Interest rates fluctuate due to market conditions but not in the way most people
even consider; we call it "the cost of money". Consider this; when the stock market is in flux,
the political climate is in turmoil, Congress can't agree on what to have for lunch let alone how to run the
country, investors are concerned about security. Not to mention what's happening in Europe and other world
All of these factors affect investors demand for their rate of return or "yield". I'll ask you to put on your
investors hat and consider this question; "if it was your money what kind of return do you want on your
Most people answer that question "as high as I can get"- what does that mean 6%, 10% even 20%? In 2012 the
average answer to that question is probably 10%to 12% (in 2008 the answer was 9%). That Is the cost of money...
Many people incorrectly assume that 6% interest is "good money" nothing could be further from the truth.
Remember there is the risk of security PLUS the return for effort. Let me explain; if one has a very safe secure
investment returning 7% interest with no risk and no effort - most would consider that pretty good.
The opposite situation (which applies to most seller financed notes); the property buyer has little or no money
down, the real estate [the collateral] is stagnant or declining in value and the risk of default is high. The note
seller says "But the Property Is Worth allot more than I sold it for"...
True HOWEVER that return requires effort. Because in the event of a default the note buyer has to foreclose,
evict the owner, cleanup and repair the property, list it with a realtor oftentimes sell at a discount because
everybody knows its a distress sale and it could take 3 to 6 months to recoup your investment. Obviously most can
appreciate this second scenario demands a higher rate of return because of the effort to protect your investment -
that is your discount.
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