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Thursday, March 18, 2004
The High Price of Not Paying Cash
by Willard Michlin
When buying something, you can buy in one of two markets. The first is buying on terms in the retail market and the second is buying in the wholesale cash market. This can be illustrated by referring to the biggest purchase we all make in our lifetime---Real Estate.
In recent years, when buying a house, its been easy to get financing of the first mortgage, so the seller is not forced to finance the whole sale. What I mean is the seller doesn’t become your first mortgage holder, the bank lends the money and the seller gets the cash. Moreover, he will most likely make some concessions if he doesn’t have to carry back a second trust deed. Therefore, giving the seller all cash will usually get you a better deal than if you ask the seller to sell you the house for a very low down payment, with him carrying back a sizeable trust deed. The big savings come when you are buying real estate that doesn’t have easy institutional financing available. The purchase of vacant land can be the best example.
Buying In Action
My father was interested in buying industrial lots in the city of Montebello, just east of downtown Los Angeles. This was during the 1960’s. In those days it was common for a buyer to put down 20% and the seller to finance the remaining 80% for 10 years at 8% interest. For example: a $10,000 lot would cost you $2,000 down with $97.06 payments every month. After 10 years the total of the principal and interest payments would be $13,647.45. If you wanted to build on the property you had to pay off the land loan, first. The sellers then would not have to wait the whole 10 years before getting all their money.
Many property owners sold their property because they wanted money. Getting the $2,000 wasn’t much money to them. So, my father would offer $5,000 all cash to the sellers. More than 1 out of 5 would take the cash up front instead of waiting for payments over 10 years. By offering the extra $3,000 cash down, my father saved $8,647.45 on the sale ($5,000 on the price reduction, plus the interest on the note). Now that is buying wholesale!!
Car Buying
Buying cars can be done the same way. When you pay retail, the dealers talk monthly payments. If he lowers the price, he’ll raise the interest rate. When you are buying for cash, he can only talk price. When you are leasing an automobile, they don’t even tell you the price!
The major consideration in leasing a car or not, is made by the leasing company to be all about what the monthly payment is going to be and how much extra it is going to cost you when you drive over 12,000 miles per year.
Ever finance a used car from a “no credit check” dealer? He gets you for 36% interest on the balance you borrow, after getting a 50% down payment from you. Then if you miss a payment he takes the car and sues you for the difference. Buy what you can afford in cash and save making the lenders rich.
Average Income Over A Lifetime
I read a report once that said that the average man makes $1,500,000 over his lifetime. Of that amount, he uses $600,000 to pay the interest on his purchases. Let’s look at the purchase of a home, from a slightly different point of view. A man who makes $1,500,000 in a lifetime will be earning on average about $30,000 a year or $2,500 per month.
He can afford to spend 40% of his income on rent or a mortgage payment. This means that he can afford a $150,000 house. If he can qualify for a 90% loan he would owe $135,000 at 8% amortized over 30 years. That means he pays $221,609.58 interest plus the $150,000 principal to buy this one house and pay it off over 30 years. The interest alone is almost 15% of his lifetime earnings! Buying anything on credit can cost you more than the retail price because you must add the interest to the cost of the item.
My Suggestion
Buy for cash and negotiate for the best price you can get. If you must borrow, pay it off in as short a time possible. Also, never borrow for personal consumption. Postpone the purchase long enough to pay cash. If you can’t afford to wait until you save the money, you shouldn’t buy the item. It is just too expensive.
To buy on payments raises the cost even higher than the cash price, so it becomes even more expensive. So if you cannot afford the cash price, you definitely cannot afford the financed price. My suggestion is to pay cash and buy wholesale.
Buy the best, pay with cash!
Willard Michlin is an Investor, California Real Estate Broker, Accountant, Financial Distress Consultant, well known Public Speaker and Administrative/Business Consultant.
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