I have been recommending partials as the best of both worlds for a long time. Partials give the note seller the lump sum cash he/she wants without a deep discount. At the same time partials will limit the risk the Note Buyer has to incur in case of default and/or devaluation of the property due to another real estate bubble bursting. The following is a perfect case in point.

A husband and wife sold an investment property for $210,000 with 10% down, and took back a note of $189,000 at 6% interest for 30 years. Payments were $1,133.15. Three months had passed, so there was 357 months remaining on the note, which now had a balance of $188,432.72. In further talking with the note sellers, I discovered that although they were not broke, they would like around $50,000 cash to pay off some bills. They wanted to sell the note to raise the $50,000 cash, but were really hesitant to take a deep discount. For those like me who are number cruncher fanatics, you can follow me on my calculations.

My investors would be happy with a 10% yield on this particular note. Let's see what the discount would be:

N = 357
I/Yd = 10
PV = -$128, 950.63
PMT = $1,133.15
FV = 0

WOW!!! That is a $59,482 discount. Although the discount was actually a little above market value, the note sellers were flabbergasted at the low price. I then offered to buy 60 months of payments to receive the same 10% yield. Let's look at this offer.

N = 60
I/Yd = 10
PV = $53,332.15
PMT = $1,133.15
PV = 0

I could actually see them smiling on the other end of the phone. I then pointed out that at the end of 60 months when the note reverts to the note sellers, their note would still have a balance of $175,107. They could either sell more payments, or keep the note for a passive cash flow. They were elated, but I could still hear a little hesitation in their voice. Then I pointed out that utilizing a partial offer instead of a full purchase offer, the discount was only $5,280.70. This was the deal clinching information they needed to proceed with the note sale. (For those who are confused about the calculations of buying and selling partials, The Note Professor Notebook covers the process in detail in the chapter Partial to Partials.)

Here is another example how partials can be the best of both worlds. By selling a partial instead of the entire note, the note seller got the lump sum cash they needed without having to take a deep haircut on the balance. At the same time, in five years the note sellers will have a seasoned note with a balance of over $175,000. Is this not a perfect combination? Moreover, the Note Buyers received the yield they desired, and reduced their exposure to the risk of collateral deterioration, devaluation or default. Now you know why I am Partial to Partials.

If you know of someone who needs immediate cash and has a note to sell, contact me. I do pay referral fees.

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

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I received an email commenting that government needs to intervene into the economy because of "market failure". Often you will hear the reason government, meaning politicians and bureaucrats, need to intervene into the marketplace is due to the fact that markets fail. The statist will point out examples of "market failure" including everything from inequality of income, to pollution, to health care, to complete economic collapse like the Great Depression. Our present economic chaos is being attributed to market failure. Discussing the myth of market failure in detail would require more time and space than this newsletter is able to provide. However, I will hit a few high spots. In a nutshell, markets neither fail nor succeed. Success and failure denote a planned outcome. Markets have no planned outcome. Markets merely follow economic laws of supply, demand and marginal utility.

Before we begin, remember, there are two, AND ONLY TWO, ways to organize an economy. The first is a market which functions through voluntary exchange, free from intervention or control by politicians and bureaucrats. I will identify this system as free markets. The second is a market based on government intervention and control. I will call this system the statist market. The fact that there are only two ways to organize an economy is a factor statists fail to recognize or acknowledge. However, when discussing "market failure" we must first identify which market "failed", as well as what is the alternative.

The Great Depression is the most common example of "market failure" statists like to use to denounce free markets. Since The Great Depression sent the country, as well as the world, into economic chaos, it was "evident" to the statists that free markets are not reliable. Therefore; we need politicians and bureaucrats to control the economy to assure stability. Yet when we examine the causes of the Great Depression, we discover it was not free markets that "failed", but rather the statist market which was engineered by politicians and bureaucrats.

Much like today, in the 1920s, the Federal Reserve made money cheap and easy to obtain. As a result, a bubble formed in the stock market, much like the real estate bubble of today. When the bubble burst, as they always do, the stock market crashed, which caused ripples in the economy. Hoover used his power to keep wages and prices high instead of letting them seek market value. He also pursued government spending as a solution, which meant raising taxes. He then initiated protective tariffs trying to protect local manufacturers, which resulted in an artificial barrier of the export of farm products. This was the final straw that sent the depression into a tail spin. FDR expanded Hoover's policies by creating cartels, wage price controls, increasing government spending, and dictating government supervision over the entire economy. The result was a depression that lasted over a decade.

It is obvious The Great Depression was triggered by the artificially low interest and easy credit which were determined by the Federal Reserve, not by market forces. The laws of supply and demand came into play. What happens when the supply of a commodity, like money, is artificially cheap, with an artificially "endless" supply. Demand skyrockets, and the illusion of prosperity made stocks and other ventures appear to be profitable. When the bubble burst and stocks crashed, instead of letting prices and wages seek the optimum level, politicians and bureaucrats dictated both prices and wages. What happens when wages are kept artificially high? The demand for labor decreases; hence the high unemployment rate in double digits for over a decade. Likewise, what happens when prices are kept artificially high? Demand drops and people cease buying. This was a "double whammy" on the economy that prolonged the Great Depression to last for over ten years.

