I hope all of you are now aware of selling a "partial" of your note. By "partial" I mean selling so many payments of your note and at the end of the contact time, the note will revert to you, the note seller.

Since purchasing partials is the preferred method of most Note Buyers, it would be wise to know what to expect should you, the note seller, want to sell more payments before the end of the partial period. In other words, say because of seasoning or other issues, the Note Buyer was not comfortable buying the entire note, but did agree to purchase 72 payments of the note that had payments of $2097.64 @ 7.5% for 348 months. Here is what the partial purchase would look like:

N = 72
I/YR = 12.5
PV = -105,881.81
PMT = 2097.64
FV = 0

It should be noted there are several criteria for purchasing partials. In this example, the partial purchase price was based on an acceptable LTV. The purchase price then determined the yield. Had the LTV been lower, the yield would decrease. This is a topic for a different issue.

Two years have gone by and you, the note seller are in immediate need of cash. You contact the Note Buyer, inquiring if you can sell 72 more months of payments. This is a common scenario whether you are buying or selling partials. Of course the Note Buyer is happy to prolong the cash flow on a note he/she already owns, assuming the payors have been making their payments on time, the property value will support the additional investment and nothing else has decreased the value of the note. You as the note seller are elated that you are able to receive an additional instant cash. However, are you going to receive the same price for 72 payments due in the future as you did for the 72 months of payments you initially sold?

A big problem will arise if you expect to receive the same $105,881 you received the first time? As a note seller, you are about to get "sticker shock" when you discover the first 72 month offer has decreased by approximately 40%. Why? Because of the Time Value of Money.

Whether you are a Note Buyer or a note seller, you need to be aware of this principle of Time Value of Money, or you are going to be "shocked" at a quote for the additional payments due in the future, which will be much less than the original offer. You will be surprised at how many seasoned Note Buyers are not aware of how to calculate a selling price for payments in the future. If you are a interested in becoming a Note Broker, it would behoove you to understand the process of buying payments in the future.

This problem can be divided into two parts. The first part is to calculate the PV of 72 payments at a 12.5% yield, the same way as above. The next part is to calculate what this PV will be in the future.

To determine what the PV will be at a future date, we must first calculate how many pay periods, in this case months, will it be before the Note Buyer will start receiving payments. Remember, the Note Buyer originally purchased the right to immediately receive 72 monthly payments. 24 payments have been paid. Subtracting 24 from 72, we come up with a difference of 48. In other words, unlike buying the first 72 payments where the payments will be received immediately, the Note Buyer will have to wait 48 months to receive the next 72 payments. This is going to affect the price enormously, as we shall see.

The last step is to calculate the PV of 72 payments of $2097.64 @ a 12.5% to begin in 48 months in the future. But how do we calculate payments due in the future? EASY. First we calculate the PV of 72 payments as we did originally. The answer was $105,881.81. Keep in mind, the Note Buyer will not realize his/her investment until 48 months in the future. The next step would then be to place $105,881.81 into FV; 48 into N; 12.5 into I/YR, and since no payments will be received for 48 months, we insert 0 into PMT. Now all we need to do is to solve for PV. Here are the calculations:

N = 48
I/Yr = 12.5
PV = -64,386
PMT = 0
FV = 105,881.81

WOW!! $64,386 compared with $105,881. This was a big drop in the original purchase price. Why the big difference? Because in the second 72 month period, NO PAYMENTS WILL BE REALIZED UNTIL 48 MONTHS IN THE FUTURE. Remember, the Note Buyer is purchasing cash flow. The 48 month period where the Note Buyer is receiving no payments there is no cash flow. Therefore, PV decreases proportionally to the time period where payments are not being made, and there is no cash flow.

As a side note, did you notice the balance of the note never did come into play when calculating the purchase price of the future payments? Although the balance of the note is not necessary to calculate the PV of payments due in the future, a professional Note Buyer should have provided you, the note seller with amortization schedules that shows you exactly what the balance of the note will be at the end of the second 72 month period, as well as the Schedule B in the event of early payoff or default. (This is another subject) A which will reveal balances of the note at all levels of payments for the payors, you will also be able to show the note seller exactly what they will receive in the event of early payoff or default. Proper preparation makes educating and explaining partials much easier.

To summarize, buying future payments of a partial is a common scenario for Note Buyers and note sellers. However, to avoid "sticker shock" whether you are a Note Buyer or note seller, you should be aware of the fact that the value of payments in the future will be less than the original offer. There is a big positive. As a note seller you will receive your lump sum of cash in a only couple days after signing a contract. Keep in mind, all the due diligence and title work have already been completed from the prior purchase. All that is left is to sign the note transfer.

The important point to remember is a a note seller, you should also be aware of this Time Value of Money principle should you want to sell more payments before your partial contract expires so you will know what to expect.

If you have any of these, send them my way. I do pay referral fees.

As always, consult an attorney and CPA before dealing in notes or real estate. Try this technique, then contact The Note Professor and tell me how you came out. I love success stories.

If you have questions or comments, please CONTACT ME. Remember, I pay for referrals if you know of someone who has a note to sell.

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

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One of my readers emailed me with a comment. She heard on one of the TV talk shows that taxes do not take away from the economy because the money is transferred to government for the purchase of other goods and services, which help the economy grow. Moreover, she pointed out that taxes go build highways, repair bridges, build schools, maintain the military etc. I suggested to her to read Fredric Bastiat's:That Which Is Seen and That Which Is Not Seen

I know this might be one of those dry economic topics, but it is still necessary to address; otherwise, we will accept another false premise, which will lead us to false conclusions.

