Is 0% better than 12.75%? - Posted by Aaron - UT

Posted by Nate-WI on October 13, 2005 at 18:21:57:

Ten-four Aaron. Keep after it.

Is 0% better than 12.75%? - Posted by Aaron - UT

Posted by Aaron - UT on October 13, 2005 at 12:45:38:

Hello everyone,
First time poster, long time reader here.
I?m about to close my first deal and I have a question about structuring the note. I am selling a 30 year old single wide (2/1) for $3K with $500 down. I initially asked $2,500 for the home but explained to my buyer that was my cash price hence the $3K. What I essentially did was ?bake? my finance charge into the higher price consequently, I plan to offer the buyer zero percent for 10 mos. ($250 per month, well within my buyer?s budget). Obviously from a ?dollars to me? standpoint, I?m doing better by offering $2,500 at zero percent than I would offering to finance $2,000 at 12.75% for 10 mos.
In the long run, isn?t it less cumbersome to structure deals at zero percent? We wouldn?t be required to track interest payments and send out 1098?s at year?s end. I?m sure there are tax considerations that I haven?t thought of e.g. how do you determine FMV of a zero percent note (using Hyre?s tax accounting)? Another issue would be future marketability of the note. I would think one could still discount the payment stream to give future note buyers their required yield.
Just curious. Look forward to other?s insights.

Re: Is 0% better than 12.75%? - Posted by joe-ga

Posted by joe-ga on October 19, 2005 at 07:27:47:

depends on who is on the receiving end of the check.

Re: Is 0% better than 12.75%? - Posted by Ryan(NC)

Posted by Ryan(NC) on October 13, 2005 at 23:26:15:

People expect to pay interest when they borrow money and it only takes a few seconds to figure when the payments come in, plus it’s makes the deal sound better, would you rather tell your friends that you paid $100,000 for your $46,000 house but got a 0% loan or would you rather tell them you got it financed on easy terms for $46,000?

Interest is mainly an illusion, the off the wall example above is the same house just financed at 6% over 360 months instead of loading the interest into the purchase, the payments and length are the same. Don?t stress the interest rates, you can make the calculator say what ever you want when you sell and people expect to pay some interest on a loan. Your real profits are made when you buy not on what interest rate you decide to charge.

We mainly do rent-to-own at retail prices and normally charge around 14.5% with a low down and easy terms and have never had it questioned. I am however quick to use lower payments and 0% as a deal closer for higher than normal down payments when I know they have it. i.e. Aaron, With the $500 down we talked about, I’ll have to have higher payments and charge you 14.5% to make this work. But if you can put 3k down from your lottery winnings yesterday, I’ll carry the balance at 0% and I can lower the payments for you by $25 a month… will that work for you?

If they take a low down and easy terms we make more money over the term of the contract, if they make a higher down payment we cash out faster and our yield shoots through the roof. Our profit is built into the purchase and both solutions work for us and the buyer gets to brag to their friends about the great easy terms they got or the fair price and a 0% loan they have. It’s a win-win situation, which leads to referrals coming from your buyers since you’ve been fair with them.

Just my .02

Best wishes,
Ryan Needler

Re: Is 0% better than 12.75%? - Posted by Steve-WA

Posted by Steve-WA on October 13, 2005 at 15:43:32:

This has been discussed A LOT in the past. Do a little archive-divin’ and see what you come up with - here’s a couple of intelligent threads on the subject of interest rate to charge; 0% and otherwise

IRS will impute an interest rate - Posted by Anne_ND

Posted by Anne_ND on October 13, 2005 at 13:04:05:

The IRS will impute (assume) an interest rate- last time I heard it was about 6%. So you’ll be paying taxes on the interest income regardless.

Why wouldn’t you charge a higher price for financing? You don’t have to give 0% interest because you let them pay over time. Once you get the principal/interest thang down in your bookkeeping it will not be a problem.


Re: Is 0% better than 12.75%? - Posted by Eric FL

Posted by Eric FL on October 13, 2005 at 12:52:30:

I was having the same thoughts just the other day. I would love to hear some pros input on this.

Re: Is 0% better than 12.75%? - Posted by Aaron - UT

Posted by Aaron - UT on October 13, 2005 at 18:16:14:

Thank you for pointing me in the right direction, very good ?food for thought? in the threads.
Curious, you started the first thread by talking about difficulty selling in a 55+ park. The one I?m selling now is in a family park however, there is a well kept senior community in my area that I?d like to explore.
Are you having any success in the senior parks; are the lower / no interest rate ads working?
Thanks again.

Re: Is 0% better than 12.75%? - Posted by Nate-WI

Posted by Nate-WI on October 13, 2005 at 16:05:22:

If you have DOW the the answer is in the book. If you don’t have the book then shame on you and buy it.


Re: Is 0% better than 12.75%? - Posted by Aaron - UT

Posted by Aaron - UT on October 13, 2005 at 18:11:02:

There are four paragraphs on the subject in DOW that address the dollar aspect of 0% vs. 12.75%. My question was about the bookkeeping / tax considerations that aren?t addressed.
Certainly not a criticism, DOW is an excellent resource but it was never meant to cover all the ?what ifs,? hence the value of this site.