It is that time of year again where retailers are offering deals to move their inventory, especially their high price inventory that did not sell over the Christmas buying period. Be on the lookout for all sorts of deals from high discounts to favorable financing. Maybe you can take advantage of one of them.

Often you will see deals being offered and think "How do they do that?". When you know the concepts of the time value of money, what is happening is simple. Let's look.

A furniture store advertises it will sell you a complete bedroom set for $3,000 with nothing down and zero interest, for 36 months. Let's get out our friendly neighborhood calculator and see what is happening. (Remember, I usually put the minus sign in front of PV because I assume I am going to buy the note. This should give you a hint as to what is going down.)

Now for a "behind the scenes" look at what the merchant is doing. Retailers use terms like "keystone" or "three marks". Keystone means they have doubled the price they paid for the product, and three marks means the retailer has tripled the price of the product. For example, if a product cost the merchant $100, it would sell for $200 if "keystoned" or $300 if "three marked". With this in mind, we see that 25% off still gives the retailer a profit, while making the product more affordable. Retailers must, I say again, MUST move their inventory quickly, if they want to stay in business. If you think cash flow is important in the real estate business, try purchasing several hundred thousand dollars of a product and have it sitting on your show room floor.

Yet with high priced items like the bedroom set, going down on the price 25% to $2,250 still might not move expensive inventory. What can the retailer do to make the product more affordable? What if, rather than going down on the price, the merchant could sell it on credit, with 0 down, and 0 interest? Think they would have any takers? Yep! How does this look?

N= 36
I/Yr= 0
PV= $ -3,000
PMT= $83.33
FV= 0

Looks attractive to the consumer, doesn't ? For only $88.33 a month, the consumer can enjoy a brand new $3,000 bedroom set. But retailers cannot stay in business unless they move their products for cash, and quickly. What are they to do? You guessed it. SELL THE NOTE. Let's say that instead of giving a 25% discount to the consumer, the retailer discounted the note 25%. What kind of yield would this give to the note buyer?

N= 36
I/Yr= 19.75
PV= $ -2,250
PMT= $83.33
FV= 0

So if the retailer "keystoned" the product, the retailer still enjoyed a $750 profit and moved the inventory quickly by offering it on credit, with 0 percent interest. Play with your calculator to see the different possibilities if the retailer "triple decked" the product. Armed with this knowledge, you might go to the retailer and offer to purchase the product for say $2,000 cash, or match the discount of the note buyer. Often times the merchant will agree just to move the product and get cash immediately. The merchant does not care from where the money comes.

Now you know another "trick of the trade". One word of caution, if you decide to purchase on such a plan, LOOK AT THE TERMS. Often the terms will state that if you are late on ANY payment, or some other obscure clause like if there are more than two reruns of "I Love Lucy" in any given week, the interest rate will go to 7% to $15%. This is going to result in either your payments going up, the length of payments increasing, or both. So be careful.

What happens when they offer zero percent interest, and no payments for 3 months? Would love to get into this, but we would have to delve into Net Present Values and IRRs, however we have run out of time, and my fingers are getting tired. BTW, if you would like to learn how to apply IRRs to your real estate investments, I strongly suggest you attend my workshop of February 4th. Don't know what IRR means? You are leaving money on the table. The simplicity will amaze you.

If you have any questions or comments, be sure to contact me In the subject line, write ASK the PROFESSOR. I will try to answer your questions in the next Note Professor issue.

Remember, if you know of someone who has a note to sell, I do pay referral fees and this has been very beneficial.

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Tom Henderson /a.k.a. THE NOTE PROFESSOR .

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Current ARCHIVES (end of 2009-2011)

I will start out by saying MERRY CHRISTMAS, HAPPY HOLIDAYS, and HAPPY NEW YEAR.

We can learn a lot about false economics and how politicians from both parties apply "Christmas Economics" in the laws they pass. What do I mean by "Christmas Economics"? Quite simple. According to the Christmas tradition, Christmas Santa Clause, with the help of his elves (not sure if they are unionized or not), works year around to produce everything from yo-yo's to expensive jewelry and electronic equipment in order to provide individuals with their needs and wants. Here is the good part. What do you have to do to be favored with gifts at Christmas; NOTHING, except be good? How does Christmas Santa know what is good, who is good and what everybody wants or needs? Well, you see, Christmas Santa is instinctively all wise and all-knowing; and will fulfill your every wish without any effort on your part. You simply wake up on Christmas Day and lo and behold, your wish was Christmas Santa's command. Amazing, isn't it?

