This month 3 note sellers made comments they wanted full value for their notes because their notes were seasoned. Along the same lines, at a real estate meeting where I was the speaker, a member of the group told me at another meeting, a real estate professional presented a note to the group that was paying 10% interest and declared he wanted par value for the note since the payments were current and the interest rate was above market. Although I am sure all of these note holders are genuine in their belief their notes full value, they are under the illusion of the number one note myth.

What is the number one note myth held by real estate professionals: A note is the same as cash or a CD. Remember, a note is nothing more than a PROMISE TO PAY. Take for example the note paying 10% interest. Let's assume this is a $100,000 note payable over 240 months at $965.02 a month. Is it clear you do not have $100,000 CASH in the bank, but rather a promise to pay $965.02 a month for 20 years.

I like the use the example of the State of Texas lottery which boasted a JACKPOT of $4 MILLION. Yet the small print read "Cash Value $2.5 Million". In reality the jackpot was not really $4 million cash, but rather $160,000 a year for 25 years. In other words, it was a "promise to pay" for 25 years. As such it had a cash value of ONLY $2.5 million. If you choose the cash value, you have in essence discounted a promise to pay in the future for cash today. Since the payor is the State of Texas, the risk considered to be far less than an average note payor, but still there is a discount.

Remember, notes are discounted because of the risks a note buyer takes when purchasing a "promise to pay". For example, what is the risk the payor will lose his/her job and not be able to make payments? What is the risk the property value will decline due to market conditions and/or there is deferred maintenance needed on the property? In the case of default, I can almost guarantee there is deferred maintenance to be performed, not to mention the cost of foreclosing.

For those who have taken my workshops, I emphasize over and over that ALL YIELDS ARE TARGETS ONLY. You do not realize your yield until paid off.

Let's take a common scenario in today's market. For one reason or another, the payor loses his/her job and cannot make payments. After trying to work with the payor to get current, it is obvious the payments cannot be made. You go through the foreclosure process to find out the house now needs $5,000 in repairs to make the house marketable. (This is conservative) There is also the cost of insurance, yard maintenance, not to mention the risk of vandalism, or the cost and time of foreclosure. Is your yield still 10%? Heck NO!!!

All of these risks are taken into consideration by a NOTE BUYER when purchasing a note. The point being when you take back a note, realize it is not the same as cash or a CD, no matter if you hold it for income, or if you wish to sell it. It is merely a PROMISE TO PAY in the future. With future payments always comes risks, so ALL notes are discounted accordingly.

If you have questions about how to structure notes for maximum value, please contact me

Remember, if you know of someone who has a note to sell, I will pay referral fees at the least, and will also split my profits if you would like to "co broker" a Note with me.

I have a Get a Note Quote web page that can be filled out and submitted for professional pricing. Check it out.

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

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Current ARCHIVES (end of 2009-2012)

I received an email from one of my subscribers wanting to know if I followed the Austrian economists like von Mises and Hayek. The Austrians seem to have the best explanations of economic events, and yes I do read them, but by no means "follow" any person, but rather I use cause and effect logic to arrive at conclusions. The different economic schools and their theories is really a complete topic within itself, and maybe I will address it in a different issue.

He further asked: "if the Keynesians in control of the federal reserve continue their 'quantitative easing' in an mad effort to re-inflate the money supply and this leads to hyperinflation, what could a note investor do to offset risk since hyperinflation is so poisonous to debt holders?"

This is a very good question, and I will try to answer without being vague. The short answer is "I DON'T KNOW"! The main reason I don't know is because I have no idea what actions the politicians will take, or what world events will come into play. In economics we have a phrase: Ceteris Paribus. Meaning "all things being equal" or "with other things being the same". The problem in economic forecasting is that the politicians often change the game board by their actions, which results in nothing being "the same". This in turn distorts the markets. When markets are distorted, undesirable and unpredictable things happen. With that in mind, I am going to give my opinion, and opinion only.

At present we have two economic forces acting against each other. First we have the market trying to deflate to get back to equilibrium, while at the same time we have politicians and the Federal Reserve trying to keep the market from naturally deflating by printing more money. The printing of money is a form of consuming without producing. No doubt at some point all this printing of money will start having inflationary outcomes which means prices and interest rates will rise. Remember, inflation is nothing more than the printing of money in high excess of production.

What affect will inflation have on the note holder or Note Buyer? For simplicity, let's assume a house worth $100,000 is purchased with 100% financing. The note is at 4% for 360 months, with payments of $477. Let' assume inflation finally sets in. "All things being equal", the price of the house might rise to $110,000, but at the same time interest rates will rise to say 10%.

Let's remember, the price of real estate is directly proportional to the financing available. It is also a fact that in inflationary spirals, wages are the last to go up. At 10% interest, for this same homeowner to be able to keep $477 monthly payments, the price of the house will have to drop to $54,400 or the buyer will have to come up with $55,600 down payment. Neither which is going to happen. In other words, the market forces are acting against one another. Inflation forces want to raise the price of housing, but interest rates will keep prices from rising because people will not be able to afford the payments. This is a recipe for an inflationary recession.

Along the same line, I often get asked why I object to balloons if I believe we are headed into inflation. Would not a balloon force the payor to refinance or the note holder could raise the interest rate. My answer is simple. As shown above, the payor will not be able to afford the higher payments. Moreover, if you take the house back, who are you going to sell it to? The income level of the neighborhood will not support a 10% interest, nor a $110,000 price. So "all things being equal" there is going to be some chaotic times.

In the above scenario you have to ask yourself the question: which would i rather have a $100,000 note paying 4% or a $54,400 note paying 10%. The payor can afford one or the other.

So instead of panicking why not just enjoy the monthly payment you are now receiving. While everybody else is scrambling not knowing what to do as prices and interest rates are rising faster than wages, you will comfortably be collecting your $477 a month, and believe me, you will be enjoying it.

With that in mind, if you have a note that is current, and want to sell your note, I would strongly suggest you try to sell it now. In today's market, selling a partial of your note makes more and more sense. Remember, when interest rates rise, the value of your note decreases if you wish to sell it. By getting a lump sum now, you could be enjoying the best of both worlds. You will receive CASH NOW and possible more cash in the future.

In conclusion, sadly, the direction of the world economy is not in the hands of market forces, but rather at the discretion of politicians and bureaucrats who got us into the mess we are in. What is going to happen if we go into hyperinflation? With the national and world economy being in the hands of politicians, I will refer back to my short answer: "I DON'T KNOW".

If you have a topic you would like me to discuss or comments, please CONTACT ME.

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