When selling your property using owner financing, and especially if you are purchasing a note, it is wise to purchase a lender's policy. A lender's policy will insure your note is valid, in first position, as well as the note seller has the right to sell the note. Another reason to purchase a lender's policy is to prevent or detect fraud.

A case in point: I received a call from a note seller who had what appeared to be a quality note. We agreed on price and were about to move to the next step. To my surprise, there was an obstacle. The seller did not want a lender's policy, even if I were to purchase it. The seller was also adamant about NOT closing at a title company. Although I will sometimes close outside a title company, NOT having a lender's policy is a deal killer for me. I did not purchase the note and we went our separate ways. What is the point?

Over the years, private note holders have called me to explain they had purchased a fraudulent note, and asked me what could be done. All had a common thread: no lender's policy was purchase, and only one had closed at a title company. Omitting the lender's policy not good due diligence because of the amount of fraud in the real estate and financial paper industry. I thought I would share some specifics about another transaction and hopefully prevent others from being ripped off.

I received a call from an investor who purchased a non-performing note from a lending group with whom he was somewhat familiar. This lending group had made a loan using the borrower's house as collateral for the note. No lender's policy had been purchased at the origination of the loan. Now the note was going into default, and this investor decided to purchase the non performing note from the lending group, with the agreement the group would repurchase the note if it became a "bad" note. To me, the fact the note was non performing means it was "bad", but that is not the point of this article.

The deal starts getting complicated from the beginning. The note had been signed using a power of attorney, not the borrower's personal signature. When the note investor contacted the borrower demanding payment, the borrower claimed he had never received a loan from anyone, plus the signature on the power of attorney was not his.

Handwriting analysis indicated the signature on the power of attorney did not match the borrower's signature. . The investor then contacted the original lending group, which sold him the note, and demanded his money back, as per the agreement. The group's attorney informed the investor, that the lending group was not going to repurchase the note at this time, regardless of what their agreement said.

Are you beginning to see the legal web being formed? If the note was fraudulent, who is responsible if the lending group made the loan in good faith? Moreover, since the investor was purchasing a note in default, the investor has lost his position of holder in due course. (Basically this means the investor cannot come back on the borrower since he knew there were problems with the note from the start.) And if the lending group made the loan in good faith, who is going to be left holding the bag? This is not meant to be a legal opinion, but to merely show how the web is forming. No one is claiming responsibility, and if the investor is to recoup his money, it appears he is going to have to use the courts and sue. Who wins in this scenario?

How could all of this been avoided? By purchasing lender's policy at the loan's origination. If the original lending group had purchased a lender's policy, this policy could have been transferred to the investor, and it would have been the title company's responsibility to untie all these knots. It has been my experience that title companies are very cautious in accepting a power of attorney, and go to great lengths to prove the validity of the power of attorney. It appears none of this due diligence was completed by the lending group. More importantly, the note investor did not insist on a lender's policy. The investor has promised to keep me informed as to how this deal plays out. Real life situations are educational, aren't they?

The lesson to be learned from this fiasco is when using owner financing as an exit strategy, obtain a lender's policy at closing. The cost is minimal. But more importantly, when purchasing an existing note, DEMAND a lender's title policy. If the note is fraudulent, the title company will eventually pay you off, and take on the problem. More importantly, if the note is fraudulent, often the title company will catch it before the deal closes.

Was the note I was offered, where the note seller did not want a lender's policy, nor wanted to close at a title company, a fraudulent note? I will never know. I do know a lender's policy is required, not requested when I purchase a note. I sleep a lot easier knowing I am insured against not only fraud, but the possibility there is something "out there" that makes my note less valuable, or even worthless.

CONCLUSION: Obtain a lender's policy when selling property with owner financing, and ESPECIALLY if you are purchasing a note.

Please CONTACT ME if you have questions or have a topic you would like me to discuss.

If you know of someone who has a Note they want to convert to cash, remember me. I do pay referral fees.

Tom Henderson
a.k.a. THE NOTE PROFESSOR
Copyright � H&P Capital Investments LLC
All rights reserved

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To those who email me asking economic questions, I apologize for not being able to respond directly to all of them. Direct response to everyone is time consuming. Economic explanations cannot be answered "yes or no". Explaining economics takes time, as well as setting logical progression to satisfactorily answer your questions. If you have questions, keep sending them, but keep in mind I have chosen this newsletter as a format to answer them.

I am also discovering many are not aware of the definitions of basic economic terms. Without knowing what economic terms actually mean, we often come to invalid conclusions.

A case in point is the definition of "demand". When we understand the true definition, we will see how our politicians distort the meaning of demand, and therefore the concept of demand. Politicians tend to equate desire with demand. No wonder we are in the situation we are in. Let's look at the definition of "demand".

