In today's market, lending standards have returned to the old, prudent practice of lending; meaning a borrower must actually be able to afford the loan, have an income, as well as have an investment in the property. No longer can a home buyer put little to nothing down, merely pass the "mirror test", and be able to obtain financing regardless of income or credit worthiness. Although there might be a few different programs to the contrary, conventional lenders are now looking for mid 600 or above credit, with at least 10 percent down, with verifiable income.

The higher lending standards are giving rise to a rapid increase in owner financing. Because owner financing is again becoming popular, there are many guru's who are trying to sell their wares by claiming owner financing is the new "magic bullet" that will not only allow you to sell your property instantly, but claim you can also make a fortune by selling, buying or brokering notes.

While it is true owner financing is an excellent way to sell your property, there are many myths, misconceptions and outright falsehoods that are being conveyed as fact. In these series of articles, I will discuss some "Do's and Don'ts" when dealing with owner financing, while separating fact from fiction.

Just as conventional lending has returned to prudent lending practices, the note buying industry also has become more conservative. Hopefully, after reading this you will have a better understanding of what Note Buyers are looking for, and will be able to make rational decisions based on reality, not fantasies.

A little history and explanation of the Note Buying industry might be appropriate to set the stage. A year ago a note could be purchase AT CLOSING for approximately 90% of the face value of the note, where the home buyer had only a 600 credit score, with only 5% down. Sadly, these days are gone. Why? In a nutshell because the end funders of these notes were hedge funds, who would play games selling these notes on Wall Street as securities. Collateral and market conditions were secondary to yield. (It wasn't their money)

As of this writing, these hedge funds have been wiped out, and there is little promise they will return in the near future. What is left are private investors, institutions, and banks who are actually using their own money to purchase owner financed notes. Trust me, when you are using your own money, you will quickly use prudent methods of determining risk or go out of business.

Prudent Note Buyers, of course, are looking for yield, but we are also looking at the risks that go along with purchasing notes. Because I am a "stickler" for definitions, let's examine a few risks successful Note Buyers take into consideration. You should consider these risks when taking back a note. By addressing all of these risks, you will make your note not only marketable, but more valuable.

Interest Rate Risk:
Possibility that a fixed rate debt instrument will decline in value as a result of a rise in interest rate. (Similar to INFLATION RISK)

Collateral Deterioration and Devaluation Risk:
Possibility the collateral of a debt will deteriorate or be devalued in price.

Repayment Risk (Credit Risk):
Possibility the borrower will not pay the obligation as promised.

Liquidity Risk:
Chance you will need immediate cash and not be able to sell your note at a price for least the amount you paid. Affected by interest rate and devaluation risk.

Risk-Adjusted Discount Rate:
The rate necessary to determine PRESENT VALUE of an uncertain stream of income. "Risk Free" rate (Treasury Bill or CDs) plus the premium adjustment to account for the risk involved. This is SUBJECTIVE

With these risks in mind, let's examine general concepts Note Buyers use to determine the value of a note.

One of the first criteria Note Buyers look for to determine if a note is a sound investment is LTV (Loan to Value). In other words what was the original loan relative to the price of the property.

For example, a house that sold for $100,000 where the buyer put down 5%, would have a 95% LTV.

LTV is telling the Note Buyer how much money the property buyer has at risk in the property. If the note has a high LTV, Repayment Risk is steeply increased because the buyer has little invested in the property, and therefore nothing to loose.

Likewise, the Collateral Deterioration or Devaluation risk is greatly increased. With little equity in the property, only a slight negative market change will put the Note Buyer in an upside down position. With little to nothing at risk, the home buyer will merely walk away from the property. This is what happened in the sub prime market. We Note Buyers do not plan to make the same mistake.

Note Buyers will also apply the concept of ITV (Investment to Value). In a nutshell, this refers a ratio of amount a Note Buyer pays for a note, relative to the value of the property.

For example, if a Note Buyer wants a 70% ITV, assuming everything else is satisfactory; the Note Buyer would pay $70,000 for a $100,000 note with nothing down.

In this example, the Note Buyer would have a 30% cushion to take into consideration the Collateral Deterioration Risk and the Repayment Risk.

The ITV might fluctuate with the credit score of the payors. For example a note with the payor credit of 700 will command a higher ITV than someone with a medium 600 score. Are you beginning to see the importance of getting as much down as possible?

If the home buyer had put $10,000 down and carried a note for $90,000, the Note Buyer would still pay $70,000 for the $90,000 note. (We are back to Repayment Risk and Collateral Devaluation Risk)

Next month, I will discuss further the criteria Note Buyers use to determine the value of a note. You might want to check out the "Check List for Owner Financing" for some money saving tips when owner financing.

If you have a question on your note or a Note to convert to cash, contact me
I will be happy to discuss your specifics.

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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

GUARANTEE! You will learn at least one new usable concept to increase your profit in buying or selling notes and real estate.

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.

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Definition: Capitalism.

An economic concept of civilization that is based on the private ownership (and control) of the means of production and distribution of goods and services. Such an institutional situation permits and inevitably encourages the division of labor, economic calculation, capital accumulation, technological improvement and the voluntary social cooperation of a market economy in which mass production is designed for the consumption of the sovereign masses. Capitalism is the antithesis of statism, socialism ,communism, fascism or any other form of collectivism, which are based on government ownership (or control) of the means of production and distribution, and where the state deems itself superior to individual rights.

When applying the true definition of capitalism or free markets, it is easy to see that our present economic situation is not a failure of free markets, as politicians would have you believe, but rather the result of the abandonment of free market principles. For example, under a free market system, a government entity like Fannie Mae would not even be allowed to exist, much less act in such a manner as to send the housing industry into turmoil. The Federal Reserve System would not exist, allowing even well intentioned men like Greenspan and Bernanke to control the supply and price of money, which resulted in artificially low interest rates that triggered this entire fiasco. Contrary to what po liticians will tell us, the markets were, and are regulated, not only by bureaucrats, but Congressional bodies.

By the same token, in a free market system, wealth redistribution programs like price supports, aid to farmers, federal grants for whatever the bureaucracy deems appropriate, aid to dependent dictators, or any other program a politician determines is worthwhile.

What we are witnessing today, is not the failure of free markets, but rather we are experiencing the results of almost a century of abandoning free market concepts, and replacing it with the illusion that politicians are actually the producers, and they know better on how to distribute goods and services than we, who produce them.

The further we remove ourselves from free market concepts and embrace the principles of collectivism, the deeper and more prolonged this recession is going to be. It is that simple. Does this mean not to invest in real estate or notes? Heavens no. It merely means act accordingly and do not be conned into believing this "stimulus" package, or any other substitute is going over ride a law of nature. Consumption cannot exceed production.



If you have questions, Contact Me. I will address them in future issues.


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