Net payoff is the profit or loss of a transaction after expenses. It’s important to understand before closing a sale to establish a floor price and determine if it’s worth pursuing. Lenders use it to inform borrowers of total loan repayment amounts. Investors use it to determine if holdings are worth selling.
Net payoff is the determination of the profit or loss of a transaction after deducting related expenses. It allows the person to consider the bottom line gain or loss on the transaction, rather than just the sale price. When analyzing a transaction, the net gain is compared to the gross proceeds from the sale and is always less than or equal to that figure.
The concepts of gross and net amounts are related concepts. Gross revenue is the selling price of an item. It is the amount of money that the buyer pays. Comparatively, net income is the amount of money the seller receives in hand, after paying all selling expenses, such as commissions. Net payoff analysis allows the seller to determine whether the sale resulted in a profit or loss. Doing this analysis before the sale can help the seller decide if it is worth pursuing the transaction.
Lenders also use the concept of net gain to inform a borrower of the total amount that must be paid to withdraw a loan. The net amount includes outstanding interest and fees which are calculated on the day of payment. Loan repayment amounts are not simply the principal amount of the loan.
A common example of net gain is in real estate sales transactions. Homeowners price their homes on the market, hoping to get an offer close to a set sale price. Once an offer is made, the seller cannot assess whether he made any money selling the house using the offer amount. To determine how much money he is actually making from the sale, the seller must subtract the expenses of the sale from the amount of the offer. He can easily find out that he is making a loss, after the mortgage has been paid off and the sales expenses have been deducted.
This is why it is important to understand the net gain of a transaction before closing a sale. The initial valuation will help the seller establish a selling price that translates into a certain amount of net profit. In the example of selling a house, calculating the net result of setting the price of the house at a certain amount will allow the seller to establish a floor price. He will know that anything below that price results in a net loss.
Financial analysis using net profit is also a good way to determine whether certain holdings are worth selling. The analysis is done in advance so the investor can make a decision that maximizes profits and minimizes tax obligations. For example, a net payoff analysis might tell an investor that selling stock will result in a profit that will increase his tax obligations to a point that eliminates the lucrative benefits of the sale. The investor could choose to donate the shares to a charitable organization and accept a cancellation donation instead of selling it.
Smart Asset.
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