Question for the rich folks. What Are You Thinking?
You own a home free and clear that’s worth about $1M. You are asking $1.4M. So, you are offered a deal where you receive $736k up front and carry the remaining $600k, meaning that you get $2,500.00 each month for 2 years (on top of the $736k), then you receive a lump sum payment of $600k OR the house is yours again. You turn the deal down.
I am not rich - at least in material things. But that's my question. What is rich? We are comfortably middle class and that makes us better financially off than most of the world population. We have clean water, air and health care. My grandchildren will have the right to make choices in their lives. Did I help or just muddy this up more?
I think the point of having questions is to answer the question with an answer, about the question and not with another question. :-)
Here is lesson in capitalism, finance and business and it isn't costing you one cent. First of all the sale price is $1.4 million and after 2 years the seller may or may not get a total of $1,396,000, which is not $1.4 million. This is the first issue.
There are a number of factors that are considered in a deal like this. The first is the "time value of money". The second is the "lost opportunity costs". The third issue is "inflation risk". And the fourth factor is "currency risk". And there are other risks as well, but we'll stick with the financial issues that can easily be monetized.
If someone is paying me in the future there is a cost associated with that time. The cost is based on the future value of the dollar, in other words -- is the value of the dollar likely to increase or decrease? In addition to that factor seller needs to analyze inflation risk which is also going to limit his/her purchasing power in the future. Stated differently, how much do I have to be compensated in "interest carry" charges to WAIT to receive my $600,000, because two years from now the value of a dollar could be 20 percent less and the price of goods could have increased 20 percent which means that $600,000 is only worth $360,000.
The other factors such, as lost opportunity costs focus on the loss associated with waiting 2 years. Perhaps there was an investment that could have been made during that period. For example, let's say the seller does the deal and another 9/11 style event were to occur a few months after the deal was signed and the seller had missed the opportunity to invest in gold for two years and the price increased 200 pecent. The financial loss on $600,000 is $1.2 million.
Essentially, it is always better to get your money up front because you never know what tomorrow will bring. Or you could look at like this, rich poeple are rich because they use OPM (other people's money) when speculating on the future.
Lions Den Media hit it on the head exactly!
At $2,500 a month you are carrying a loan at 5% interest. While to some people that may sound like a good deal, many can make a much better return than that on their money.
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