Do not be lured into thinking because you are charging a high interest rate or you discounted a note to obtain an astronomical yield, this is the yield you will realize.

In my owner financing workshops, I emphasize over and over again that your "yield" is not realized until the note is paid off. (BTW, you do not need to discount notes heavily to enjoy "Obscene Yields" with little risk or money. With this in mind, let's discuss another common owner financing or note buying myth: IF YOU HAVE TO FORECLOSE, YOU WILL RECEIVE THE PROPERTY BACK IN THE PRISTINE CONDITION IN WHICH YOU SOLD IT.

I am going over this myth again because a common theme I am hearing from note holders is "If I have to foreclose, I will "simply" take the property back".

What is the fallacy in this logic? What is not taken into consideration are the cost of foreclosing, holding costs, and closing costs when you sell the property. This is not to mention if your payors file bankruptcy, which will further delay your getting the property back. More importantly, repairs and maintenance cost are rarely considered.

I have read the average house that has to be taken back will have $12,000 in repairs before the house is "market ready". This is assuming there is only normal wear and tear, and no vandalism has taken place. (How many of you landlords have horror stories of tenants moving out leaving your property in shambles, or vandals have come in a gutted your property of everything from plumbing to wiring.)

Last, but not least, few consider in today's economy, the value of their house has declined. Along the same lines, how long will your house remain on the market, and who will buy your property is an important factor, whether you are purchasing a note, or selling a property using owner financing.

Let's look at a typical example. You purchased a $100,000 note for $81,000 to receive a 10% yield, or perhaps you merely sold your house and took back a $100,000 note. It is the concept that I am trying to convey. Assume further the value of your house has declined to $85,000 ARV, and needs $12,000 worth of repairs to make the property marketable. You have also acquired a couple of thousand dollars in holding costs, and vandals are entering your property at night to sleep, party or steal your newly installed carpet, wiring and plumbing. What is your yield? Not good, is it. & lt;br>
I hope I have pointed out two major note myths.

1. If you have to foreclose, you will receive the property back in pristine condition, and immediately find the perfect buyer without spending a dime.

2. Yields are determined by the interest rate your set, or the price of the note, not by the conditions of the final payout. Both of these statements are false. Do not fall into the trap of believing them.

The moral of this article is no matter if you are taking back a note, selling a note, or buying a note, take all factors into consideration before assuming, "If the payors quit paying, I will SIMPLY take the property back". There is nothing simple about it. Are there ways to minimize these risks? YES. But solutions are too lengthy to go into in a brief newsletter forum.

I will be discussing this and other investment strategies in my April workshop.


If you have questions Contact Me
I will be happy to discuss your specifics.

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So much has happened since my last issue, and I have gotten so many questions, it is hard to know where to begin. Let's suffice it to say that I have never seen so many economic fallacies and outright falsehoods than what has been thrown at us in the past two weeks. None of what these "geniuses" are doing is based on sound economic principles. If you get nothing out of this issue, please realize this truism. WE DO NOT HAVE A FREE MARKET ECONOMY, and REPUBLICANS ARE NOT FREE MARKET ADVOCATES.

You can always tell someone is either being intentionally deceptive or is completely ignorant of economic principles when you hear statements like "I believe in free markets, but_____ " or "We must regulate when free markets are not "working". With this being said, let's look at the two most recent fiascoes being perpetrated on us in the name of "If we do not act BOLDLY and quickly, we are in danger of_____ "

The first fiasco is the Federal Reserve announcing they are to purchase $300 BILLION in long term Treasuries. The question you need to ask is "Where do they get the money"? I have heard, "from the tax payers" or " they will borrow it". It is worse than both of these. The Federal Reserve will merely create money out of thin air. No longer do they even have to bother with printing the money, they can now create money by a computer entry. What will be the result of the Feds action? INFLATION. This is an economic reality with no exceptions. They are only fueling the fire for a future crisis. (Ask yourself if a free market economy would have its money under the control of politicians and bureaucrats?)

Then comes the brainstorm of our Secretary of Treasury. Under the guise of a partnership of private investors and government, they are going to buy up these "toxic" loans. Here is the farce, I mean "plan". Say you have a toxic loan of $100. The private investor will put up $7 and the government, WITH YOUR MONEY, will put up another $7, and the government will then loan the private investors $86 to purchase the rest of the toxic loan. (Notice how they used $100 as an example, and not several hundred billion) What we are not told is the $100 toxic note would sell on the market for only $50, at best. So the banks will seem to get "bailed out" with no loss to them.

The next logical question would be "Where does the $86 to loan to the private investor come from, and what are the terms of the loan?" I have yet to get an answer. If you find out, please let me know. I know if I were the private investor, I would not borrow $86 on an asset worth $50. Would you? I would imagine the $86 loan would have to be "modified" when it is determined the toxic notes are worth only $50. If this is the case, the lending institutions would loose nothing, the private investor would still receive a hefty profit and YOU AND I WOULD BE FOOTING THE BILL for this charade.

Here is a fact that is intentionally being omitted. When there is a loan of $100 that is now worth only $50, somebody is going to have to absorb the loss. It appears it is not going to be those responsible, neither Congress nor the lending institutions. Is this a free market system?

Ask yourself another question, "Would Fannie Mae even exist in a free market economy?" We are witnessing not the breakdown of free markets, but rather the results when regulations and political motives replaced the principles of free markets. Remember, "FREE" markets means free from the interference from politicians and bureaucrats. F.A. Hayek described our current situation perfectly in "The Road to Serfdom". Hayek points out that even with the best intentions, when politicians try to interfere with free markets, there will be unintended consequences, which will result in more rules and regulations to combat the bad effects of prior regulations. This process will repeat itself until a free market economy decays into the tyranny of a controlled economy.

The classic economic essay, "I, Pencil" by Leonard Read, explains in a simplistic analogy how impossible it would be for someone to manage the production of a simple pencil, much less try to regulate an entire economy.

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

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