Interest Rate Illusions - Posted by Tony-VA

Posted by jeff on September 29, 2002 at 14:38:40:

i agree totally with that. i see no need to rerun your numbers either. LOL

Interest Rate Illusions - Posted by Tony-VA

Posted by Tony-VA on September 29, 2002 at 12:41:27:

Much has been said below about the concern that investors are ?leaving money on the table? by not charging higher interest rates on our Lonnie notes. I disagree and welcome others input.

As Lonnie teaches, one of the first questions we want answered is ?How much can the buyer afford per month??

When I ask this question and my buyer says something like, ?after paying lot rent, I can afford $250 per month.?

That?s it folks. That is how much he can afford, that is how much the market will bear, and that is how much I want per month for this home. Done deal.

When we quote monthly payments, WE INCLUDE THE INTEREST AND PRINCIPLE in that number.

We don?t add on interest to that payment. We don?t say, ?Well, Mr. Buyer, that?s great, you can afford $250 a month in principle payments, how much can you afford in interest payment??

Does it matter if that payment includes a 12.75% interest rate or 18% interest rate?

I would argue that from a cash flow standpoint, it makes no difference at all. I will receive $250 per month from this buyer for the next 3 years. It makes no difference to me how much of that income is generated by interest payments.

Honestly, I could be charging Zero % and still receive the same income. Remember, the buyer is paying $250 per month for 3 years.

Several people have come to the conclusion that profit is being overlooked if we do not raise the interest rate. I beg to differ.

The only way the investor charging 18% is receiving more income than I at 12.75% is if he increases the number of payments (we are excluding down payments from this discussion). That being the case, what is to stop the 12.75% guy from simply adding a few payments as well?

How do we compute our investment performance? Is it computed in Interest Earned? No.

It is often computed by yield (in essence, how much income our invested money brings back to us). If the income payment is still $250 for 3 years, our Yield will not change no matter what the Interest charged is. We still receive exactly the same income.

Let?s see how much the 18% investor makes over the course of the note.

36 (payments) X $250 = $9,000

Now let?s see how much the 12.75% investor makes over the course of the note.

36 (payments) X $250 = $9,000

Imagine that! How can that be? But he was charging more in interest wasn?t he?

I find that the chosen Lonnie ?Industry Standard? is an easy sell to your buyer, makes notes marketable, and allows you to be the nice guy and at least appear that you are leaving something on the table for the buyer if the others are charging 18%.

Charge whatever rate you are comfortable with, be it Zero or 18% but do so with an understanding that it does not change the bottom line.


Same Old Shell Game–New Tortise - Posted by Dr. Craig Whisler CA

Posted by Dr. Craig Whisler CA on September 30, 2002 at 13:14:25:

Tony, your point is well taken. I would just like to add one thing.

Buyers usually don’t know the exact value of used mobile homes. Heck, some sellers don’t even know, BUT buyers DO understand comparative interest rates. They know that 12.75% is better for them than 18%. It leaves a bad taste in their mouths when they perceive that they are being charged a very high interest rate. I want to leave MY customers feeling GOOD about their deal and about me, if they are going to be making payments to me for a long time. Since, as you point out, it really doesn’t make any difference what interest rate you choose if the downstroke and monthly payments all total up the same, then why not take advantage of this golden opportunity to make real friends out of your buyers by only “charging” them 3-4% interest. Same old shell game but with a new tortise. Customers who “think” they got a 3% interest rate from you will brag to everyone they meet about what a GREAT deal they got from YOU. I believe we can get more referrals this way as well as have customers who are happier and who pay better.

Regards, doc

Question - Posted by Gary Baird

Posted by Gary Baird on September 29, 2002 at 17:06:28:


I see your point and agree with your example. It is not, however that simple. What if your buyer says, what is the price, and they won’t accept $500 down and $250/month for 36 months? I don’t know if it is in the water here or what, but about 75% of my buyers want to know the total price, not just the payments. In these cases isn’t charging higher interest rates the only way to increase yield and profit? When I have the chance to do a deal solely based on payment, I see your point, and I do what you suggest, but I would like your input as to other ways to increase profit when buyers insist on hearing a price.


Re: Interest Rate Illusions - Posted by Karl (Oh)

Posted by Karl (Oh) on September 29, 2002 at 13:53:00:


Yes, the interest rate is irrelevant if you lock in the number of months at a certain monthly payment. I do it a little different. I get agreement on the downpayment and the monthly payment, then I throw out the sell price based on those first two numbers. The number of payments is the last number to fall out. I tell my buyer?s that I sell homes at ?full retail? if I finance the purchase. This is a number I make up, but it has to still sound fair to them long after they move in, or I don?t get the referrals that keep my business going. If I can?t get a commitment on a downpayment (many times they just want to know the bare minimum cause they?re broke) I give them the minimum down I would accept, usually $1k, but tell them I?ll reduce the price if they can put more down. I just sold a home to a guy who put $2k down, he?s scrambling to put together another $2k in exchange for $1k off the price of the home. I told him I?d give him 60 days after the sale to do it. On another home I just sold the buyer originally had $2k down. Later he called and said it would be more like $1500. So I increased the price of the home by $500. That sounded fair to him. When it came time to close, he only had $1k down. So I added another $500 to the price. Everyone?s happy.

