Out of ignorance of the law, ignorance of how interest rates are determined, or out of fraudulent motives, scams will always spring forward when new programs are introduced. The $8,000 tax credit for first home buyers is no exception.

I want to send a "heads up" to my readers so they will not get caught in charging usurious interest at best, or at worst, become entangled in a fraudulent scheme with the illusion of fast money for small investments.

The scam, in couple of variations, goes like this.

A seller will contact you asking if you will loan $6,000 NOW to receive the $8,000 tax credit when the government sends it to the buyer. All is arranged and your money is all that is needed. The seller will have "their accountant" determine the eligibility of the buyer, and in some cases have the buyer sign a power of attorney giving the account the right to have the tax credit sent directly to the accountant. This in itself is a debatable relationship. How can the accountant be representing the seller in his/her affairs, and at the same time have a fiduciary duty to the buyer that a power of attorney establishes? You might ask your attorney about this one. It is not a "sandbox" I want to play in, but you make the call.

Add to this the usury issue. For example, I have been approached by three different sellers wanting to know if I would lend the buyer $6,000 NOW, and receive the $8,000 when the buyers receives their check from the government. I was assured since the accountant was on board, and I could actually secure the loan with a deed of trust, I would have no risk. (RED FLAG)

What's wrong with this transaction? All things being equal, the usury rate in Texas is 18%. How much interest would you be charging? I have been told it might take as long as 16 weeks (Let's say four months) for the buyers to receive their $8,000 from ole Uncle Sugar.

Here is a chance to apply your calculator skills. If you were to make the loan for $6,000 and actually receive the $8,000 check in four months with no payments in between, you would be charging 89.48%.**

If the seller challenged the transaction, you as an investor would not only get involved in a legal battle over usury laws, you could also get entangled in a web of being an accomplice in unethical practices of the accountant.

To summarize, even if there were no issues whom the account represented, you are still left with the fact that your interest is over 89%. Since interest rates this high are definitely usurious, is this not a law suit waiting for a place to happen? Act accordingly.

There are ways of getting these high yields that do not involve usury laws. "How To Make Obscene Yields with Small Money" gives you some concrete "everyday" techniques. You will be amazed at their simplicity.

If you have questions about structuring a note to sell, or have a note you want to convert to cash, be sure to contact me. (Hint: if you have good notes you might want to convert them to cash now before interest rates rise)

**(If you do not know how to calculate interest, THE NOTE PROFESSOR NOTEBOOK is an inexpensive way of learning about the concepts of the time value of money)

If you have questions on notes or yields Contact Me
I will be happy to discuss your specifics.

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The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it." P.J. O'Rourke

I received an email stating something to the effect that I was "anti Obama" and should give his programs a chance. Those who have followed my newsletters know I was just as critical of Bush's economic policies. Bush believed in wealth redistribution just as much as Obama does. I am a free market advocate, not a political advocate. The sad truth is the Republicans advocate socialistic programs just as much as the Democrats do. The Dems believe their socialistic programs will work because "we care", and the Repubs believe their socialistic programs will work because "we have good intentions". For the Repubs, a $1Tril stimulus program is socialistic, but a $650 Bil program is not. All the time, neither party will examine the mixed socialistic economic system we have been living under for the past century, and admit it does not work.

No matter which party is in power, nor how good the intentions, when the principles of free markets are abandoned in favor of politicians determining the price and supply of goods and services, the price system will become distorted, leading to shortages and wealth destruction. This is not a political statement, merely economic reality. I wish it were true that we could just pass a law where medical care, housing, food, clothing and transportation would instantly be provided. We would then have the dream of Heaven on Earth.

But this is not a dream, it is a fantasy. Everything has to be produced. It is the exchange of production that makes human survival possible. When government TAKES the production of one individual and transfers it to another, this is a form of consumption without production. Sooner or later, consumption by government officials will exceed the ability of producers to produce. We have reached that stage. The dream will turn out to be a nightmare of poverty. I did not make this rule, Reality did.

Relative to real estate, here are the forces we must contend with. First, the Federal Reserve has been steadily increasing the supply of money to pay for government programs. This is the cause of inflation. Add to this the reality that the Federal Reserve is artificially keeping interest rates low, which is causing another inflation bubble to form. Sooner or later the bubble will burst, releasing the "inflation monster". But the politicians do not want to address this fact. They had rather we concentrate on "The Dream".

Keep in mind we are also in an economic "correction" mode, which mean that prices of assets are declining in response to overvaluation caused by the past easy money policies of the Federal Reserve. In other words, real estate is going down in price and loans are becoming harder to obtain. These two forces of inflation and declining prices are at play.

There has never been an inflationary bubble that has not resulted in a recession. Yet, if the Federal Reserve decides to not let prices decline as they should, and increase the supply of money, we could well drift into an "inflationary recession" similar to what we experienced in the 80's. (With an ex president of the AFL-CIO being head of the New York Federal Reserve Bank, your guess is as good as mine as to what the FED will do)

I look for inflation to start emerging in the near future. The prices of real estate will escalate, but the money to purchase real estate will dwindle. CASH WILL BE KING!!!

The other method of purchasing real estate is to return to buying and selling real estate using owner financing. This is the only way the real estate economy moved back in the latter 70s and 80s. It is likely this will be true in today's market. The days of investors purchasing with institutional loans and selling with conventional mortgages are going to dwindle, if not come to a complete stop. You would do well to learn how to use owner financing techniques. When we came out of the 80s, those who bought and sold using owner financing, along with those who used cash to their advantage, created large amounts of wealth.

Does this mean not to invest in real estate? Heavens no!!! Just realize what economic factors are at play, and do not listen to the politicians or news "experts". Neither saw this economic chaos coming, even though it was clearly visible. Act out of knowledge

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All rights reserved