Since it seems the credit crunch is going to be with us for a long time, having note knowledge in your "quiver" will definitely give you more "arrows" to shoot. Serious real estate investors need to move to the next level, and have more knowledge of note techniques than simply creating a note and selling it to a Note Buyer. Here is a basic note technique that will come in handy when you find a distressed seller who just wants out. It is also a "no money", or should I say no cash down.

Say you own a house worth $150,000 that has a $100,000 first on it. As we discussed in last month's issue, you now have $50,000 equity. You find a property you can pick up for $200,000, as is, which is free and clear. You believe with some minor repairs, you can make it worth $275,000. (Yes these types of deals are out there). However, you are in a state of financial embarrassment, and have only $3,000 to make the deal work. What can you offer?

Why not offer your $3,000 cash to pay for closing costs, then create a second lien note on your house for $17,000 as part of the down payment. Then have the seller and take back a note for $180,000 @ 6% for 30 yrs. If the distressed seller accepts your offer, and distressed sellers will accept almost any real offer, you now have gotten into $200,000 house for only $3,000 out of pocket expenses. Moreover, you are now in a position to start "wheelin and dealin".

For example, since this is an owner financed note where you were in control of the terms, you could structure it so there is no due on sale clause. Could you not IMMEDIATELY sell the house for $220,000 with 20,000 down and take back a note for $200,000 @ 9% for 40 YEARS, which "wraps around your $180,000 first. Now for the fun part. The payments you will receive from your wrap note is $1542.72; however, your underlying payment is only $1079.19. By higher mathematics, this is $463.53 cash flow each month.

What about the $20,000 down payment? If you have taken any of my courses, you know to get "built in discounts" by getting an option at closing to purchase your notes back at a discount if you pay off in a short period of time. The same is true of the $17,000 note you created on your house for part of the down payment. In this example, assume you had an option to purchase the $17,000 note for $14,000 if paid within one year. With the $20,000 you received from your buyer, you could purchase you $17,000 note back for only $14,000. This leaves you with $6,000 cash, which will reimburse you for your initial $3,000 down, as well as give you $3,000 in your pocket. Not bad, is it? (You do not have to be a professional NOTE BUYER to buy back your own note)

What else can we do that would be fun. Remember $180,000 first? If we got a built in discount for the option to purchase this note for $165,000, we are ready to start wheelin' and dealin' again. Why not go to your buyers who are paying on your wrap and offer them $10,000 CASH if they refinance within 6 months or a year? When they get a refi loan for $200,000, you will pay off the underlying lien for the discounted price of $165,000. With the remaining $35,000 cash, you give your buyers $10,000. This leaves you with a tidy $25,000 profit, plus the number months of payments you will have received. Everybody is smiling. Of course, many would be just as happy getting into the deal with virtually no money down, and receiving the $463.53 cash flow each month.

Are there any other scenarios using this technique? Yes, there are several, but this is all that time and space will permit in this issue. For those who took Gaylene's and my note workshop know we go into more detail, along with the paperwork, with this, as well as other techniques. I crunch the numbers and Gaylene adds her legal and title expertise. If you would like to get on our list to be the first notified of our next workshop, please CONTACT ME.
If you have a topic you want me to discuss, simple drop me a line. It is from your feed back that I get my topics. I look forward to hearing from you.

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The new Health Care law demonstrates how both parties completely ignore economic laws, namely the law of supply and the law of demand. Rather than examining why medical costs are so high, both parties concentrated on health insurance costs instead of medical costs. Trying to correct the high cost of insurance will not correct the high costs of medical services. Both parties were intent on using the "wisdom and brilliance" that only a politician can possess (Thank God) in bringing down the rising costs of health insurance. Neither party addressed the fact that health insurance costs are directly proportional to health care costs. If health care costs decline, insurance costs will also decline. If health care costs rise, insurance costs will also rise.

However, it does not follow that just because insurance costs are artificially lowered, health care costs will be decline. For example, will transferring insurance across state lines lower the cost of insurance? Yes. Will it bring down the cost of medical care? Nope! Getting away from the Constitutional and individual liberty issue, will forcing young individuals to purchase insurance make it feasible for insurance companies to provide insurance for prior existing conditions policies? Yes. (For only a short period, but this is a different topic). Will it lower health care costs? NO!

