High yields are possible when armed with the knowledge of the time value of money, and how to tweak the variables to increase yields. In THE NOTE PROFESSOR NOTEBOOK and "How To Obtain Obscene Yields with Small Money" located in the NOTE STORE, I gave a case study of how I turned a 7% note into a 75% yield. The following is a variation of this concept.

The note sellers sold their property 23 months ago for $130,000 with $5,000 down, and took back a note for $125,000 @ 5% interest for 360 months, with payments of $671.03. The property was more than acceptable, even with the low down payment. The payors also had acceptable credit. However, the 5% interest would demand a hefty discount. In counseling the note sellers, I discovered they were in immediate need of only $25,000 to take care of a family emergency.

I immediately started gathering information. Since the note sellers did not have a lender's policy, and was a "kitchen table" deal, I calculated the closing would cost $2,126.37, which would cover the cost of a policy, escrow, etc. I started playing with my calculator and looking in my data base for investors. I found a perfect match. The investor wanted small deals, required a 9% yield, but wanted safety. This was a good note, so I also wanted a part of it, and at the same time give my investor the yield he required. This is a perfect scenario for a partial purchase to address the goals of all concerned; the note seller, the investor, and me. Remember, we need to come up with $27,126.37 to give the note sellers the cash they needed, and to cover the closing costs. We agreed to purchase 5 years of payments. To give the investor his 9% yield, we agreed he would receive 75% of the monthly payment ($671.03 x 75% = $503.37). I would receive the remaining $167.66.

How the Investor Came Out

N = 60
I/YR = 9
PV = -$24,244.23 (The amount the investor is putting into the deal)
PMT = $503.37
FV = 0

Subtracting $24,244.23 from the $27,126.67 total cost to fund and close the note, I would have to invest ONLY $2,882.44.

How I, the Note Buyer Come Out

N = 60
I/YR = 67.14 %
PV = -$2,822.44
PMT = $167.66
FV = 0

WOW! Who wins in this deal? The note sellers get their $25,000, WINNER. The investor gets his 9% safe yield, WINNER. And I walk away enjoying 67.14% yield, with very little money. WINNER. Without getting into the legalities or tax consequences, to make this deal more favorable to me, I actually created a note to my investor for $24,244.23 payable @ 9% interest for 60 months, with payments of $503.37. I will have the documents and forms available for this type of deal at a later date. But the point here is how I will enjoy a 67.14% yield, with only a couple of thousand at risk, on a note secured by a property worth over $100,000. This deal was made possible by knowing the concepts of the time value of money, not merely a note technique copied from some manual.

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

If you have not attended a Note Professor "How To Get Rich with Notes" class, be sure and purchase the Note Professor Note Book manual to enhance your knowledge of creative real estate financing and note buying and selling.

"I got your news letter. It was great, purchased your (Notebook) and it was awesome. I used your renter technique and it worked also. I am getting 41% return thanks to your expert advice. I have spent hundreds and not able to do any thing thru other gurus" Gary W. Garland, TX

"It blew me away what a powerful tool notes can be. Lots of great information, worth every penny! Highly recommended."
Jeff C. The Colony/Investor

"Your manual is short and straight to the point, it's rare to buy something today that gives you your money's worth. Thank you" Stephan B. Phoenix, AZ

You will learn at least one new usable concept to increase your profit in buying or selling notes and real estate.
Tom Henderson, author

By popular demand, THE NOTE PROFESSOR NOTEBOOK is now available in easy, downloadable E- book form for a the low, affordable price of $39.95. Other products are also available, including HOW TO MAKE OBSCENE PROFITS with SMALL MONEY, and GUIDE FOR SECOND LIENS. There is also a FREE download of CHECK LIST FOR OWNER FINANCING. Simply go to the NOTE BUYERS STORE. I can think of nowhere that you can find such information packed products at such incredibly low prices. We are still working out the bugs, so if you have any problems, be sure to contact me.

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Current ARCHIVES (end of 2009-2011)

Gas prices are soaring again. As usual, politicians are forming commissions, panels or some other investigative body to find a villain in the rising price of oil and gasoline. "We can't have price gouging", is their rationalization. Have you ever heard of their trying to define "price gouging"? Probably not because the definition is vague and indefinable. Here is the Wikipedia definition: Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair.

It should be readily clear that "price gouging" is really a political, not an economic term. Why do I say a political term rather than an economic term? In the economic world, the buyer and seller determine what is reasonable and what is fair by adapting to the dictates of the law of supply and the law of demand. In the Wikipedia definition, notice the phrase "a seller prices goods or commodities much higher than considered reasonable or fair". This definition explains the fundamental difference between those who favor government control of the market place, and free market advocates. In the political sphere, "reasonable" and "fair" are determined by the whims of politicians and bureaucrats, not free markets forces. What the politicians are afraid to address is "reasonable and fair" to whom? In the gas station illustration below, I will show how setting the price of gas is "reasonable" to the consumer, at the expense of the seller. Do politicians believe they can just suspend economic laws? In other words, if supply of a good is disrupted because of a disaster, or any reason, the price will necessarily rise. It is this natural rise in price resulting from a disruption, or even a perceived disruption of supply that politicians deem to be "price gouging". The illusion politicians portray is if they make it illegal to charge a price "unfair" or "unreasonable" by their subjective determination, everything will return to normal as if there were no disruption in supply. This form of price control has the same result of any price control tactic; shortages. Another factor politicians seem to disregard is the "fairness" and "reasonableness" of consumers not being able to purchase a good or service at any price because it is not profitable to provide the supply of a good or service. ( I remind you of the results of Nixon's wage/price freeze, and Carter's gas price controls )