Rather than relying on Christmas Santa's intuitive powers, you can also contact Christmas Santa directly by writing him a letter. A more direct approach is to talk to Christmas Santa personally, and maybe even get your picture taken with him at a local mall. As we know, those who are good, Christmas Santa will shower will gifts. But woe be unto those who dare provoke the wrath of Jolly St. Nick. No gifts for them. Switches and lumps of coal are the best they can anticipate. Is this not what we were told as children, and for a time, actually believed? This is CHRISTMAS ECONOMICS.

The question of how Christmas Santa gets his raw materials and produces all these gifts in a small workplace on the frozen tundra of the North Pole is never answered. Likewise, how Christmas Santa distributes these gifts is also left to the imagination. In the end, we are just left to "believe in the magic" where we are given things just because we are "good", and things are produced by magic from some secret place on the top of the world and hand delivered to your house. No effort or work required.

Especially those of you who are parents know Christmas Santa is a fantasy. You are well aware the video game left under the tree, or the doll or bicycle was not magically produced by a fictitious being, and delivered to your living room free of charge. You know it was YOU who produced and worked in order to exchange your skills and labor for the gifts, while Santa is given the credit. How often did you have to give up something you wanted in order for your child to get "that special Santa gift"?

Is this not how our politicians from both parties treat economics? Have they not persuaded us that Christmas Economics is real, and that something for nothing is possible, if you "just be good". What does "just be good" mean; vote for them of course.

Have the politicians not become the Political Santa? Can't you just hear your politician saying "Just be good" (vote for me) and Political Santa will provide for your health care now and in your old age. "Just be good" and Political Santa will provide you with corporate subsidies and price support. "Just be good" and Political Santa will pay you not to work and not to grow crops. "Just be good" and Political Santa will_____(You fill in the blank).

How do these Political Santas know what is good? Just like the Christmas Santa; they all knowing and all caring. As with the Christmas Santa, if you want a more direct approach, you can also write Political Santa and even talk to him personally, if you are "good" enough, to tell Political Santa exactly what you want or need. Is this not the same story we were told as children about Christmas Santa, except you merely substitute toys and gifts for adult goods and services.

As with the Christmas St. Nick story, there is no mention of how the Political Santa is going to provide all these goods and services, and likewise, how the Political Santa is going to deliver all the goods and services that are promised. We are just supposed to believe that by magic and goodwill alone, all these goods and services will not only be produced, but hand delivered to your door step. All that is required is you "be good". Vote for them.

Like the Christmas Santa, the Political Santa is also a myth. Just as the gifts of the Christmas Santa depends on parents working and producing for there to be that "gift from Santa" in your living room when you awake Christmas morning, for the Political Santa to fulfill their fantasies, they too must depend on other individuals to work and produce for there to be "gifts from Political Santa" delivered to those "who are good". And in the end, it is the Political Santa who gets the credit, while you are left out of the picture. It gets even worse because Political Santa keeps promising more and more to get votes, it is you who must work and produce more and more in order that those "who are good" will wake up and received the "gifts from Political Santa". Is this not Christmas Economics?

I am amazed how adults know the Christmas Santa is a fantasy, but will readily believe their politicians who also use Christmas Economics to persuade you to vote for them. So when you hear politicians, from both sides, promise to provide us with anything for "just being good" (voting for them), the song "Here Comes Santa Clause, Here Comes Santa Clause" should immediately come to your head.

With all this being said, for those REAL SANTAs, who worked and gave up something so their loved ones could have a gift, I want to say "Thanks", because it was you who made Christmas. You might also go to YOUR real Santa, if they are alive, and say "Thanks, Santa. I know what you did". Hope you had a Merry One.

P. S. The "tax cut" was not my topic and I did not want to discuss it; however, I received SEVERAL emails wanting my opinion. I will give it; short and sweet. THERE WAS NO TAX CUT. It is a sleight of hand. That's right. In a nutshell, the government has $100 in expenditures and you pay $100 in taxes. They now say you have to pay only $95 in taxes, and to rejoice, because you have a tax cut. However, the government still has $100 in expenses. That $5 has to be made up by borrowing, printing money, taxing something else or a combination. In other words, the politicians did not cut your taxes; they merely shifted the tax from a direct tax to an indirect tax of borrowing or printing money. Both parties were for this "tax cut" in some form. Both parties touted a "tax cut". BOTH PARTIES LIED; there was NO TAX CUT. Let's end on a merrier note: HAPPY NEW YEAR!!!

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

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