I recently received a request from a Note Broker to value a Note. The broker had all the information, but no Note. I have a policy of NO NOTE; NO QUOTE. The broker assured me all the information was correct and became a little hostile that I would require seeing the Note before giving a quote. The Note Broker acquiesced and finally sent me the Note.

This Note reminded me of why I have a NO NOTE; NO QUOTE policy. Without going into details, the Note had 3 different effective dates as well as no mention of a deed of trust as collateral. Although this Note has problems we addressed them immediately.

While I am now working with the note seller to untie the knots had I given a quote at the beginning it would have been erroneous.

This brings to mind a situation that happened a few years ago, which not only points out why I have a NO NOTE; NO QUOTE policy, but also utilized a creative time value of money concept. I hope you enjoy.

Although I have a policy of NO NOTE; NO QUOTE, in this day of automated quote web sites I once relented somewhat in order to keep up with the competition who are providing instant quotes. However, I will never again give a written contract without a copy of the Note in my hands. This is because of a hard knocks experience a few years ago.

A note seller listed his Note on my web site. All the payments, terms, balance and interest rate coincided with my calculations. Rounding for the sake of simplicity, the note was for $100,000, 20 years remaining, 9% rate, with payments of $899.93. To make the deal better, the payor had a 700+ credit score. I knew the seller was shopping this Note, so I cut corners and without seeing the Note. I gave a written contract for $92,000, which was the yield at the time (10.19%). Now all I needed was the documentation.

The note holder faxed me everything; the deed of trust, closing statement, lender policy, hazard insurance, proof of payments. All that was missing was the Note. The seller assured me he had the Note somewhere, but he wanted to open escrow because he was in immediate need of $85,000.

Wanting to get the transaction closed quickly, I relented and instructed him to take our contract to the title company and order a "nothing further" commitment, which he did immediately. Three days later the seller found the Note and faxed it to me.

All is going well. Or so I thought. However, when I read the note, my jaw dropped. Plain as day, in bold font was the clause: "THIS NOTE IS NON-TRANSFERABLE. The balance of the Note is to be paid on the sale of the property."

The note holder meant to say "NON-ASSUMABLE. But NON-TRANSFERABLE does not mean NON-ASSUMABLE. My investor's legal department agreed. The Note would have to be modified before we could move forward.

I informed the note holder of the problem. As written, his Note was not marketable. The note holder was flabbergasted because the Note was drawn up by a title company. Going straight to the solution, I suggested the note holder go to the payor and ask him to sign a modification, but do not mention the Note was being sold. Contrary to my suggestion, the note holder told the payor he was selling the Note.

The payor consulted his attorney who advised the payor not to sign anything unless "he got a piece of the action." The payor demanded $10,000 to sign the modification. The note seller went beserk. He needed $85,000 not the $82,000 after the $10,000 is deducted from the note quote of $92,000. At the same time the title company was grumbling because it was eager to close. The note holder was distraught. Nobody was smiling.

After negotiating, he got the payor down to requiring only $7,000 to modify the Note. The note holder was satisfied; not happy, but satisfied. This would give the note holder the $85,000 he urgently needed.

After the modification agreement was signed and the deal was assured, I suggested to the note holder to offer to replace the original modification with a new offer before closing.

Instead of the payor receiving $7,000, the new offer would be for the note holder to decrease the balance of the Note by $5,000. Keeping the payments the same, this would reduce the number of payments from 240 to 210. If we multiply the number of payment decrease (30) by the payment amount ($899.73), the payor will save $26,991.78. The payor went for it.

How did the note seller come out? By purchasing a Note with payments of $899.73 for 210 months to achieve a 10.19% yield will give the note seller $88,000 instead of the $85,000 with the original modification. The deal closed 6 days later.

Everybody was smiling again. From my point of view, much of the aggravation could have been avoided if I had seen the Note at the beginning of the transaction, instead of almost at the end. The same problem would have existed, but there would have been less pressure on the note holder to negotiate, and perhaps we could have done even better and closed quicker.

NO NOTE; NO QUOTE might appear to be a little stringent, especially in light automated websites quotes (which BTW are not REAL quotes, but that is a different subject). However, I will always stick to my guns and never put my name on the dotted line until I have seen the note.

Lesson for Note Holders: READ YOUR NOTE BEFORE COMPLETING THE TRANSACTION.

CONTACT ME if you have questions or comments. And remember, if you know of someone who has a note to sell, I DO PAY REFERRALS.

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

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.

Politicians and pundits from both parties are still touting their different economic programs to eliminate poverty and save the middle class. They would do well to take a lesson from Adam Smith in his famous work "An Inquiry Into the Nature and Causes of the Wealth of Nations".

