A note seller contacted me very upset with a particular note buyer whose contract stated that from the date of the contract, the note buyer will have the rights to the next payment, and all further payments until the note is sold. In other words, say the contract was signed on the 27th of August, the note buyer would be entitled to the September 1st payment and all future payments. This can open up a whole "can of worms".

To add insult to injury, this note buyer prolonged the due diligence process where the actual closing was to take place October 4th. With the payments being $2,000 a month, the seller had an unpleasant surprise to discover at closing she was to receive $4,000 less than expected. She then asked me for legal advice I could not provide.

The point is to ask your note buyer for a copy of their contract BEFORE you commit to selling your note. If the contract does state the note buyer is entitled to payments, even though they do not own the note, I suggest you ask them WHY? Is this not the same as my putting a contract on your rental property, and demanding I be entitled to all the rents before I actually close on the property?

Another issue to be considered is what happens in the event that after an appraisal, the property value comes in lower than what the contract stated. For example, say your property sold for $110,000 and you took back a note for $90,000. If you were offered $80,000 by your note buyer, the offer was based on the property being worth AT LEAST $100,000 today. If the appraisal comes back at $85,000, of course the purchase price of your note is going to have to be adjusted to reflect the true value of the property. Make sure this adjusted price is NEGOTIABLE and not predetermined in your note sale contract, or you might be in a situation where you are forced to take a price you would never have agreed upon.

To summarize, BE SURE TO READ YOUR CONTRACT BEFORE COMMITTING TO AN OFFER. This way there will be no unpleasant surprises at closing, not to mention it is just prudent business.

If you have questions on notes or yields Contact Me
I will be happy to discuss your specifics.

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Because I had prior commitments, regretfully I will not be able to speak at this years NoteWorthy Convention. It will be held Nov. 10th thru 12th. I urge all who have not attended to take advantage of the wealth of knowledge you will receive. Go to www.noteworthyconvention .com and register. When you get there, tell Clint and the gang I said "Howdy" from Texas

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False Economic Theories

There are several false economic theories that are being passed off as "accepted", but the Paradox of Thrift fallacy is one that I have heard three times in three days, from three different "experts". It is almost as if it is to be the talking point of the week. All of these pundits would do well to read Bastiat's, "What Is Seen and What Is Not Seen".

The most recent I heard it was from a Saturday morning radio talk show host who advised one of his listeners to google Paradox of Thrift. He went on to state that it was an "accepted" theory. Accepted by whom is not mentioned. (It is accepted by poor economists like Paul Krugman and others who still support the defunct economist John M. Keynes, who is attributed to giving rise to this theory. ) BTW, have you noticed when "experts" do not have arguments to support their premises, they merely say "It is accepted".

In a nutshell, the Paradox of Thrift says that if "consumers" save, they will not be spending. If they do not spend, then local merchants will suffer and we will end up in a depression. In other words, consumers cause depressions, and savings is undesirable. BOVINE SCATOLOGY!

The major fallacy being perpetrated is that there is a difference between production and consumption, and that consumption alone will "stimulate" the economy, without acknowledging that in the real world, you can only consume what is produced. The "paradox" is also based on the false premise that money not spent immediately is not spent.

What is ignored is that ALL MONEY IS SPENT. It is just a matter of when and in what form. Savings merely means the producer has decided not to spend his/her production (income) now, but rather sometime in the future. Moreover, without "thrift" or savings, there would be no real capital available for growth. Is this not what we are experiencing today? Savings declined to practically nil in the last decade, and as a result, banks have no money to lend. Remember, printed money is not REAL CAPITAL or production. It is merely paper.

Let's take a real estate example. Say a young couple decide they want to buy a house for $100k. In order to qualify for a loan, they must have $20k down. The couple decide rather than spend their income (production) on other goods and services now, they will save part of their earnings in order to purchase a house. All they have done is decided to spend their money at a later date. The local merchants will indeed miss this young couple spending at their stores, but everyone from the local real estate agent, funders, appraisers, not to mention the delighted home seller, will benefit when they do "spend" their $20,000 as a down payment, some time in the future.

Moreover, is this young couple not going to want some furniture, appliances, garden hoses, and other goods and services connected to home ownership after they purchase their home? Now the local merchants start receiving benefits from the young couple's waiting to spend their income. In short, this money was "spent". Just not today. More importantly, look at all who benefited from the young couple's being thrifty.

The Paradox of Thrift "sees" that immediately local merchants would suffer. What is not seen is the consumers who borrow the young couple's savings, and "spend" to purchase goods and services, and the merchants who benefit from the savings, nor the benefits the local merchants will receive in the future.

Next let's examine what is done with their evil savings before the couple purchase their home. When they deposit their savings into an institution, let's say a bank, this institution will "spend" this savings in the form of loans. Everything from cars, tv's, to short term 90 day loans will be borrowed by other consumers or businesses. Most importantly, this savings is REAL money that was produced, not just paper printed. Is it becoming clear that not only do those in the real estate industry benefit from the young couple's saving up to purchase a house, but also the auto industry, appliance industry, and other businesses that used this couple's savings to spend. In short, savings are spent, even before the house is purchased, only it is in the form of loans.

Let's now look at what happens when we accept the Paradox of Thrift fantasy. This same young couple, being good citizens, will spend all they earn. The local merchants will benefit, and all is right with the world. But what about the home seller, appraisers, real estate agents, not to mention other consumers who will not be able to purchase cars, tv's, appliances etc, because the bank has no REAL capital to lend. We have not even delved into the prospect that a "rainy day" arrives and the young couple have no savings to "spend now", because they spent it all in the past.

In summary, when you hear the Paradox of Thrift argument as being "accepted", ask by whom, but more importantly by what major premise is the Paradox of Thrift based? It is based on the idiotic assumption unless money is spent immediately, it is not spent. We have shown where this assumption is false. Secondly, it ignores the economic reality that without savings, there is no REAL CAPITAL to finance economic growth. Rather than being the cause of recessions, SAVINGS IS AN INTEGRAL PART OF ECONOMIC GROWTH. The opposite is also true, WITHOUT SAVINGS, DEPRESSIONS OCCUR!

I receive emails regarding my Economic Observation column. Sorry I cannot address them all. If you do have a comment or question, please Contact Me.

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