Let's take a real illustration of "price gouging" from the Hurricane Katrina disaster. A bag of ice normally costs $1.99. However, because of Katrina, electrical power was down and refrigeration was almost non existent. The result was a complete disruption of the supply of ice. An industrious entrepreneur saw a need. He bought ice from an area not affected by Katrina at $1.99 and put them in coolers by the truck load and drove them to the areas where ice was needed. This entrepreneur would then charge $7 and upwards for a bag of ice. (Am not even going to discuss the entrepreneur's cost, such as gas, truck rental etc) For those who think charging $7 for a bag of ice is highway robbery, keep in mind he would almost immediately sell out as soon as his truck stopped to unload. He repeated the process, making a profit for each run. In fact, people would be waiting for him the next day to purchase ice they could not acquire in their local market. Did the people at the disaster site consider $7 to be "unfair" and "unreasonable"? NO. How do we know; they purchased all he had.

Enter the politicians. "How dare you take advantage of a disaster." they exclaimed. "You are nothing more than a greedy profiteer and a price gouger. We demand you cease this operation." And cease it he did. The next day as people went to the regular pick up point, but there was NO ICE AT ANY PRICE. Why? Because politicians decided the laws of supply and demand do not exist, and that ice should have the same price after the disaster, as if there were the same amount of supply. In other words, the politicians and bureaucrats completely ignored the laws of supply and demand, and attempted to control the price of ice. By controlling the price of ice, the politicians not only created a shortage, but actually made the supply of ice impossible to fulfill. Had the politicians not interfered with this industrious entrepreneur, the people in the disaster areas might have paid $7 for a bag of ice, but they would have had ice. Add to this, as others saw there was a profit to be made by transporting ice from other cities to the disaster areas, more entrepreneurs would entered the market and the price of ice would have either declined or more areas served. THERE WAS NO PRICE GOUGING, only events obeying the laws of supply and demand. When supply decreases; the price increases. It is that simple. Supply disruptions because of disasters do not over ride this economic axiom. Neither do politicians, bureaucrats, judges or laws.

Let's take another example of "price gouging", and address "fair and reasonable". This time let's ask the question "fair and reasonable to whom"? Say you own a gas station and are selling your gas for $1/gal. At $1/gal, for one month you can pay all your business expenses and your personal expenses. Then comes a disruption in your supply because of a natural disaster. It will be one month until your supply comes back to normal. Because of the disruption in supply, you raise your price to $2/gal. At this price, you will be able to meet all your business and personal expenses for the one month your supply of gasoline is disrupted. As a result of raising your price, demand is lowered and people will consume less. Although there was a hefty price increase, people could still purchase gasoline, and you could still meet your financial obligations. Then along comes a politician and/or bureaucrat who exclaims, "You are price gouging. $2/gal is 'unfair' and 'unreasonable'. We demand you lower your price back to the $1/gal and not take advantage of your fellow man".

You then lower your price to $1/gal as ordered by the law. The fantasy politicians would have you believe is you will continue to sell gas at $1/gal until the supply of gasoline is again back to normal, and everybody will live happily ever after. However, reality has another scenario in mind. As a result of the lower price of gasoline, people will consume as they have. In one month your supply is exhausted. Because of the disaster, you will not be able to replenish your supply for another month. However, the rent on your building is still due and your mortgage needs to be paid, not to mention having to eat and other living expenses. Yet you do not have the money to cover your expenses because you were forced to sell gasoline at $1/gal, which was enough to cover your obligations for one month, NOT two months. The end result will be that not only are you in a financial bind, but your customers were completely without gas for one month. Had the laws of supply and demand been allowed to continue, you could have raised your price to $2/gal to compensate for the disruption in supply. This price increase would have enabled you to meet your financial obligations, and at the same time, there still would have been a supply of gas for your customers, only at a higher price. Under this more realistic scenario, is it "reasonable" and "fair" that you, as the gas station owner, be made to suffer financial hardship because you are forced to sell your product at a price where you will not be able to meet your financial obligations? Do the consumers think it is "fair and reasonable" to be WITHOUT GAS for a month?

Summary: When the supply of any good or service is disrupted, the price of that good or service necessarily increases. Passing a law that contradicts this economic axiom under the guise of protecting us from "profiteers", is merely another method of price controls, which interferes in the market process. As we have demonstrated again in these examples, price controls result in shortages.

I will close in asking you the two following questions:
1. Would you rather pay $7 a bag for ice and have ice readily available; or $1.99 a bag have no ice
2. Would you rather pay $2/gal for gas and have gas; or $1/gal and have no gas

There is no such thing as price gouging. This is a political term, not an economic reality.

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

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All rights reserved