When $10 Is Better Than $100 -- Teaching Note Holders
Published: Sat, 11/24/12
It's very difficult to buy a note from someone who doesn't
understand that future payments are discounted. Below is
one of the best ways I know to explain it.
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W. J. Mencarow
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www.cashflows.org
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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.
Many note owners 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 owner just won't trust you.
I have found the following approach is often 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. Everyone I've asked has chosen the $100.00 a month
from now.
Then say, "how about the $10.00 now or the $100.00 year from now?"
He'll likely still want to wait for the $100.00. 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 (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 calls for monthly payments and the
$100.00 bill doesn't. But there is no guarantee that the
payments will be made. The note holder is taking a risk that
the payments may not be made and he will be faced with the
expense, time and trouble of foreclosure, then repairs to
the property, having it sit on the market, costs of holding
it, costs of selling it, etc., etc. And point out that all
of those factors are another reason investors insist on
a discount.
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 --
IF IT IS PAID!
To learn more about notes, visit www.PaperSourceUniversity.com
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