Brett Burky: it. Okay. So each  

Rick Allen: one's a structured difference. 

Rick Allen: Everything is structured different.  

Announcer: Are you new to the mortgage note industry? Have you been wanting to learn the step by step process to purchase your first mortgage note? Well, you're in luck! We've convinced our CEO Rick Allen to break down everything he knows about mortgage note investing. Through a series of 50 videos, you'll get everything from start to finish of where to purchase notes, how to purchase notes, and all of Rick's investing techniques he has developed over the many years. 

Announcer: From performing note tactics to non performing notes. Rick gives you everything he knows about investing. Bonuses include our glossary of industry terms, Rick's own proprietary calculators he created to evaluate notes, discounts from our partners, our Rolodexa vendors, a private Facebook group, along with a lot more. 

Announcer: We've packed so much content into the Academy to take you from beginner to expert in no time. [00:12:00] To learn more about the Academy, Go to academy. paperstack. com slash welcome. Again, that is academy. paperstack. com slash welcome. 

Brett Burky: And I know Certain servicers don't do partials. I only, when I know that does, I think is FCI. FCI  

Rick Allen: does partials. There's a couple of them out there. We can on the support at paperstack. com page, we will have listed on if they service partials or not on under the servicers. 

Rick Allen: FCI definitely handles partials.  

Brett Burky: Because you've done them there. Yeah. And that works like, so the borrower sends in the funds, there's something in the FCAI system that says this is a partial, and they know not to send it to here, but send it to here. Correct. That's it. And for this amount of time, it goes here, just like a, maybe setting up like a bill pay in your account Bill pay this one for the next 15 months goes here and after that, cut it off. 

Brett Burky: Exactly. Okay. All right. So now that's some of the  

Rick Allen: really interesting things on the buyer side. So the seller side is pretty cool. Tell them, just tell some of the, so the seller side is why would I ever want to just sell? A [00:13:00] chunk of notes. There's a couple of different reasons. 

Rick Allen: Maybe you're running into something where you're, I don't know, you've got a portfolio of notes and you're like I need to make a big chunk of money right now, or I need a big chunk of funds because my daughter's getting married. I need to pay for a wedding. We'll just use that, right? 

Rick Allen: You can sell them a portion of your notes. To get that chunk of money, but you're not selling the whole note. Yeah, right So you're losing out on some income there, but you're getting a big chunk of money up front And it allows somebody else to collect those payments and you know They're gonna have their targeted returns of 10 15 18. 

Rick Allen: I don't know 20 And you gotta look at it and say does it make sense? It's expensive money, but if you need the money, it's good. You can keep Right? You're like at least I'm, I have that coming back to me. Another reason that if you're somebody who's out there marketing for notes, or you find a note, maybe on paper stack, and I've seen this happen, where it's a high interest rate, maybe low balance, and the purchase price on there is you [00:14:00] could buy a loan and then turn around and resell a partial on that loan. 

Rick Allen: And maybe there's 18 years left on the thing. Okay. And you can sell the partial. At a 12 or 14% return and cover your purchase price of the loan. And then you keep the last eight years on the loan. So it can be in a situation where in yourself and any speed calls at the a hundred dollar model to where you got to leave a hundred dollars in there to be considered consideration with the IRS. 

Rick Allen: And of course, go talk to your accountant and your attorneys because I'm neither. But. If you're buying with your self directed retirement account, you can just start buying these things and leaving 100 in each deal. And, if you bought it for 30, 000 and you sold it for 30, 100, and then you're keeping the last 15, 000 or 16, 000 in your IRA, that's going to come in later on. 

Rick Allen: You're just collecting tax You're just collecting tax free money, and it's only costing you 100 for 15 grand, and you're not going to see that for a while, [00:15:00] so this is a great play for somebody who's got a self directed retirement account with, limited funds in there that wants to start building it up. 

Rick Allen: They're not retiring next year. I know  

Brett Burky: a guy who does that. Josh Andrews he wrote Proffert, oh, I forgot the name of his book, it's a green book, I had it, got it all wet, used to bring it to the pool. But I keep getting on him because he was supposed to write a book about partials, and then he never did, but his strategy was pretty slick. 

Brett Burky: He would do that exact model, and he would keep it, he's, he's probably maybe 41, 40, he's young, so he's keeping that, and that's his retirement account. So he's just, you just put it in there, put it in there and buy them. He has this, he had stuff sold before  

he  

Brett Burky: would buy it. 

Brett Burky: He would be on paper stack and he would buy the note and he already has it sold  

Rick Allen: on the other. Yeah. And that's what you do. You already have it sold. And so it's like super easy.  

Brett Burky: And you just come in and get it, boom, switch it, doom. And then just, he has, I think he has a maybe regular, I don't know if he has a full time job, but like he did, but. 

Brett Burky: In a couple of years, he's just going to collect all that money eventually and just sit there. I was, it was brilliant. I saw him at a paper [00:16:00] source when he told me that I was like, that's a really  

Rick Allen: good story, man. Yeah. And so like we had one where we bought a non performing loan and this is like a home run. 

Rick Allen: Home run scenario, bought up a non performing loan for 15 grand. They owed 70. Okay. Or 75 on the back end, or it was, they owed a lot and ended up, they gave us four grand up front, failed on their forbearance agreement, ended up getting a hardest hit fund, which wrote a check for 30 grand to get them to catch him up past due. 

Rick Allen: And I think there was still a 50 left of principal balance that they owed. And we were already, we'd already made back, yeah, you're already, we're already like 20 grand ahead. And so you can turn around and sell that partial for, or you could sell the whole loan and you could, or you could sell that partial and be like, look, we'll just sell, chunks of that and give ahead. 

