I am receiving more and more notes lately that have not been structured to make a note appealing to Note Buyers. Let's revisit some basics, especially since the credit crunch has changed the rules for a year or so. I am seeing motivated sellers who are using seller financing out of desperation, and as a result are letting their buyers take command of the sale. Especially with owner financing, you want to be in control going out the gate.

Even if you want to keep your note for cash flow, but especially if you want to sell your note, remember, there are certain general guidelines you should know. This article will address some general guidelines.

Notes are valued in what I call the 3 P's. The PEOPLE, the PROPERTY, and the PAPER; meaning
a. the credit worthiness the Payors,
b. the value of the Property,
c. and the terms or conditions of the Paper, or note.

Starting with the PEOPLE, obtain a credit application on your prospective payors. If you do not have one, CONTACT ME, and I will send you one. It will include employment, assets, liabilities etc.

First, look this over and ask yourself.
Do the payors look like they can afford the house payments, along with their other bills? If not, you might want to consider moving on to another buyer.

Second, you want to be able see their credit report. If you are not able to pull credit, have your buyers pull their own credit by going to www.myfico.com. (This is the only way to get a true credit report) This will cost around $50. If your prospective buyers cannot afford $50 or so to pull their own credit, what is this telling you? MOVE ON.

Third, if they have a sub 600, at best you are going to have to settle for a partial purchase of your note, and if you want to sell all of your note, you are not going to like the price. If your prospective buyers have above 600 credit, you are in the game to sell your note.

Next Note Buyers will examine the PROPERTY. The biggest mistake I see being made is sellers over pricing their property to make up for the owner financing. If you plan to keep your note, this is perfectly fine. But realize that by inflating the price of your property, you have eliminated the chance your payors can refinance. Moreover, when you go to sell your note to a Note Buyer, we will do a BPO to determine the value of the property. Just as a lender is not going to refinance a note for $110,000 when the property is worth only $95,000: a Note Buyer is going to adjust his/her price to purchase a note, based on the equity on the note to the property's value. As a rule, Note Buyers will want a minimum of 75% ITV (Investment to Value) when purchasing a note. This is why it is IMPORTANT, to get as much down as possible. I suggest 10% minimum, but if the credit scores are low, DEMAND 15% to 20% down. Statistics show that no matter the credit score, the chances of foreclosure decrease in proportion to the down payment. In other words, if you have a house for sale for $150,000 and a buyer with a 580 credit score he/she puts $3,000 down and you carry a note for the rest, this is not going to make Note Buyers feel warm and fuzzy. Equity in the note, meaning the balance of the note related to the market value has replaced yield as the number one factor in determining a note's value. SMALL DOWN PAYMENTS TRANSLATE INTO STEEP DISCOUNT!

Last we come to the PAPER, or the Note. In todays market, you want to charge at least between 9% and 10%. Do not inflate the interest rate to the point the payors cannot pay. . If you are going to sell your note, stay clear of short fuse balloons of 5 years or less. Short term balloons will usually get an offer by a Note Buyer to either buy the payments, and let the note holder keep the balloon, or assume the note is going to have to be renewed indefinitely, and price the note as a self liquidating loan for 20 years. In other words, make the interest and terms realistic. Assuming a payor can pay 15%, and refinance in 3 years, especially if the property was inflated, is not realistic. Note buyers like non hassle notes that are going to pay like clock work, not outlandish interest or terms, that are foreclosures in embryo.

For more details, you can go to my website, www .hpnotes.com, and click on NOTE STORE. You can download a FREE article CHECKLIST FOR OWNER FINANCING. This information will save you thousands if you are going to sell your note, not to mentions avoiding aggravations, and confusion.

If structuring your note correctly is important to you, whether you want to keep your note or sell it, please CONTACT ME. I look forward to hearing from you.

Copyright © H&P Capital Investments LLC. All rights reserved

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MYTH OF FREE MARKET- MONOPOLY

One of the questions I received from last months Economic article was, How do you keep a firm from becoming a monopoly and controlling a market if there is not government interference. (Politicians)

I responded with two questions:
1.) How do you define monopoly
2.) How does a firm become a monopoly in a free market system?

There is no greater myth that distorts the free market system more than believing natural monopolies are harmful. I am going to concentrate on how a firm becomes a monopoly in a free market system. (No matter how you want to define monopoly) ANSWER: By providing a good or service more efficiently and/or at a lower price than competitors. Is it not economic justice to acquire more of a market if you can produce more efficiently and at a lower price?

But Tom, you say, "What about the robber barons and all the atrocities committed by corporations in the late 19th century." Where the confusion, and yes, deception comes into play is equating political entrepreneurs with market entrepreneurs. It was the political entrepreneurs, who obtained their markets by political favors of subsidies and laws which eliminated competition.

These political firms achieved a monopoly, not by being efficient but by laws and regulations. Because laws protected these firms from competition, they were free to raise prices and reduce services. These political entrepreneurs were the Robber Barons. However, history books lump the market entrepreneurs into the same class as political entrepreneurs, and more often than not, it will be the market entrepreneur whose name comes up when thinking of monopolies.