Having said all that, I use 12.75% on almost all my notes. I hear folks complain about 14-15-16% and higher rates they pay on other loans and credit cards, but I get few complaints about my interest rate. Maybe I could get away with charging higher interest, or maybe it would hurt my business. Things are going pretty good right now, I?d rather just stick with what?s working.

Not long after I first started doing deals, I tried adding in $500 for closing costs on my loans. The banks all do it, right? The first three people I tried it on all threw fits, the idea was short lived. Just cause the banks get away with it doesn?t mean its always going to work for us.

Karl Kleiner

Re: Interest Rate Illusions - Posted by jeff

Posted by jeff on September 29, 2002 at 13:45:58:

i have one small reply to this, but the rest is fine by me.

with higher interest you are receiving more income and less investment recovery. this gives you a higher taxable income. with zero interest and all principal, you have some ungodly taxable gains right up front.

the difference between 12 and 18 shouldnt be enough to break anybodies back when dealing with a couple grand on a mobile.

but i agree with yuor statements totally.

Doc has broken radio silence… - Posted by Shawn J. Dostie

Posted by Shawn J. Dostie on October 03, 2002 at 12:45:59:

Good to hear from you, and I agree for the most part with your advise. Tony thinks that 3% could be too low. We are all right, in that when the terms, ie payment and time period have already been set, the rate and amount financed become somewhat meaningless to a point. I use rate for a somewhat different purpose. If I want the cash as soon as possible, I will charge a much higher rate. 25% is the rate ceiling in Ohio. If I want the income stream to the bitter end I will offer 7-10% (local lender charges 13.5% if at all)
I would be careful charging only 3-4% because I don’t want any snooping officials, and because as a car dealer, 3% financing is obviously a gimmick and that is not my style. I prefer a straight up belly to belly, eyeball to eyeball deal. People do talk incessantly about rate, price, anything that can be used against you, so other than those 2 reasons for rate change, I try to stay consistent. We’re all right, it just depends on your personal closing techniques as to how you STRUCTURE your deals

Good Luck,

Re: Same Old Shell Game–New Tortise - Posted by Tony-VA

Posted by Tony-VA on September 30, 2002 at 14:40:35:

I agree that Low or reasonable interest rate can be a marketing ploy if the market places a value on it. However, I find that they do not, unless it is brought to their attention as too high or very low.

My approach is to instill in the buyer’s mind what numbers are important…down payment and monthly payment (unless they are paying cash). Once we agree on these numbers, the deal is set. The manipulation of price can begin if necessary either to supress price (higher interest) or leave the 12.75% in place.

However, I am not convinced that interest rates are often bragged about to the neighbors by these folks. But I am confident that sales price is.

If we get too nice and go with the 3% or 4% interest rate, the price on the home would increase dramatically.

I have to ask myself, what is more likely to occur?

My buyer bragging to his neighbor that he got a 4% loan, or his neighbor saying “YOU PAID HOW MUCH FOR THAT HOME?”

I contend that the foul taste of over price stings more, lasts longer and breeds more ill will than the a low interest rate brag would gain me.

I don’t intend to imply that 12.75% is the only rate or that higher or lower is better or worse. It was merely my intent to point out the false impression left by several posters that money was being lost by the failure of investors to charge high interest.

No matter what rate investor’s decide to charge, it is my hope that they know how interest rate can be used as a negotiating tool as well as a financing tool, to supress or increase price…AND NOT THAT MONEY IS MADE OR LOST EITHER WAY.

Best Wishes,


Re: Question - Posted by Tony-VA

Posted by Tony-VA on September 29, 2002 at 17:28:48:


What you are encountering is a negotiating question more so than a financing question. Each personality will handle such a question a bit differently.

I do not believe that one location is more prone to a certain tactic (i.e. name the price) than another. What you are hearing from the buyer is a negotiating tactic (whether they know it or not) of trying to make this discussion black and white. One issue and one issue only…price. This of course is not the case and it is up to you to reverse this ploy and get them back to reality.

What is the reality? They need someone to accept their monthly payments and down payment in order to own a home.

The question of price seems logical, but ONLY if they are paying cash. Since most are not, the price is immaterial (and easily manipulated as we have pointed out in this string). And to be honest, price is of no consequence to me. I don’t care if my homes sell for more or less than the other guys. I want a down payment and monthly payment that I am comfortable with. I could not care less what that final price is. I live on cash flow, not price when financing.

A couple of suggestion about what to say or do when hit with the “what’s the price question.”

