In THE NOTE PROFESSOR NOTEBOOK, I have a section on purchasing an entire note, then selling half the note for enough to purchase the entire note. Your profit will be the "tail" or back end of the note.

I used a case study from several years back where the prevailing interest rate was in the mid teens. The scenario goes like this. There are 25 years left on a note paying $578.86 monthly, with a balance of $75.000. The note sellers were in dire need of cash and needed to sell their note immediately. I purchased the note for $42,598.20. Although this is a hefty 43% discount, it was actually market value at the time. But remember, this was back in the day where interest rates were in double digits.

I did know an investor who required only 13% yield. He agreed to purchase half the note, or 150 payments (Half of the remaining payments) Here is what my note investor's purchased looked like:

N = 150
I/Yr = 13
PV = 42,819.41
PMT = 578.86
FV = 0

How can this happen? If you learn nothing from this issue but the following point, you will be way ahead of all other Note Buyers and Note Brokers. It all has to do with the concept of compound interest. Contrary to what many believe, when you "purchase a note", it is not the "note" you are purchasing, but rather the right to receive a CASH FLOW for a specified period, to obtain a specific yield.

Since the payments for the first half of a long term note are mainly interest, not principal, at the end of 150 months, the balance of the note is still $54,780.42. This will give you monthly payments of $578.86 for the next 12.5 years. If this is placed in an IRA, ask your accountant what the tax advantages are.

In The Note Professor Notebook, I go more into advanced explanations as to why these transaction can be done, but suffice it for this article to know that it can be done. (Along this train of thought, did you know that the Net Present Value of a straight amortized loan is the same as the Present Value? Just food for thought!)

I have been asked if this technique can be accomplished today. The example I am given is a $100,000 note at 10% that is purchased for $70,000, then applying the process of selling half the note for enough to pay for the entire note. The issue here is that by offering $70,000 for the entire note translates into a yield of 14.87%. In today's market, if the note seller does any shopping at all, he/she will be able find several note funders who will pay much more. At a 12% yield, the price would be $85,000. I was able to complete my deal because the interest rates were higher and the spread fell into place.

In other words, do not spend time looking for these deals, just realize the concept and let them fall into your lap. With this being said, be sure to contact your Note Buyers now and ask them if they will allow you to keep the back end of the note. Some will, some won't.

What happens in the event of an early payoff? We then go into schedule B which I have discussed in past articles of The Note Professor Newsletter. If you would like me to revisit this topic, please let me know.

What happens in the event of a default? This all depends on your partial contract, so be sure to read and understand it. From a practical stand point, are you really that concerned about what happens? In the worst case scenario you will get nothing after the foreclosure. Then ask yourself the question, "How much do I have in it?" Since you have nothing in it, why be concerned?

Conclusion: Purchasing a note is really a misnomer. What is actually being purchased is a cash flow over a period of time. The concept of compound interest and interest spread sometimes allows us to create a situation where we can purchase the entire note's cash flow, and sell half the cash flow for enough to purchase the entire cash flow. Of course our profit will be the back end or tail of the note. Your risk is zero money wise in the event of a default. In the event of an early payoff, you will get a lump sum, which depends on when the payoff occurs. The interest spreads allows you to apply this technique. Although it is difficult in today's market, the deals still might be out there. Look for them.

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.

I received several emails wanting me to comment on Jonathan Gruber's revelation that for Obamacare to have passed Congress, deceit and the stupidity of the American voter not to understand that Obamacare is basically a wealth redistribution program. Gruber also admitted the Massachusetts Program was "successful" only because Senator Kennedy created a federal slush fund to subsidize it. When any program is subsidized by government, the program is a form of wealth redistribution, and therefore a form of consumption exceeding production. If you have been following my newsletters, you know that consumption cannot exceed production. It is a law of nature.

When I first started this article, my thoughts were to comment on all the negative aspects of Obamacare from an economic standpoint. However, on one of the cable news programs there was a prominent Republican legislator and a prominent Democratic legislator debating the pros and cons of Obamacare in light of Gruber's "off the cuff", but honest, portrayal of Obamacare. It was during this discussion that something caught my attention, which is more reason for concern than Obamacare itself.

What took my attention away from Obamacare to a more serious issue? Both the Republican and Democrat agreed that with all government programs, there will be winners and losers, and it is the job of politicians to evaluate these trades offs for the common good.

Did you notice that both political parties embrace the concept of collectivism? Without knowing it, both these politicians defined the major difference between a free market economy and a collectivist system.