A brief history into Standard Oil will be a case in point. No myth of robber barons is more prevalent than that of J. D. Rockefeller. In the early 1900s, the main source for artificial lighting was whale oil and sperm oil. As demand increased, sperm oil rose from 43 cents a gallon in 1823 to $2.55 in 1866. Whale oil's price rose from 23 cents in 1832 to $1.55 in 1866. In 1846 Abraham Gesner discovered how to make kerosene from oil cheaper than the cost of whale oil. By 1867 there were several hundred firms refining oil into kerosene, which probably is why there are still sperm whales left today, because producing kerosene from oil became cheaper than producing kerosene from whale oil.

Enter J.D. Rockefeller. He started his oil career with a modest investment of $4,000. Rockefeller was a doer. He pioneered new technology for extracting oil that increased production from a few barrels a week to over 3,000 barrels a week. Unlike political entrepreneurs, Rockefeller personally supervised much of his operation, and performed manual labor to continually look for ways to cut costs. For example, he found he could cut costs by manufacturing his own barrels and wagons. By doing so, not only did he not have to worry about being slowed down by depending on others to supply barrels and wagons, he manufactured them near his refineries to save on transportation costs. As a result of his efficient operations, the price of kerosene fell from 30 cents a gallon in 1869 to 5.9 cents a gallon in 1897. To eliminate waste and increase profits, his chemists figured out how to produce such oil byproducts as lubricating oil, gasoline, paraffin wax, Vaseline, paint, varnish, and about three hundred other substances. Rockefeller turned waste into profit. In contrast, his competitors would dump their waste into rivers and the land.

Today, it does not seem like a big thing to have cheap kerosene. However, in the mid 1800s, having cheap, accessible light when the sun went down revolutionize peoples life styles. To have affordable means of lighting at night meant that individuals could work, play, read and function when night fell. We take it for granted now, but tonight, I want you to think how you would function without lighting.

Is it any wonder when there is an innovative force like J.D. Rockefeller at the helm, other refineries with less talent and initiative than Rockefeller would not be able to keep up? Did Rockefeller sell his product cheaper than his competition? Yep. But he also was able to lower cost, and therefore sell at a lower price. He made only 2 cent a gallon profit. This was not predatory pricing as he was charged, but supplying a superior good at a lower price. As a result by 1897 Standard Oil had 88% of the market? Did the consumer mind that kerosene was so cheap? I don't think so.

Rockefeller started buying up many refineries of his competitors that could not match Rockefeller's efficient methods of producing. He was accused of dog eat dog tactics.

Yet the major complaint of Rockefeller's competitors was he got rebates from the railroads, which gave him unfair advantage and an un level playing field. (Do these terms sound familiar?) What is conveniently omitted was the amount of rebate was conditional on the amount of oil shipped. If competitors could have matched Rockefeller's production; they would have gotten the same rebate. The unfair advantage Rockefeller commanded was the ability to produce a product at a cheaper price by holding down costs, and produce more of it.

Not having the ability to compete with Rockefeller, his competitors accomplished through the courts what they could not accomplish in the market. Politicians were bribed and anti trust charges were levied against Standard Oil. Were these charges a result of increasing prices? Nope, Rockefeller lowered prices. Were the charges a result of lowering supply? Nope again; supply increased. Did the consumer benefit from lower prices? Yep.

Who then benefits from anti trust suits? Competitors who cannot compete in the market, and demand a level playing field by the courts. When ever you see or hear the term level the playing field, you know someone who lacks ability wants protection from those who have ability.

But Tom, when Standard Oil had almost 90% of the market, could it not raise their prices to milk the consumer? The answer is Yes, but why? Raising prices invites competition, which is counter productive, is it not?

Even though Rockefeller was extremely efficient, being human, he still made mistakes. Rockefeller failed to see beyond his own empire, and miscalculated the presence of oil in Texas. He did not believe there was any marketable oil in Texas and Oklahoma. Companies like Gulf, Humble and Texaco sprang up out of the blue. As a result, Standard Oil's market share declined from almost 90%in 1897 to 64%, and still declining in 1911, which was the year the courts decided Standard Oil was evil and needed to be busted up. Little attention was given that because of other market entrepreneurs, not court orders by government; firms which could operate as efficiently as Rockefeller were being formed. As a result, Standard Oil's market share declined because of free markets, not because of anti trust laws.

Remember when General Motors was taking heat for being a monopoly? Where are they now? How about IBM? Where are they now? Did anti trust laws or the free markets cause their decline in market shares?

Summary: Monopolies in free markets are formed by firms producing an efficient product at a lower price than his/her competitors. When firms like Standard Oil EARNS a high market share, it is because they are more efficient than their competition. Moreover, being able to provide a superior product at a cheaper price, benefits consumers, rather than takes advantage of them. J.D. Rockefeller and Standard Oil are just one example of how history books omit that prices of kerosene decreased, not increased, because of Rockefeller, as well as supply of kerosene increased, not decreased. The next time someone comments that free markets should be bridled to prevent monopolies, ask the question, How does a firm become a monopoly in a free market system? Next remind them about J.D. Rockefeller and ASK, Who benefited from his superior ability to produce? ANSWER: The consumers who were able to provide their dwellings and work place with cheap, artificial lighting, while at the same time probably preventing the sperm whales to become extinct. The argument that politicians must bridle those who are efficient at producing or they will take advantage of consumers is a myth.

If you have a question or comment, please CONTACT ME. It is from your feedback that I get my topics.

If you would like to attend a short, inexpensive half day seminar to learn economics in easy to understand laymen terms, and how it relates to today's environment, please contact me with a short note give me an idea of what you would like to understand.

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