Smith recognized that nations begin in poverty; this is a nation's natural state. So rather than questioning why nations are poor, Smith inquired what caused nations to transform from poverty to wealth.

Smith observed that governments which tried to control and plan their economies noticeably acquired less wealth, even to the point of poverty. Whereas governments which were less intrusive into the voluntary trade of individuals accumulated wealth. Smith noticed when individuals acted in their own self interest, without favor or hindrance from government, society benefited as much as the individual.

Smith said: "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest". Smith goes on to say: "Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

In other words, if individuals are allowed to trade for their own self interest, society in general benefits along with the individual. When individuals prosper, the nation prospers. However, when action is taken by government to interfere with trade for "the public good" (i.e. eliminate poverty or help the middle class), undesirable results occur that inhibits or even prevents the accumulation of wealth by individuals. In Smith's time, it was common to measure a nation's wealth by how much gold or money a government possessed. If a government had gold in its coffers it was considered to be wealthy, no matter the poverty of its citizens or subjects.

Smith was one of the first to recognize that a nation is comprised of individuals. When individual citizens were allowed to accumulate wealth, the nation would also become wealthy. Smith also observed that wealth was not merely gold in the government treasury, but the standard of living of its citizens. It was an easy task to contrast governments which inhibited the accumulation of wealth by its citizens, by trying to eliminate poverty would observably have a lesser standard of living than those nations which allowed trade to flow freely, without interference.

Smith's invisible hand is quite conspicuous today. The "invisible hand" is nothing more than events obeying the laws of economics. When individuals are allowed to trade freely, a price system is established by the participants in the trade, not a politician or bureaucrat setting prices to satisfy the dictates of voters or other interest groups. A price system determined by voluntary traders ensures both parties gain wealth. When individuals are allowed to keep their earnings to spend on their self interest, rather than having their earnings drained by taxation to support a system of wealth redistribution, individuals and therefore the nation becomes wealthier.

However, the "invisible hand" also works in reverse. When politicians and bureaucrats restrict trade, drain resources in the form of taxes, interest or inflation the individual's wealth shrinks accordingly. When the producers have to spend billions a year to conform to the thousands of pages of regulations that no one understands, wealth is drained from the individual. As Smith pointed out, when individuals are less wealthy, so is the nation.

This brings us to today. Politicians from both sides of the aisle are pushing for different programs to help the middle class or bring the poor out of poverty. These politicians would do well to take a lesson from Adam Smith to answer the question as to why the middle class is shrinking, as well as addressing the problem of our chaotic economy.

As Smith foresaw, after decades of our government's wealth redistribution, taxation, regulations, subsidies and interference into the voluntary trade of individuals, would always result in a shrinking middle class. Rather than acknowledging the cause of our economic plight is government's interference into the economy, our politicians choose to "solve" the problems they caused by other government programs or policies.

What is sad is many actually believe their programs will work. Little do these politicians know that as Hayek, Bastiat and Mises predicted, the new programs designed to solve the problems of the old programs will do nothing but make the downward spiral deeper and longer.

Conclusion: If politicians want to increase the wealth of our nation, they would do well to learn from Adam Smith on what makes a nation wealthy. A nation becomes wealthy when individuals become wealthy. Likewise, wealth is not mere currency, but rather goods and services produced for the enjoyment and benefit of trade for those who are producers. More importantly, a nation where individuals who are allowed to trade freely for their self interest without government favor or hindrance will enhance the wealth of the individual, and therefore the nation.

Conversely, a nation that strives to help the middle class or the poor through government programs will set into motion economic laws that diminish the ability to accumulate wealth. The end result is a nation in poverty.

Remember, there are only two ways to organize an economy. One method is where the politicians control the means of production and distribution. The other method is where individuals decide on how they will voluntarily trade with each other.

As Smith observed, the first method ends in poverty, while the second results in individuals, and therefore the nation accumulating wealth. The invisible hand works both ways.

Note: I have gotten a request to comment on the PBS documentary on the Roosevelts. I have just started watching. However, realize that from what I have seen so far, there is much omission and distortion on Teddy's policies. If this is a topic you would like to visit, please let me know.

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

Copyright © H&P Capital Investments LLC
All rights reserved

Real Estate
Note Newsletter and Archives
Click here to subscribe or view the archives of past information packed issues 2003 to 2009. (Current archives 2009 though August 2014 click below.) Forward this newsletter to a friend that would have an interest in Owner Financing and Real Estate NOTES.

Click here for Current ARCHIVES (end of 2009 through August 2014)