In today's economic climate many "gurus" are touting owner financing is the new panacea as an exit strategy for real estate. Often balloon notes are given as the ultimate solution to the real estate investor's problem of selling property in a tight money economy. The theory is to sell the property now, then have a short term balloon.

For example, a house sells for $100,000 with $3,000 down with interest only and a three year balloon.

The fantasy being presented is that in three years, the buyers will miraculously be able to refinance, and the real estate investor will walk off with all the money due him/her.

A second fantasy is that the investor can immediately sell the note and get maximum value because the note buyer would be able to get his/her money back in a short period of time when the buyers refinance.

Then, of course, is the old myth, "If they cannot make their balloon payment, I will just take the property back in the pristine condition I sold it." These strategies do not reach from the "podium to the pavement". Do not be fooled.

Let's realistically think about this scenario. To begin, if the buyers cannot obtain financing now, what makes you think they can obtain financing in three years? Are their credit scores going to improve in three years? Probably not. Add to this the possibility the property will decline in value only by a small amount. Even if the buyers' credit has improved, the property's decline in value will not support a refinance, even by FHA standards. (To add gasoline to the fire, some "gurus" are teaching to get more than market price when selling your property with a short term balloon. How is the property going to get refinanced when the value was inflated from the beginning?) Are you beginning to see these strategies are not sounding good, because refinancing the property is probably not going to happen. Live in reality, not in illusion.

What about selling your note and getting a higher price because of the balloon. It is true that on a calculator the note buyer will enjoy a high yield by purchasing a balloon. In last week's NOTE Workshop in Dallas, we learned that yield is a target only. True yield is determined only after the payoff. Note buyers know this and realize the note will probably not be able to be refinanced in three years. Therefore, we will price notes in one of two ways.

1. Buy the payments only, and leave the seller with the balloon. (Sometimes we will buy part of the balloon also, but this is becoming less common than a year ago)

2. Anticipating the note will have to be extended, therefore pricing the note as a straight amortized note.

If it is an interest only note, many note buyers will buy only the payments, and will not even consider recasting the note.

If you want to sell your owner finance balloon, here are some procedures to take to make sure your note will have maximum marketability.

1. Make sure your property is not over priced
2. Make sure your buyers are credit worthy
3. Get at least 5% down
4. DO NOT MAKE THE NOTE INTEREST ONLY (This is true especially for commercial notes)
5. Make the balloon 7 years or more
6. Be ready to accept a partial purchase of your note

I will teaching about balloons in the next Workshop series on NOTES in Dallas Saturday April 18th.

If you have questions about structuring a note Contact Me
I will be happy to discuss your specifics.

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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 question I have received most often this past month concerns the "stimulus" bill, and why this is not positive for the economy. (Remember, an economy is nothing more than individuals exchanging values) I am again going to refer to Frederic Bastiat's classic essay. Look at "The Broken Window" and "Public Works"

Remember, government can only spend what it extracts from producers, and more importantly, governments consume, they do not produce. Since this is tax paying time, this is the perfect opportunity to point out the illusion that government creates jobs.

Let's take a simplistic example that governments create jobs is a myth. Say you produce $3 a year and hire one employee and pay him/her $1 a year, you consume $1, and you will have a profit of $1, which you will save and create real capital (this savings will capital for future growth).

Now assume that a person (let's call him George) is out of work, and in order to obtain George's vote, the politicians promise to "create a job" for him by the government's spending money. The politicians spend money, and lo and behold George gets employment, for $1 a year. The politicians w ill tout how "their spending" has created a job for George, how George is now spending money and the economy is recovering. This is what is seen. But what about what is not seen?

What is not seen is where did the politicians (when you think of government, think of politicians and bureaucrats, that who they are) get the money to "spend"? They had to come to you who is the producer. Since it took $1, to hire George, the politicians had to tax you $1 to pay for George's job. You now have some choices to make. Since the government has taken $1 from your production, you can either let your employee go which will mean there is now another person out of work. In other words, George was hired at the expense of your employee. No job creation here, is there? Or you could take $1 out of your profit, which will mean no money saved for expansion. Without expansion, your business (the economy) will stagnate. Or you could reduce your consumption, which would mean other merchants would suffer, and they will be in the same situation you are in. What is not seen is that when the government takes your money for George's job, you pay at the expense of your employee's job, or your business growth, or cutback in your own consumption, which results in your merchant 's being forced to contract.

The point is governments cannot create jobs. The best that can be obtained is to shift employment, not to actually create jobs. If government spending (of your production) could create jobs, the unemployment rate would not have been in double digits through out the Great Depression.

Why can government not create jobs? Because governments consume, they do not produce. Here is an economic law that cannot be overturned by Congress, the Supreme Court or public opinion. CONSUMPTION CANNOT EXCEED PRODUCTION. Governments are now consuming more than the ability of producers to produce. The "stimulus" bill is merely a form of government consuming without producing, under the guise of creating jobs.

The question that is being ignored is "where does the money from the stimulus" come from. Politicians spending your earnings to "stimulate" the economy is but one example of how a system of free markets differs form a collectivist form of economics. In free markets, values are exchanged voluntarily where each side benefits. In a collectivist economy, values are extracted by coercion resulting in one side benefiting at the expense of another. In a nutshell, the politicians are acting from a false premises in economics: consumption need not be preceded by production; deficits do not matter, and printing currency is the same as producing values.

But what about the politicians having to spend money to "jump start" the economy in a recession if the producers choose to save their earnings instead of spend it. Good question. I will discuss this myth in my next newsletter. HINT: All money is spent

If you have questions, Contact Me. It is from your letters and comments that I get many of my topics. .

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