You know you make your profits in real estate when you buy, not when you sell. Buying notes at a discount gives you another opportunity to obtain properties at a discount. In THE NOTE PROFESSOR NOTEBOOK, I discussed how to buy notes and then trade them in at face value on real estate to get sort of "automatic equity" in property.

In this issue, I am going to give you another technique you can use to obtain "automatic equity". In today's environment of record breaking foreclosures, this technique is a powerful way of obtaining real estate.

Let's say you purchased a $100,000 note for $80,000 that will yield you 9.5%. When you contact the payors (property owners), instead of introducing yourself as the big, bad note holder, why not be a little more amicable, and set the stage to purchase the property in the future. You might even get the payors to grant you a "first right of refusal" option. For those who are unaware of this type of option, if the payors (property owners) recieve an offer to sell their property, you will have the option to match that offer. If you do not like the price, you can pass. Even if the payors do not give you the option, you have established a relationship with them where they will contact you if they get into financial trouble and need to get out of the property.

Here is a good example. The property that secured the $100,000 note you purchased for $80,000 is worth "as is" $120,000. The payors (property owners) NEED to sell the property, but in today's market there are few buyers. The property owners then come to you. Hmmm, what can you do?

Can you see the opportunities this situation offers?

Why not give them $5,000 walking money and take the house. You now have a $120,000 FREE AND CLEAR house that you have only $85,000 invested ($80,000 for the note + $5,000 to the payors). PRESTO! You now have automatic equity. Now you can either refinance and put around $10,000 in your pocket, then rent it out for a cash flow. Or maybe you would prefer to have a free and clear house in your portfolio, and just rent it out for a large positive cash flow. This is going to jump your yield to astronomical levels.

Depending on different variables, such as how much you charge for rent, or if you sell the property for all cash in the future, your IRR would be somewhere between 25% and 75%.

While the creative ideas are flowing, once you purchase the property, why not sell the house using owner financing. Do you think you would have any takers with 5% down, and carrying a note for $114,000. Now you have $114,000 note that you have only $80,000 invested. Depending on the terms and interest rate, this will increase your yield to double digits. (Play with this for a little calculator practice)

A third possibility, GIVE THE PAYORS ALL THEIR EQUITY (house valued at $120,000 with an underlying note of $100,000) in the form of a note. In other words, give them a $20,000 note secured against the property or another property. This puts you in a perfect position to obtain a built in discount on your $20,000 note. You then have just increased your automatic equity. Sounds good to me! Variations of these techniques can be applied for those who sell their properties with seller financing just as well as those who purchase notes.

What would happen to your note that you gave for the property? Good question. There are several possibilities, all of which are in your favor, but we do not have time to discuss them in this issue.

I am going to stop here, because those who have taken my classes, or have purchased THE NOTE PROFESSOR NOTEBOOK, know I teach concepts, not just techniques. In this issue we examined only a couple of techniques you can utilize when you are aware of the concepts of the time value of money and seller financing.

All of the above techniques and concepts need to be discussed with your CPA and/or attorney. I think you are going to like all their answers.

If you want to purchase a note or have a note you want to convert to cash, contact me for professional pricing.

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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One of the most common mistakes in economic logic is reversing cause and effect. A prime example is the belief that an overall rise in prices results in inflation. In reality, cause and effect are reversed.

As a result of confusing cause with effect, the government "fixers" created regulations and laws trying to curb higher prices, while the real cause of inflation is the Federal Reserve printing money, ie; QE1, QE2, QE3, was ignored.

When the effect rather than the cause of inflation is addressed by regulations and laws, this action distorts market forces, which often leads to undesirable consequences. Remember in the 70s and 80s when inflation was double digits? The politicians' "remedy" was to enact wage/price controls. Did wage/price controls result in lower prices and plentiful supply? Nope. Instead we got shortages, pent up demand and long lines at gas stations. Prices did not actually come down until wage/price controls were lifted, but more importantly, prices did not come down until the Federal Reserve ceased expanding the money supply.

