When making a major investment, get the best bang for your buck. Is the asking price firm? Will the seller negotiate? How about a reduced price if you pay cash?
Do a little pencil work before you make your offer on any major purchase. Look at this example.
Suppose the seller wants $100,000 for a piece of real estate. He is willing to sell it to you for nothing down and equal annual payments for ten years at 8% interest. Your payments would be $14,903 per year. The seller now has to live with a ten-year contract. Perhaps he would rather have cash than a long-term contract.
If he would settle for $80,000 cash, here's how you would benefit. Let's assume that you have $80,000 of your own money available. Paying $80,000 cash for this property will give you an equivalent return of 13.3% on your investment.
Remember, if the seller carries a contract, you will pay $14,903 per year for ten years. Your $80,000 is, in effect, getting you $14,903 per year for ten years, and that results in a 13.3% return.
If you don't have $80,000, perhaps you can borrow it and still make a profit. Let's assume that the bank's interest rate equals 8%, the same as the seller wants. You'll pay the bank $11,922 per year. The total amount paid to the bank over ten years is $119,220. This is $29,810 less than you would have paid the seller over the same period of time.
It is easy to see that some combination of your money and borrowed funds could also be used to negotiate a reduced price and a much better deal for you.
This discounted cash payout holds true for existing contracts also. If you owe a sizable long-term contract, perhaps the holder of the note would take a reduced cash payout. It doesn't hurt to make an offer. Money that is now earning you 5% (or less), could be earning you a higher return.
We will gladly assist you in determining your rate of return for discounted cash payouts versus long-term contracts. Please give us a call.
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