I hope those of you who have been following my articles can readily see the error in the economic logic that politicians spending your money does not shrink the economy, but merely transfers money to purchase other goods and service. . Remember, governments consume, they do not produce. With this in mind, let's create a simple economy to demonstrate the effects taxes have on resources.

Let's say you produce three apples, and one of your neighbors produces three oranges, while another neighbor produces three peaches. You will keep one apple for consumption, and then trade the other two apples with your neighbors; one apple for an orange and one apple for a peach. When the smokes clears, you end up with an apple, an orange, and a peach, as do your two neighbors. Happy campers, one and all. The total amount of production is three apples, three oranges and three peaches.

Enters a politician who states he/she has a pet project to advance, and for the good of the country everybody must pay their fair share, and demands you pay a tax of one apple. Likewise your neighbors must pay a tax of one orange and one peach. This tax results in your having only two apples, one of which you wish to consume, but only one in which to trade. Without going into the different combinations, let's assume you choose the orange. You now have one apple and one orange. The orange producer now has one orange and one apple, while the other neighbor is left with two peaches. (Remember this. It will be important later.)

Yet the government with its taxing authority has an apple, an orange and a peach. Did you notice this is more than what our producers were left? Taking this scenario further, the politicians finance their pet project with one apple. They will now tout, "Look at the jobs we created with your taxes".

What happened to the peach and the orange, you ask? The government keeps them for "administrative" costs, and again tout, "See, your tax money goes to buy other goods and services and creates jobs". The jobs created by government is readily seen. What about what is not readily seen?

Using our example, it is true that somebody ended up with an apple the government used to finance the politician's pet project; and the same holds true with government administrators ending up with the orange and the peach. There is no doubt that tax money went to purchase other goods and services, but the question that should be asked is what did the government produce to purchase these goods and services or finance their pet projects? NOTHING!

What is not readily seen is you and the orange producer came out behind because both of you ended up with only an apple and an orange, instead of an apple, an orange and a peach. Remember the peach producer? He or she really came out behind; because once the apple and orange producers were taxed, there was not enough left over to trade for the peach. The result was the peach grower ended up with a product no one could afford.

Moreover, since production takes time and capital, do you think the peach producer will produce three peaches next year and be left with one peach that cannot be traded, or decrease production to only one peach for personal consumption? It is more financially advantageous for the peach producer to reduce his/her production to only one peach. However, when the peach producer cuts down on the production, the economy will further shrink. The inevitable shrinking of production is not readily seen, but is just as real. This in essence is an artificial reduction of production, which in a real economy translates to a loss of jobs.

Looking at this scenario another way, remember in the beginning there were three apples, three oranges and three peaches. When the government financed their pet, projects and paid for government administration, did we not have the same amount of apples, oranges and peaches. The economy did not grow, but rather shrunk. Why? Because the government consumed an apple, an orange and a peach, but did not produce. In other words, government spent our resources, but produced nothing.

What about the assertion that taxes pay for highways, repairs bridges, builds schools, provides for the military? I am truly amazed that even well meaning, educated individuals often use this argument. I will point out again. Highways and bridges are financed by a usage gasoline tax. With the amount of money taken in by the gas tax, our highways should be paved in gold, but that is another subject.

It should be noted that although there are proper functions of government like the military; at the same time the military budget consumes resources that could be used in more productive ways. Even proper functions of government is a form of consuming without producing. For example on a national level, the military; while on the local level a police department. Both are excellent examples of Bastiat's "The Broken Window". For example, using a local police department as an example, if an apple is taken from your production to fund a police department, this apple could have been spent on something more useful. While police protection might be necessary, so is the broken window that needs to be repaired in Bastiat's "Broken Window".

The same holds true with military spending. While military spending might be necessary, taxes to support the military also depletes resources that could have been spent on more productive goods and services. The results of military spending is readily seen. The jobs and productions that were denied because of the military budget is not readily seen.

When you look at a new aircraft carrier or jet being produced, that which is seen; think of all the apples, oranges and peaches that went into the production of these military ventures that could have gone for other productive resources. The point being that even government's proper function is also a form of consuming without producing.

With that being said, those who support collectivism will always point out that taxes go to support the military, Statue of Liberty, Washington Monument, national parks etc, while completely ignoring that taxes go to finance all the wealth redistribution programs like aid to dependent dictators, aid to dependent farmers, aid to dependent corporations, aid to dependent government employees, aid to dependent activist groups and price supports for dependent sugar growers etc.

The collectivist combine proper functions of government with the runaway spending of wealth redistribution programs, as if both are equivalent. We are suppose to believe to believe that spending on all wealth redistribution projects are to be ignored, but rather we should focus our attention on the miniscule spending on popular government tourist projects or legitimate functions of government when discussing taxes.

In conclusion, when somebody asserts that taxes do not hinder the economy, but merely transfers money to other goods and services, be sure to point out the same can be said of a thief. If a thief stole one of your three apples, then traded it for another good or service, did the thief not support a job? Was not your apple merely "transferred" to someone else, so there is no harm to the economy? In many respects the thief is like government. Like the government, the thief took your apple and spent it without producing. In the end you end up with one less apple than you started, while the thief "supported a job" with YOUR apple. In the same manner as the government, the thief consumed but did not produce. Taxes are necessary to fund government. However, even taxes diverted to necessary functions of government such as the military is also a form consuming without producing.

This is why voters must be very vigilant in overseeing politicians and their inherent nature of spending. Whether a necessary function of government or a wealth redistribution program, you the producer are still going to be "one apple short" to purchase a good or service that would grow the economy. When the producers come out "one apple short" the economy shrinks rather than grows. Why? CONSUMPTION CANNOT EXCEED PRODUCTION.

NOTE: If all wealth redistribution programs were eliminated, the government's budget would be so small we would not even be having this conversation.

If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR .

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