Lowering insurance costs is a smoke screen to the real problem, rising health care costs. Don't we need to be examining the law of supply and the law of demand as it relates to health care costs, rather than the cost of insurance premiums? In other words, when the high costs of medical care is addressed, the cost of insurance premiums will correct itself automatically.

Let's revisit why health care costs are rising. In the June 2009 issue of THE NOTE PROFESSOR NEWSLETTER, I pointed out how the health care industry is a perfect example of the end result of politicians and bureaucrats replacing economic laws and market forces with their political "whims and wisdom". In a nutshell, our decaying medical system started with the formation of the AMA, a cartel of allopathic doctors, which persuaded Congress to force doctors to be licensed by only "accredited" medical schools. Of course the "accredited" medical schools were those that taught the use of drugs as the main method of treatment of all illness. (The pharmaceutical companies control the AMA, and the AMA control the medical schools) Medical schools declined from 140 at the turn of the century to only 77 in 1940. (As a side note, the reason most doctors, until recently, were white males goes back to the first medical schools to be discredited were women's medical schools, and African American medical schools)

Getting back to the laws of supply and demand, what happens to prices when the supply is artificially lowered by restricting the number of doctors? Prices increase! Add to this employers' implementation of providing employees health insurance instead of raises to skirt the wage freeze laws of FDR. Since employees did not have to pay for health care costs, what happened to demand when prices were lowered because of "free" insurance? Demand increased. The stage is set for the cost of health care to start increasing. A system is now set into motion which artificially limits the supply of doctors, while at the same time increasing the demand for doctors' services. Is it any wonder there are long lines in doctors' offices in addition high prices? This does not even take into account the laws that prevent individuals from getting even the most minor of treatment without going to a doctor. For example, go to a lab and ask to get blood test for a simple cholesterol test. You will be told you have to have a "doctor's order". Now you must make a doctor's visit to order a blood test and another one to receive it. Was this your choice, or because of mandates of politicians, under the guise of "protecting you".

Politicians were still not satisfied. In order to "provide" more health care and bribe, I mean attract more voters, along came Medicaid and Medicare, which were nothing more than wealth redistribution programs. Now a system was in place that not only increases the demand for medical services, but actually determines the price of medical services, regardless of market forces. This is a form of price controls. As we discussed in previous issues, price controls cause shortages. Are we not already witnessing doctors, hospitals and pharmacies not accepting Medicaid and Medicare because the bureaucrats' prices do not cover the health providers' costs?

How does the laws of supply and demand and price controls affect the Health Care law? Can we agree the supply of doctors is already suppressed? Now that everybody will have insurance, what happens when 37 million more "patients" are thrust upon the suppressed supply of doctors? At the same time, politicians and bureaucrats will determine the "fair price" of medical services.
One of several things:
1. Prices go up (insurance premiums included)
2. Doctors exiting the medical field
3. Long lines and rationing
4. A combination of all three.
If you can think of another outcome please email me. I will be happy to post it.

The point being, that although everyone will have insurance, artificially decreasing the cost of insurance does not address the rising cost of health care. Has any politician even addressed how increasing the demand for health care will lower the cost of health care?

The smoke being blown in our face is ignoring how health care costs have risen to the point of being unaffordable. The answer is simple. The medical industry is but a snap shot of what happens not only to an industry, but also a nation, when free market principles are abandoned for regulations, cost controls, and protectionism by politicians under the guise of protecting us, or providing us with a "right". Even a "right" must obey the laws of supply and demand.

When applying the laws of supply and demand, as well a cost controls, expect the following at some point:
1. Long lines and shortages of doctors caused by both doctors exiting the field or not entering the medical profession, along with the increased demand by adding 37 million patients to be treated by an already suppressed supply of doctors
2. Insurance premium increases as the young individuals, who were forced to purchase insurance now take advantage of their "free" medical care
3. A rise in taxes in some form to pay for the "right" to medical care. My guess is a value added tax or national sales tax.

In closing, do not be mislead by Democrat's or Republican's smoke screen of trying to convince you their program to bring down insurance costs addresses the underlying problem of rising health care costs. Rising health costs are a result of almost a century of politicians suppressing the supply of doctors, while at the same time increasing the demand for services, coupled with introducing wealth redistribution programs that implement cost controls. All economic systems must obey the laws of supply and demand. A health care system is no different. Economic laws will override man made "rights". Is it any wonder the health care industry is in a state of collapse?

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

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