What Is a Net Payoff?
Net payoff is the determination of a transaction's profit or loss after deducting related expenses. It allows the person to consider the bottom line gain or loss on the transaction, rather than just the sales price. When analyzing a transaction, the net payoff 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 sales price of an item. It is the amount of money that the purchaser pays. Comparatively, net revenue is the amount of money that the seller receives in hand, after he pays all sales expenses, such as commissions. Net payoff analysis allows the seller to determine if the sale resulted in a profit or a loss. Doing this analysis before the sale can help the seller decide if the transaction is worth pursuing.
Lenders also use the concept of net payoff to inform a borrower of the total amount that needs to be paid to retire a loan. The net amount includes outstanding interest and fees that are computed to the day of payoff. Loan payoff amounts are not simply the principal amount outstanding on the loan.
A common example of net payoff is in real estate sales transactions. Home owners price their houses according to the market, hoping to get an offer that is close to a set sales price. Once an offer is made, the seller cannot evaluate whether he made money selling the house by using the offer figure. To determine how much money he is actually making on the sale, the seller has to subtract the expenses of the sale from the offer amount. He can easily find that he is taking a loss, after the mortgage is paid off and the sales expenses are deducted.
This is why it is important to figure out a transaction's net payoff before entering into a sale. The initial evaluation will help the seller set a sales price that results in a certain amount of net profit. In the home sale example, calculating the net result of setting the house price at a certain amount will allow the seller to establish a bottom line price. He will know that anything below that price results in a net loss.
Financial analysis using net payoff is also a good way to determine whether it is worthwhile to sell certain investment holdings. 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 stocks will result in a profit that will increase his tax obligations to a point that obviates the profitable benefits of the sale. The investor might choose to donate the stock to a charitable organization and take a donation write-off instead of selling.
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