Rick Allen: So wait, but it was still not performing, right? No, it was performing at that point.  

Brett Burky: So you got so wow, so let me see [00:17:00] here.  

Rick Allen: So they gave me four thousand dollars down there Yeah, four thousand down then she made about three or four grand worth of payments and then defaulted And then you got the thirty thousand from the heart I got thirty thousand from the hardest hit fund and then the hardest hit fund paid the next 24 months of Payments for her and then turn around and sell the partial. 

Rick Allen: Holy crap, man that was a really good one.  

Brett Burky: Yeah, that's a really good one. Yeah, those are good.  

Rick Allen: Wow.  
 

Brett Burky: And how'd you,  

Rick Allen: how'd you market the partial? How'd you do that? Just through talking to people, just, Hey, we got, you guys want to buy a partial on the note? Yeah, sure. 

Rick Allen: Okay. Did that one ever, is that one still going or? Oh, we ended up getting it and then selling the whole loan later on. Did you really? Yeah. Wow, you really killed it with that one. Yeah, that was a really good deal. Wow. And the nice thing about doing the partials is if you're selling it and you get a loan that you've restarted up front, right? 

Rick Allen: So maybe it was not performing, you turn around and you convert it to performing. And one of the things you do to help people [00:18:00] out, you say, look, we're going to restart your loan. We're going to set it at 360 months. It's a 30 year  

Brett Burky: loan. So you restarted the clock.  

Rick Allen: You restart the clock. Maybe you adjusted the interest rate or not. 

Rick Allen: Maybe you left it the same and you didn't touch the principal and you just said, look, we're going to restart it. That's how we'll get you there. We'll extend your loan. The nice thing about that is, is once you do that, it resets the entire amortization schedule and you can sell a loan. That's brand new, that's got, the next 10 years of payments coming is pretty much all interest. 

Rick Allen: And so when you get it reassigned back to you, you've still got a large principal balance there. And that's called the entitlement balance.  

Brett Burky: What is the entitlement balance?  

Rick Allen: So the way it works is you might say, there's an entitlement balance, and that's what's it, the entitlement balance is for the the person that buys it, but there's basically two balances that you're looking at, three balances. 

Rick Allen: You're looking at the balance [00:19:00] that is owed to the person that bought the partial, right? Then there's the whenever it's reassigned, there's that balance. Okay. And then there's  

Brett Burky: the current principal balance. Wait a second. With these  

Rick Allen: partials you sign an assignment of mortgage? It's a specific kind of assignment of mortgage, but it's for a certain period of time. 

Rick Allen: Like I said, the paperwork on it is, which is why we don't have all the paperwork on paper  

Brett Burky: stack at this point. Yeah, I remember when we tried to do that, I was like, oh my gosh. It's  

Rick Allen: just, it's just a lot. It'll come eventually. It's just something that's... It was  

Brett Burky: just too, it's not as easy as buying a mortgage where you're like, okay, this is  

Rick Allen: selling a whole loan is a lot less technical when you start selling it. 

Rick Allen: There's a lot of, yeah. And there's a lot of like customizable stuff in there. So right now, no, probably within the next 24 months. Yes. Once we get the new dev team and get. Really it's once we get our enterprise product up there because the way the contracts will be done there, you can, there'll be more modular. 

Rick Allen: Yeah. Easier to modify. [00:20:00] Good  

Brett Burky: stuff. All right. Good. I learned some stuff about partials. Didn't even talk about that crazy word. Hypothification. 

Brett Burky: I still don't have  

Rick Allen: No.  
 

Brett Burky: Hypothecation. Yeah. It's, if you want to look it up. It's like a partial, but. So  

Rick Allen: it's just a different kind of a partial. So you can sell, instead of assigning like a whole payment, you're basically getting a line of credit or something against the mortgage. 

Rick Allen: Yeah, but you're like, you're so instead of if you have a thousand dollar payment. So typically in a partial, you may sell the whole thousand dollars, the whole thousand dollars. And so for a given number of years, you're not getting the thousand dollars. Somebody else is getting it. And hypothecation, it may be like you're getting a large chunk of money. 

Rick Allen: And the way this works out is if it's a thousand dollar payment, you're getting. 400 and the other person's  

Brett Burky: getting 600. See, that's why we, that's why we didn't do it. It just  

Rick Allen: gets really hairy. There's a lot of ways to skin that cat. And and once you even have that, there's different negotiation [00:21:00] points, like you said, who pays servicing, who handles default what happens after X amount of years for entitlement, but just, there's just a lot that goes into it. 

Brett Burky: There's a guy, if you're listening, his name is Tom Henderson. He's a part of the PaperSource kind of group. You can, I forget, just if you look up Tom Henderson mortgage notes, he puts out a newsletter and he's like the king of that. He is a king of hypothecation. He'll be at PaperSource, which will be  

Rick Allen: in May. 
 

Rick Allen: Vegas.  
 

Brett Burky: Yeah. And but he breaks down, like he does all, he sends out these newsletters and he'll have these different strategies and. He could have been in the notes for 15 years, and some of these things he's doing are just bizarre. Just really interesting ways of doing things. 

Brett Burky: Just creative.  

Rick Allen: That's the nice thing about notes is you can think outside the box. There is no box. You can just create your own world. Yeah, it's interesting. If you can dream it, you can do it. So  

Brett Burky: nice. All right. Cool. Next time, hopefully we'll see you in a different studio.  

Rick Allen: Maybe not. 

Rick Allen: I don't know. But Unless we're going to record another podcast right after this one.  

Brett Burky: I [00:22:00] always wear this shirt. Yeah, we might, who knows. We might get you today. Alright, that's it for today. We'll talk to you soon. Thanks.