Annuity Definition: a specified income payable at stated intervals for a fixed or a contingent period. Annuities come in two forms: Ordinary Annuity and Annuity Due.

What is the difference between the two annuities? In a nutshell, the payment of an Ordinary Annuity is applied to the pay period which precedes the payment date. A real estate note is nothing more than a form of an Ordinary Annuity. In other words, the payment you make on November 1 is for the interest you accrued in October. Interest is paid in arrears. When you are setting your calculator for Ordinary Annuities, make certain your calculator is in the END mode.

Contrast an Ordinary Annuity with an Annuity Due. Again, in a nutshell, a payment for an Annuity Due is applied to a pay period following the payment. Leases and rents are examples of an Annuity Due. Unlike a note, the payment you make November 1st for a lease is not for the month of October, but rather for rights to the property for the month of November. In as sense, you are "prepaying". When you are setting your calculator for Annuity Due, make sure your calculator is in the Begin mode.

We have now set the scene where you can enjoy astronomical yields by applying the Annuity Due concept. In THE NOTE PROFESSOR NOTEBOOK and HOW TO ACHIEVE OBSCENE YIELDS with SMALL MONEY , I outline different techniques in applying these techniques with very small amounts of money.

For example, one of my students gets her hair done once a month for $100. She asked her hair dresser, who she has used for years, if her hair dresser would take $270 now if my student prepaid for three months. Did you notice this was only a 10% discount? Ok, put your calculator in BEGIN mode for a little calculator practice.

N = 3
I/YR= 138.65
PV = -270
PMT = 100
FV = 0

In other words, if you paid $270 AT THE BEGINNING of a payment of $100 a month for three months, your yield will be a whopping $138.65. As a side note, if you discount the payments by 10% for 3 months in the BEGIN mode, your yield will always be 138.65%. If you can get the discount larger, your yield will increase tremendously. But remember, Pigs Get Fat, Hogs Get Slaughtered.

Scenarios like this can be found everywhere if you are looking. For example, a national hair cutting franchise which cuts hair for $14.95 advertises you can purchase a card to receive the same hair cut for $9.95 per cut if you purchase 5 haircuts in advance. What do you think your yield will be? Remember: BEGIN mode.

N = 5
I/YR= 309.78
PV = -49.75
PMT = 14.95
FV = 0

Not a bad yield for only $49.75, is it? You can apply this concept to rent, storage, yard work, or anything that you pay on a regular basis, including your seller financed mortgage you are paying on. Can you think of anything else where this technique might apply? Do me a favor, try this technique and CONTACT ME, to let me know how you came out. I love success stories.

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.

The Price of Real Estate vs The Financing Available

A recent call from a woman desiring to sell her note brings to mind an important axiom all Note Buyers and real estate investors alike should keep in mind. Remember: The price of real estate is directly proportional to the financing available.

As with all my note sellers, the initial call is very important to setting parameters, as well as gathering information. In this conversation the topic of "how much is your property worth?" came up. She quickly replied, "Properties are selling for $100,000, but since I am seller financing, the property is worth more, so I sold it for $110,000". She went on to say she had taken a seminar that taught her this is the way to sell property when utilizing seller financing.

This is a common myth when selling property. It might be a good business model if your goal is to hold on to the note forever. However, if you ever want to sell your note, or have any hope of the property being sold or refinanced, then selling your property for more than "market value" is not a good strategy. This note seller is going to come to a rude awakening that the value of her note is dependent on how much her property is worth using conventional financing, NOT seller financing.

Why is selling the property for more than appraised value a bad idea if you want to sell your note, or possibly get paid off should the property be sold or refinanced? To begin, when you sell your note, the Note Buyer will determine the value of the property by a BPO (Broker's Price Opinion). A BPO is very similar to an appraisal in that it will take comps from nearby properties. When the BPO comes back indicating the property is worth $100,000 NOT $110,000, the Note Buyer will either significantly reduce his/her offer, or drop out of the deal completely. (Look for past articles on Investment to Value)

Likewise, when a bank completes an appraisal on the property, and the appraisal indicates the property is worth $100,000 NOT $110,000, the property's value will justify neither a loan, nor a refinance. Either way, the note holder is not going to be paid off and will have to hold on to the note, or sell at a deep, deep discount. Let's investigate further the economics of seller financing.

Let's take an example of your having a house that sells for $100,000 and the buyers are able to obtain financing from a bank. How much cash will you, the seller, receive? $100,000, RIGHT? What if someone were to offer you $85,000 CASH for the same house? Would you accept the offer? Why, heck no. Why? Because other buyers can obtain financing and you could get the full $100,000 and not have to take a $15,000 hickie. In other words, your house is worth $100,000 because buyers can easily obtain financing to purchase your property.

Now let's take this same house, except your buyers are unable to obtain financing for one reason or another. In order for you to sell your property, you are FORCED to seller finance. So you sell your property and take back $100,000 note. However, if you were to sell your entire note for cash in today's market, you might receive only $80,000. (Which is why partials are so popular? You don't have to take a large discount with a partial). With this in mind, and someone offered you $85,000 cash for your house, would you accept? Maybe, because $85,000 CASH is more than the $80,000 you would receive for the note. The point is because of lack of financing, your $100,000 house is really worth only the $85,000 cash offer.

We are back to the Number One myth most note holders believe: "A $100,000 note is the same as $100,000 cash." (Revisit the August 08 issue of THE NOTE PROFESSOR NEWSLETTER You might also check out my Economic Observation from six years ago to see how I did.

Take the myth that a note is the same as cash one step further and you will deduce that a house that sells for $100,000 and is financed by a bank has the same value as a $100,000 house that sells with seller financing. We know better, don't we?

Is it becoming clear that as long as seller financing is being touted as the "magic bullet" to sell your property, in reality real estate prices are declining. Does this mean to get out of real estate, or to never seller finance? Heavens, NO. It merely means to remember the price of the property is directly proportional to the financing available. Do not be misled that getting a "higher price" for your property by seller financing is the same as getting more cash. Revisit the July/07 issue.

This brings us to the present financing situation. At this time the Federal Reserve is still purchasing Fannie Mae notes, which is a major reason why real estate prices are remaining stable and even rising in some areas. As long as the Federal Reserve keeps purchasing Fannie Mae notes the real estate market will artificially be propped up. Being an election year, it is difficult to ascertain what the politicians and Federal Reserve will do in the next 12 months. Some say they will "open up" credit, while others say look for Obama to initiate debt forgiveness on mortgages to buy votes. I am not sure what to expect. However, I do know that as long as seller financing is the major vehicle for moving property, the price of real estate will remain stagnant at best, or at worse continue to decline. This is why you must be able to think outside the box in order to prosper in these chaotic markets.

Recommendations: Buy properties at rock bottom prices with all cash and/or buy with seller financing with favorable terms to have an immediate exit strategy. More importantly, become aware of alternative exit techniques, like partials or wraps that will allow you to achieve exceptional returns. As long as seller financing remains a strategy to exit your property, knowing how to effectively structure notes to achieve maximum value will be paramount in increasing your wealth.

More importantly, keep your eye on the Federal Reserve's purchasing Fannie Mae notes. When the Federal Reserve ceases to purchase Fannie Mae, the financing of real estate will essentially dry up.

Remember: The price of real estate is directly proportional to the financing available. Seller financing gives a property a different value than conventional financing.

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

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