The Great Depression is a good example of which market "failed"; free or statist. Markets whether free or statist, must follow the laws of supply and demand. When government stepped in to regulate both prices and wages, these actions also influence demand. Government dictated high wages, which resulted in the demand for labor decreasing because businesses could not afford to hire. The same was true with prices of certain products. The end results were high wages and high prices, along with high unemployment and surplus inventory. Remember the economic axiom: PRICE CONTROLS CAUSE SHORTAGES. With this in mind, is it not clear that it was not the free market that "failed" but rather the regulations and intervention of price controls of the statist market. The market merely followed the laws of supply and demand.

Let's examine the health care industry which is foremost in the news today. The rant is free markets have "failed" and do not provide affordable health care. However, is the out of control health care industry indicative of a free market environment or a statist environment? I can think of no industry that is more regulated or more government controlled than the health care industry.

As pointed out in other issues of THE NOTE PROFESSOR NEWSLETTER , at the turn of the century medical care was cheap and abundant because there was neither government control nor licensing. The AMA, which represented allopaths, decided there was too much competition, and used the coercive power of government to restrict the number of medical schools to only those medical schools that were approved by the AMA. Of course the schools that were "approved" fell in line with the allopath philosophy of prescribing synthetic drugs for medical treatment. The medical schools which taught other, and often more effective, means of medical care were forbidden. It did not take long for the AMA to become government created monopoly because of legislation, not because of efficiency. The fact that pharmaceutical companies control the AMA, and the AMA controls the medical schools is subject all to its own, but needs to be mentioned.

The stage was set. With the supply of doctors artificially controlled by the AMA and competition forcefully removed, doctors' income sky rocketed. The second stage began when FDR initiated wage controls during the Great Depression. Firms were not able to offer higher wages than competitors to induce the most productive work for them. They got permission from FDR to be able to offer medical insurance instead of wage increases as a means to influence the most talented to work for their firm. Firms offering to pay health insurance instead of higher wages was the beginning of making health insurance the responsibility of the employer instead of the individual.

Medicare and Medicaid completed the stage as government started paying for health care. Both government programs pay for medical expenses for one group at the expense of another. Both are also going broke. No longer is the individual responsible for paying for health care. Employers or government now have the responsibility to pay for health insurance. This sounds so seductive, doesn't it? "Free" health care insurance for all. However, good intentions do not override the laws of supply and demand. The population keeps increasing, yet the supply of doctors is kept artificially low. What happens to prices when demand increases, yet the supply is kept artificially low? Prices increase. Add to this the fact that government or employers are responsible for paying for health care insurance. What happens to demand when the price of medical service is virtually free due to a third party paying for medical insurance? Demand rises. However, because of an artificial shortage of the supply of doctors, health care prices rise, which results in insurance costs to rise also.

Politicians blame free markets for the high price of medical care. However, it is obvious that the medical industry is not a free market, but rather a statist market which is spearheaded by the AMA, which used the force of government to eliminate competition by restricting medical schools, restricting alternative medical treatment, preventing the import of medication and classifying more and more ailments as a "disease", which means only MDs can prescribe treatment. More recently, bureaucrats will determine what doctors can charge for services. When you get an appointment with your doctor and have to wait up to an hour before seeing him/her, you are witnessing firsthand the effects of the artificial restraints on the supply of doctors.

I wish I had more space to tackle the free market "failure" or social costs of pollution. This is really an entire article in itself. With this in mind, the main point to remember is there are two and only two ways to organize an economy or market. One is free markets, meaning free from politicians and bureaucrats intervening in the voluntary exchange of individuals; and the other is a statist market where the economy is regulated and/or controlled by politicians and bureaucrats. When discussing pollution, or any failure of free markets, one should then compare the topic to the statist economic system. For example, there is no doubt that one of the byproducts of early industrialization was the polluting of our lakes, rivers and air. However, should we not compare the pollution of America with the pollution in China, Russia or India? What is not generally recognized is pollution is actually waste being discharged. Is it not in the more free market economies where individuals have come up with better more efficient means of producing products, as well as how to clean up waterways?

For example, when Henry Ford developed a method of mass producing automobiles, the new invention gave us the ability of become more mobile and at a cheaper price, as well as being more efficient than beast of burden. Yet at the same time, the early internal combustion engines were enormously less efficient than the motors today. Contrary to popular belief, it was individual innovations of the internal combustion motor which made motors create less waste, resulting in the decrease of pollution. It was not bureaucratic regulations. In fact it was the EPA that mandated the catalytic converter, which actually decreased the efficiency of motors, along with dictating MTBE be added to gasoline that had the effect of polluting our rivers and lakes. The point is that innovations, not government regulations, have decreased pollution. Now compare the more statist economies to the more free market economies. Which system has the least pollution, along with innovations to improve the elimination of waste; the free market system or the statist system?

Conclusion: There are two types of systems: 1. The Free Market System 2. The Statist Market System. Markets are not aware of success or failure. Markets only obey the economic laws of supply and demand. When politicians and bureaucrats intervene in markets, the price system is distorted, which affects supply and demand. As with The Great Depression and health care, it was the statist markets which produced undesirable results, not free markets. Likewise, it is the more free markets that have the least amount of pollution, along with innovations to improve the efficiency of production. One only has to compare the pollution of China, India and Russia with the pollution of America to make a judgment of which system most effectively solves the pollution problem. When you hear of market failure, first evaluate which market "failed", the free market or the statist market. Next compare the "success or failure" of more free markets to the more statist markets. The statist will not acknowledge the failures of the statist system. Which system do you prefer? I will take free markets over the dictates of nameless bureaucrats and self serving politicians any day.



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