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Hello again ,
It's very difficult to buy a note from someone who doesn't understand that future payments are discounted. In this Note Course Bonus Lesson I'll tell you one of the best ways I know to convince them.
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How To Explain Discount To A Note Holder
By W. J. Mencarow
It's very difficult to buy a note from someone who doesn't understand the time value of money.
Most people cannot understand why they shouldn't get (as an example) $10,000 for their $10,000 mortgage note. "After all," he or she might say. "It says $10,000 right on it."
Since you are offering him less for his note than what he thinks is "fair," many times the note holder just won't trust you.
Often, I have found the following approach to be successful:
Pull out a $10.00 bill and a $100.00 bill. Offer him his choice: he can have the $10.00 bill right now or the $100.00 bill a month from now. Unless they are starving, everyone will choose the $100.00 a month from now.
Then say, "how about the $10.00 now or the $100.00 year from now?"
If he still says he'll take the $100.00 a year from now, keep increasing the time it will take for him to get the $100.00 until he chooses to take the $10.00 bill now.
Your response: "You have told me that a $10.00 bill now is worth more than a $100.00 bill a year (2 years, 5 years, whatever he chose) from now. So the important factor is not what amount is printed on the piece of paper -- whether it is a dollar bill or a mortgage note -- but WHEN YOU GET THE MONEY."
"Your note has $10,000 written on it, just like this bill has $100.00 written on it. They are both pieces of paper with dollar amounts written on them. Your note is like this $100.00 bill that you don't get for a long time. It's value depends on WHEN it is paid off."
So he doesn't think you are trying to trick him, point out (before he does) that, yes, his note provides monthly payments and the $100.00 bill doesn't. Tell him that is why it is more valuable than a note that does not have any monthly payments, and you will pay him more than you would for such a note (there are such things, of course -- balloon notes, where all the payments plus interest accrue to be paid in one lump sum at the end of the term).
Don't get into detail. Don't try to impress him with what you know. That's not why you are there. You have a choice: You can impress him with how knowledgeable you are, or you can buy his note.
Keep it simple. You have one job to do in this mission: You must make him understand that it doesn't matter what is printed on the piece of paper -- whether it is a $100.00 bill or a mortgage note -- what matters, what determines value, is WHEN THE MONEY IS PAID.
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How To Explain Discount To A Note Holder
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