Kudos to a former student in one of my Advanced Classes. She had an opportunity to purchase a partial of a note that would give the note seller the lump sum in cash that was needed, while at the same time giving my former student the yield and safety she required. The note was for $100,000 @ 8% interest for 30 years with payments of $733.36 and a five year call. Eleven months had passed, and the note had a balance of $99,236. The note seller was in desperate need of $40,000. My student astutely remembered in class we discussed how she could purchase all the payments and part of the balloon. My student wanted to enjoy a 14% yield. However, she was confused on how to determine how much of the balloon she would purchase. Here is a great opportunity to do a little calculator practice.

For those who have programs like T-Value, which calculates amortization schedules etc, I invite you to follow along and check my figures. For the rest of you, simply sit back and learn another way to sell your note, and the math involved.

Let's start with the basics. The Five Variables for calculating the time value of money are:
1.) Number of Payments,
2.) Interest Rate or Yield,
3.) Present Value,
4.) Payments,
5.) Future Value.
If we know 4 of the 5 variables, we can calculate the 5th variable. As with any time value of money problem, when we identify the variables the problem becomes easy. We need to determine FV in 49 months. Here is how the note purchase will look. ( Remember to put a "minus sign" in front of PV since you are buying the note)

N = 49 (60 months minus the 11 months that have passed)
I/Yr = 14 (Desired yield)
PV = -41,000 (Amount the note seller needed, plus $1,000 cushion)
Pmt = 733.76 ( Amount of Note's Monthly Payment)
FV = ?

Did you come up with $24,243.31? Seeing money signs in front of her eyes, my student rounded this off to $25,000. What did this small amount do to her yield? Did you get 14.4%?

When the smoke clears, how will all of this play out? The note seller will receive $41,000 she immediately needed. My student will receive $733.76 a month for 49 months, PLUS $25,000 in 49 months. My student will enjoy a whopping 14.4% yield, and at the same time limiting her exposure to only $41,000 on a property worth at least $100,000. Sounds like a WIN/WIN to me. How does it look to you?

I know some of you are asking, "How much does the note seller receive in 49 months,when the balloon becomes due?" If you complete an amortization schedule on the original note, you will find after the 60th monthly payment the balloon will be $95,070. Subtract the $25,000 due my student note buyer and the note seller will receive $70,070. Add to this the $41,000 LUMP SUM CASH the note seller received for the purchase of her note, and the note seller received a little over $110,000 total for the note. Is this a good deal for the note seller? YES! The seller was overjoyed.

For my advanced students, here is a little more calculator practice. What was the value of the partial that was purchased? Answer: $48,638.73 (This means there was ONLY a $7,638.73 discount) If the note paid off in the third month, how much would the note seller and note buyer receive? Answer: Note Seller = $51,616.87 PLUS $41,0000 LUMP SUM CASH for a total of $92,616.87 ; Note Buyer = $47,402.02 plus payments of $733.36 for three months.

Again congrats to a "former student" for seeing the opportunity in this situation. I put "former student" in quotations because she is no longer a student, but rather a "Pro" who solved problems, and made a wise investment at the same time.

What happens in the case the payor cannot refinance in 49 months. There are several ways to address the payor's not being able to refinance that will be WIN/WIN situations for all concerned. However, that is a topic for a different article. Here we were just crunching numbers to illustrate another lucrative way to sell your note when you have a short term balloon. If you have notes like this, why not consider selling the payments and part of the balloon? You can get more cash.

If you have a note to sell, or know of someone who wants to sell a note, CONTACT ME Remember, I pay referral fees.

Be sure to contact THE PROFESSOR with questions or comments. This is where I get my topics.

As usual, consult a CPA and attorney before dealing in notes.

Copyright © H&P Capital Investments LLC All rights reserved

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If you want to tax your patience, as well as question your sanity, I suggest you listen to advocates of quantitative easing attempt to not only justify quantitative easing, but to define it. See if you can make sense of the following double talk.

First let's get a "nut shell" view of how QE works. The process is the same, whether you are talking of the Bank of Japan, European Bank, or the Federal Reserve. To keep it simple, I am going to be concerned only with the Federal Reserve. The Federal Reserve will create money out of thin air by electronically injecting money into their account. The Fed then purchases financial instruments, which includes government bonds, Treasury notes, corporate bonds, and mortgages from banks and financial institutions. In theory this action is supposed to give banks liquidity by increasing converting the banks' government bonds into cash, and therefore the banks' reserves. This process in itself is somewhat of a con game. Why? Because by law, the Federal Reserve is not allowed to purchase government bonds directly from the Treasury, even though private citizens have this privilege. Rather the Fed must purchase these bonds from third party financial institutions. (Nice racket. By legislation, the government has created the need for a middleman which the financial institutions willingly fulfill. This action produces nothing, yet brings in billions in fees for the financial institutions with no risk.)

With a law mandating the necessity of a middleman in place, the Federal Reserve will announce how much government debt they are going to purchase. The banks and financial institutions (Goldman Sachs) will then purchase these government bonds, and sell them to Federal Reserve at a increased price. Not only does this cost tax payers extra money, but it also defeats the intended purpose of QE. Why? Because banks are merely "flipping bonds" with no risk, rather than lending money and taking risk. This is a form of consuming without producing, especially with firms like Golden Sachs. (Sounds a lot like money laundering) But I digress.

Back to the definition of QE. Many, and myself included, define "quantitative easing" as the mere printing of money by the Federal Reserve. But advocates of quantitative easing will exclaim, "Not so". The printing of money is when the Federal Reserve creates out of thin air to directly finance government programs. However, with QE the Federal Reserve will create money to purchase government bonds or other financial instruments, not directly from the Treasury but from banks, and not only that, but the purpose of this money creation is not to finance government programs, but to stimulate the economy". Jeeze.

In the minds of the politicians and economic planners of both political parties, if the Federal Reserve CREATES MONEY OUT OF THIN AIR to purchase government bonds from financial institutions with the intention of "stimulating the economy" rather than financing government programs, these actions are not the same and therefore justified. Never mind that money is being created from nothing in both circumstances. In political double speak, "intentions" not actions determines outcomes.

Let's assume for a minute that we temporarily lost our sanity and agree that intention alone will make a distinction in the actions of the Federal Reserve. What about the affects, will there be different results because of intentions? NO! Remember, the printing of currency is not the same as production, no matter how noble the intention. In other words, if you have one house in an economy, and the Federal Reserve increases the money supply from $100 to $1 million dollars, you still have only one house. Nothing was produced, but the price of the house increased. To politicians, this is "economic" growth. In reality, economic growth means increased production of goods and services, not printing money out of thin air.

What will be the effect of QE2 or perhaps QE3? Just as the printing of money out of thin air triggered this recession, the continuation of printing of money will created a bubble within a bubble. As with all money creation from nothing, at first there will be the illusion of prosperity, or "signs the stimulus is working"; but sooner or later, economic laws will prevail over "intentions". One economic axiom that is being overlooked is CONSUMPTION CANNOT EXCEED PRODUCTION.

CONCLUSION: Calling the printing of money out of thin air to quantitative easing does not change the effects. The printing of money, not matter how noble the intention is consuming without producing. Consuming without producing is unsustainable. QE is merely adding fuel to the fire.

Does this mean not invest in real estate or notes? Heavens NO. It means make your investments wisely and act from knowledge, not fear or ignorance. With this being said, I do suggest if you hold notes, and are planning on selling them, NOW IS THE TIME. When interest rates rise, and they will rise, the value of your note decreases.

If you have questions, CONTACT ME. I will address them in future issues.

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All rights reserved