Confusing cause with effect is my topic this month because in this presidential election, both candidates mistake cause with effect on one issue in particular. What is that issue? Assuming that a large middle class creates a strong economy.

The politicians from both parties imply the middle class is shrinking, and therefore the economy is getting weaker. Not true. The economy is weakening, and therefore the middle class is shrinking. To put it another way, politicians are implying a strong middle class creates a strong economy. In reality it is the other way around; a strong economy produces a large middle class.

Is it dangerous to assume a strong middle class creates a strong economy? YES!
Why? Because the real causes of our stagnant economy are not being addressed. Instead our "fixers" (notice how polls will ask who can best "fix" the economy? ) will tout how the economy must grow from the middles class out, or favor tax incentives which will help the middle class grow. Trying to "fix" the effect rather than the cause produces undesirable results. The underlying cause of our weak economy is abandoning free market concepts. Just as wage/price controls did not solve the cause of inflation, neither will "helping" the middle class result in a stronger economy.

Even if the middle class is "helped", we are still left with the problem of having an economy based on collectivist tenets. No matter which classe is "helped", an economy based on collectivism cannot grow.

What is alarming is neither party addresses the fact we do not have a free market economy. The real solution to getting our economy on track is to first acknowledge the cause of our weak economy, and not the effect. The cause is we have replaced free market concepts in favor of government control and wealth redistribution. (Corporate and individual)

Has either candidate even mentioned we have abandoned free market principles for collectivist concepts? No. Both candidates believe politicians should protect us from everything from how large our soft drinks should be to who should get a loan and for how much. I was especially taken back by one of the candidates stating "Of course we need regulations. We cannot have somebody start a bank in his garage". Yet nobody asked the question, "Why Not?". Any private lenders reading this issue? Any investors looking for private lenders? Do you care where the lender's office is located? Do you need protection? "We" cannot have private lending according to our politicians.

Confusing cause with effect enhances the distortion of market forces. Our economy deteriorated over the past century by often reversing cause and effect. Laws and regulations were enacted to deal with the effect, while the cause was not acknowledged.

Simply speaking, one regulation or government action caused a problem, which resulted in another regulation, which caused another problem, and so on and so on. In other words, one "reform" begets another "reform", which begets even another "reform". Yet none of these "reforms" addressed the underlying cause: the abandoning of free market principles in favor of politicians controlling the market place. The result is the accumulation of reforms and government programs which evolved to the point where almost all industries are controlled at some point by politicians and bureaucrats. Politicians having control of industries leads to consumption exceeding production. Consumption CANNOT exceed production.

When both parties have the mind set of attacking the symptoms instead of acknowledging the true cause of our weak economy, solving our economic dilemma is impossible. As an illustration, The Great Depression is filled with examples of how effects are mistaken for the causes. Here are a few:
1. The stock market crash caused the Great Depression
SOLUTION: Regulate the stock market.
RESULT: the Great Depression lasted over a decade
2. Higher wages will give workers more money and therefore help the economy grow.
SOLUTION: Wages kept artificially high
RESULT: unemployment in the double digits for over a decade
3. Farm prices are too low. Prices need to rise to help farmers
SOLUTION: Destroy crops and livestock to decrease the supply and raise prices.
RESULT: Food lines

Looking back, is there any doubt confusing cause with effect prolonged and deepened The Great Depression.

Conclusion: When you hear someone tout how a government policy or action make the middle class grow, and therefore make the economy stronger, do not be misled.

An economic system based on free market principles creates a strong economy, and therefore a large middle class. If an economic system is based on collectivist concepts, no matter how hard you try to "help" the middle class grow, it is unsustainable. Smaller government is not possible when the economic system is not based on free market principles.

Food for thought: When wealth redistribution has been deemed sustainable and moral, the only thing left to do in a democracy is to vote to determine who is to be plundered and who is to receive the plunder. What are the main issues in this election? Is it let's get back to free market principles or is it who is to be taxed, and who is to receive tax money?

If you have questions or comments, please contact me. It is from your input that I get my topics.

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.

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

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