In a free market economy, we voluntarily trade for goods and services without the interference from government. For example, when tenants pay rent, they are exchanging their earnings for a dwelling to shelter them from the elements, as well as the amenities associated with housing, such as electricity to cook and preserve food, not to mention other pleasurable activities such as watching TV, listening to music, and playing games. Likewise the landlords receive earnings that can be converted to things they value, while the tenant receives the value of obtaining the best housing that can be obtained for an agreed price. Is this not a Win/Win scenario where both parties come out better than they were before the transaction?

Notice this is a mutually beneficial, voluntary transaction based on an agreed price as set by the laws of supply and demand. As a side note, when events are allowed to follow the laws of supply and demand, shortages or surpluses seldom occur. Moreover, if they do occur, the price system of free markets will rapidly bring prices to market value.

Contrast this voluntary trade of a free market system to a collectivist system where political programs, such as rent controls determine the price of shelter. A perfect example is the rent controls Nixon enacted in the 70s. Because of the Federal Reserve's massive money expansion, inflation was in the double digits. Of course this put upward pressure on both real estate and rents. Rather than acknowledging that high rents were a result of the rapid expansion of money, Nixon decided to enact price and rent controls, "for the common good".

Politicians, not market forces, decided the price of rents. Politicians and regulators setting a price for goods or services distorts the market pricing system. Just as today, the politicians of the 70s also reasoned, "There must be tradeoffs."

As with all government programs, under rent control there are winners and losers. The winners were renters who had their rents artificially frozen without regard to rising costs or the laws of supply and demand. (A point that is seldom mentioned is the fact that elite tenants of high end apartments benefited the most from rent freezes rather than low income tenants.) The losers were not only landlords who could not pass on their increased expenses to their tenants, but in many situations tenants themselves who had to endure the unpleasant living conditions of massive deferred maintenance because landlords were not permitted to raise rents to pay for the inflationary rise in the cost of labor and building supplies, and yes property taxes to properly maintain rentals.

Now fast forward to today's Obamacare. The winners are the sick who will have their health care premiums subsidized by those who are healthy or tax payers. The insurance companies also win if the tax payers pick up their costs. Of course the losers will be not only the healthy and tax payers who subsidize Obamacare, but the health care industry itself.

Remember, price controls cause shortages, and politicians intervening in the price system will always results in distortions in the market. Look for heath care and insurance premiums and deductibles to be in chaos next year.

But I digress. The theme of this issue is that Obamacare, price controls, corporate subsidies, price support, rent controls, minimum wage and ALL government programs are only the symptom of the problem, not the cause. To reiterate the problem: Both political parties believe there must be tradeoffs in all government programs, and it is the job of the politicians to determine what tradeoffs are for "the common good". Is there not a presumption of politicians from both parties that they know better how the economy should run than those who are actually producing and exchanging for their own benefit? The result is we are strangled with government programs and regulations that distort an economy's price system.

The philosophy that politicians decide what is good or bad for the economy is the basis of collectivism; which in a nutshell is a system where the state decides what is to be produced and who is to receive the production, and the individual is inferior to the state.

Nowhere in history is there an example where an economy based on collectivism has sustained itself, and worse has not decayed into some form of tyranny. Obamacare and Gruber are not the problem, but the symptom. Both parties believing in the concept of collectivism is the main concern.

To add a foot note to this article was a question from another of my readers. She asked what some of my economic observations have to do with real estate or notes. A quick answer is consumption cannot exceed production. We are consuming more than the ability of producers to produce. Moreover, when politicians and bureaucrats interfere in the market place, a distortion of the price system results. When price systems are distorted, shortages or surpluses occur. This distortion affects all areas of the economy, including real estate and notes.

Applying this to real estate and notes; no one can doubt our economy is in turmoil because both parties adhere to the concept of collectivism. Be aware of debt on your investments and the money supply, because the price of real estate is directly proportional to the financing available. This awareness will keep you from making unwise decisions, and can even increase your wealth. If you have notes, now would be a good time to sell them if you believe interest rates are going to rise.

Does this mean not to invest in real estate or notes? Heavens no! Just be aware what is happening. Act out of knowledge, not out of fear or ignorance.

Merry Christmas, Happy Hanukkah and Happy New Year.

If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR Remember: If you know of someone who has a note to sell, I DO PAY REFERRAL FEES.

Copyright © H&P Capital Investments LLC
All rights reserved

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