Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Payoff

What it is:

Net payoff is the profit or loss on the sale of a good or service after all the costs of producing and selling that good or service have been subtracted.

How it works (Example):

Let's assume investor X wants to sell his house for $700,000. He purchased the house six months ago for $650,000. Normally, it would seem that the investor has made $50,000. But the net payoff is much lower once the investor factors in the following costs associated with the sale:

Realtor commission: $42,000
Closing costs: $8,000
Capital gains tax at 15%: $7,500
Staging costs: $1,000

The net payoff is now: $700,000 - $650,000 - $42,000 - $8,000 - $7,500 - $1,000 = -$8,500

In other words, the net payoff is actually negative. Investor X will have to sell the house for far more than $700,000 in order to make money, even though $700,000 is well above the original purchase price.

Why it Matters:

As the example shows, calculating the net payoff of any investment decision can often lead to a far different decision than one based on the gross payoff. Forgetting to incorporate commissions into a profit calculation is one common oversight, especially for those trading stocks and other securities, which underscores the need to calculate net payoff in most investment decisions.