Partial Sale

A partial sale is a transaction in which a mortgage note holder sells a defined portion of the loan's future cash flows to another investor while retaining ownership of the remaining payments. Rather than selling the entire note, the holder carves out a specific number of monthly payments — say, the next 60 out of a remaining 240 — and sells that stream at a discount. Once the sold payments are collected, the original note holder resumes receiving payments for the remainder of the loan term. For note investors, partial sales are a capital recycling strategy that accelerates the velocity of money without giving up long-term upside.

How a Partial Sale Works

The mechanics of a partial sale are straightforward once you understand the cash flow split:

1. The note holder identifies a performing or re-performing note with a predictable payment stream and a remaining term long enough to carve into segments.
2. A buyer agrees to purchase a defined number of payments. For example, the next 60 monthly payments of $500 each ($30,000 in total future cash flow).
3. The buyer pays a lump sum today for the right to receive those payments. The price is determined by the buyer's required yield and the net present value of the payment stream.
4. The servicer directs payments to the partial buyer for the agreed number of months.
5. After the partial period expires, payments revert to the original note holder for the remaining term of the loan.

In this example, the seller recovers 72% of their original investment immediately and still owns the note for the final 180 payments — a position with significant remaining value.

Why Note Investors Use Partial Sales

Partial sales solve a specific problem: capital is locked up in a long-term performing asset with no liquidity event on the horizon. The note is paying reliably, but the investor needs cash to deploy into new acquisitions. Selling the entire note would work, but it means giving up all future cash flow permanently. A partial sale splits the difference.

Common use cases include:

• Capital recycling. Recover your original investment (or most of it) while retaining the "tail" — the remaining payments after the partial period. The tail represents pure profit on a recouped basis.
• Portfolio balancing. Convert a portion of long-duration assets into cash without liquidating your entire performing portfolio.
• Funding new acquisitions. Use partial sale proceeds to purchase additional non-performing loans, work them out, and repeat the cycle.
• Reducing concentration risk. If too much capital is tied up in a single performing note, a partial sale reduces exposure while maintaining an ownership stake.

Pricing a Partial Sale

The price a partial buyer will pay depends on three factors:

The seller calculates the net present value of the partial payment stream at the buyer's target yield to arrive at the lump-sum price. Most partial sale transactions price at yields between 10% and 15%, depending on the credit quality of the underlying note and the collateral coverage.

Risks and Considerations

Partial sales are not risk-free for either party:

• Borrower default during the partial period. If the borrower stops paying during the months sold to the partial buyer, both parties are affected. The partial buyer receives no payments, and the original holder must decide whether to intervene. Clear contractual language about default responsibility is essential.
• Servicing complexity. The loan servicer must track the payment split and redirect funds accurately. Not all servicers are equipped or willing to administer partial arrangements.
• Buyer due diligence. The partial buyer should underwrite the note as thoroughly as if they were buying the whole loan — reviewing the collateral file, property value, borrower payment history, and lien position.
• Legal structure. The partial sale agreement must clearly define the number of payments, the start and end dates, default remedies, and the reversion of payments to the original holder. An attorney experienced in note transactions should draft or review the agreement.