DEMAND: The willingness and ability of individuals within a market area to purchase particular amounts of a good or service at a variety of alternative prices during a specified time period.

ANOTHER DEFINITION: The want or desire to possess a good or service with the necessary goods, services, or financial instruments necessary to make a legal transaction for those goods or services.

I picked these definitions randomly from economic dictionaries. Separately, neither quite explains the concept of demand, but if you combine the two, you will find the most complete definition of "demand" I have time for in this issue.

The first point to notice is that mere want or desire is not the ultimate element of demand. There must also be a willingness, (I use the term "voluntary") along with the ability to exchange goods or services for what we want.

What about "the financial instruments"? In another issue I will delve into the concept of currency, but for this issue, suffice it to say that currency is only a means of exchange that represents goods or services. Is this not why we work or invest; to obtain goods and services we desire, to not only survive, but also to prosper. In essence when we go to work, although we get paid in currency, we are actually exchanging our services for other goods and services that money is suppose to represent.

Think of what this phrase means "with the necessary goods, services, or financial instruments". Let's use a real estate example. As a landlord, you will trade a person a place to live in exchange for "financial instruments" in the form of rent. You will then exchange the rent for goods and services you desire. Your tenant also worked to exchange his/her services for "financial instruments" to pay you rent for a place to shelter him/her from the elements.

This is the essence of division of labor, and what makes a free market system function. Demand and production go hand in hand. In other words, without production there is nothing to exchange; and therefore no demand.

Next notice in the definitions "purchase at a variety of alternative prices". This means for there to be a "demand" there must be a price system. A price system means you will exchange an apple for an orange, but you might want two bananas for one apple because of your preference or the supply of bananas. You, the individual, will decide what "price" to put on an orange or a banana. To put it another way, we produce oranges in order to consume bananas. More importantly, we cannot consume unless there is production.

Two points must be emphasized.
1. Consuming without producing is not demand.
2. Consumption cannot exceed production.

For the economic concept of demand to function, there must be a price system by which individuals determine what is needed or desired, and how much. A price system answers the basic question; what to produce and how much to produce.

As a side note, socialism cannot sustain itself because there is no price system. Socialist have the false belief that production will just happen and need alone is the only requisite for the concept of demand. At the same time, the socialists completely ignore the other part of the equation for demand, which is producing goods or services to exchange.

The same holds true when government distorts the price system by having a political regulators usurp the laws of supply and demand by artificially setting a price of a good, service, and even money.

Think of the real estate bubble triggered by the Federal Reserve artificially setting interest rates low. At the same time the politicians encouraged mortgages be given in contradiction to the laws of supply and demand, and then had Fannie Mae purchase these toxic loans. It was touted "the demand" for housing is rising. "This is the age of home ownership", boasted the politicians.

As we now know, there was no real demand for housing, because the price system had become distorted to the point you could purchase a house with no money, no job or assets. What was the result? Since real estate was not based on reality, but a false belief "demand was rising", the market could not sustain itself and collapsed.

I am addressing the concept of demand because of a question I received wanting to know if Congress "gave" banks money, as well as individuals, would this not increase demand. The answer is "NO"!!!!

Why? What did Congress exchange for the money they are "giving"? Nothing. They merely took it out of "productive pockets" and redistributed it into non productive pockets. Not only did Congress produce nothing in exchange for our production, the recipient of our money produced nothing to exchange for our money. This is a form of consuming without producing.

As the definition of demand tells us, demand requires willingness and production for there to be an exchange. How can demand increase when there was no voluntary exchange of goods or services?

You will often hear media pundits and politicians incorrectly state that our economy is based on consumer demand. What they omit is "consumer demand" is based on individuals producing in order to exchange goods or services. They imply that all that is needed is to "give" them our money, and in turn this will increase demand. As we have learned this is a false economic premise.

The concept of demand also embraces individuals to produce something in exchange. This is the essence of any economy and the cornerstone of free markets. Consumption alone does not create demand, it only depletes resources.

We also hear the phrase, "the demand for money". Knowing the definition of "demand", what does this imply? HINT: What goods or services are exchanged for money? When money is printed from thin air, is this the same as production, or is it a form of consuming without producing?

Does quantitative easing increase production, or merely increase the supply of currency? Does "stimulus" exchange goods or services, or does it merely transfer wealth without producing. Food for thought. Bon Appetite.

If you have a question or comment, please CONTACT ME. It is from your feedback that I get many of my topics.

Remember, if you know of someone who has a note to sell, I will pay a referral fee, or split my profits with you

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

Copyright � H&P Capital Investments LLC
All rights reserved