Responses such as:

  1. The price is negotiable but if it’s reasonable I’ll work with you. This is used by Lonnie very effectively.

  2. The price will be whatever we can negotiate. How much did you say you could put down again? (or how much per month etc.)

Simply reverse their question and steer them back to the facts of life. They are NOT negotiating from the position of strength, you are. They are the ones with bad credit, little savings, small monthly incomes etc. You are the helping hand.

Explain that many of your buyers have similar financial concerns and need someone to work with them. In order to do so, you need to be flexible and make the payments affordable for them. You then return to the question again,“how much can you comfortably afford per month?”

Negotiations are often circular. Keep circling the wagons until their bluff is exposed, you have moved past it and the real numbers (monthly payment and down payment) on the table.

Best Wishes,


Re: Interest Rate Illusions - Posted by Glen SoCal

Posted by Glen SoCal on September 30, 2002 at 01:48:49:


My question has nothing to do with the thread. I’d like to know; what is the 12.75% interest about?

I know it’s an inside joke of sorts, but forgot what it is.

Thanks, Glen

Re: Interest Rate Illusions - Posted by Tony-VA

Posted by Tony-VA on September 29, 2002 at 14:05:58:

Hey Karl,

I understand your manipulating price based upon the down payment. Price can also be manipulated by changing the Interest Rate and leaving term the same (as you ellude to).

My point is that either investor, the 18% guy or the 12.75% guy can do this, but both receive the same amount of money (in my example $250 per month for X number of years). If the 18% guy has to make it 48 months to cover the interest, the 12.75% guy could extend his loan to 48 payments. The only difference would be the selling price, but not income received.

I concede that it is possible to supress the selling price (Buyer shock) on loans that are extended over long periods of time by raising the interest rate.

However, the total money received remains the same (thus the “Illusion”).

As for arguing Negotiating standpoints, there is certainly room to argue both sides (lower interest vs. lower price). But in response to the posts regarding “profit being left on the table”, there is no profit being lost that I see.


You lost me - Posted by Tony-VA

Posted by Tony-VA on September 29, 2002 at 14:14:55:

Jeff, can you explain?

You Wrote:

“with higher interest you are receiving more income and less investment recovery. this gives you a higher taxable income. with zero interest and all principal, you have some ungodly taxable gains right up front”

How is the higher interest rate providing higher income?

If anything, a higher interest rate would lower the sales price, providing an illusion of less gain in the year of the sale.

Yet the total income received remains the same in both scenarios.

$250 X 36 Months= $9,000 for either investor regardless of interest rate.

Thanks for your response. I am interested in understanding both sides of this discussion.


ps. I am purposely avoiding the tax discussion on this issue as tax strategies are individual in nature and can be difficult to compare across the board.

I am simly addressing the “loss of profit” that I can not confirm exists.

Re: Interest Rate Illusions - Posted by Karl (Oh)

Posted by Karl (Oh) on September 30, 2002 at 07:19:42:

Its not really a joke, as much as it is just a thing. Lonnie uses 12.75% interest when he creates his notes. Since most of us here learned the business from him, many of us just followed his lead and use the same interest rate. The joke is that we refer to it as the industry standard. There’s no real industry standard, lender’s interest rates vary based on the credit worthiness of the applicant and other factors.

I agree (nt) - Posted by JHyre in Ohio

Posted by JHyre in Ohio on September 29, 2002 at 14:39:13:


Re: You lost me - Posted by jeff

Posted by jeff on September 29, 2002 at 14:28:47:

if your avoiding the tax issue, then my response has no discussion since it was based totally in the tax realm.

but, interest is taxable income, recovery of invested money is not. this gives you the higher income tax and less basis in the property since havnig the same end money and more interest lowers the principal by default. this lowered principal gives you less gains from charging 7K for a trailer instead of 10K and no interest. the end collected dollar is the same, but the tax basis is raised if its all principal.

youd have to actually work out the total dollar amounts to see the difference between paying higher incmoe on interest or paying higher capital gains up front. one is paid all at once, the other is paid over time. i prefer the over time method, whether or not its more or less, run the numbers, im too lazy to even attempt. LOL

but i have seen Hyre run the numbers before and there was a differnce, paying aver time amounted to less than paying all at once. i trust his numbers completely, i have no need to rerun them myself, even if i had the energy.

You are correct… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on September 29, 2002 at 14:38:03:

All things being equal (and Tony’s saying that by and large, they are), a higher interest rate and lower sales price will spread out the tax, assuming that the tax on any initial gain is payable up-front. I’ve not run the numbers to see how higher interest interacts with my “cash method” approach to paying taxes on the initial gain…remind me in November (once my book is done and for sale) when I’ll have a bit of time to run the numbers on that scenario.

John Hyre

Re: You lost me - Posted by Tony-VA

Posted by Tony-VA on September 29, 2002 at 14:36:46:

I avoided the discussion of taxes for several reasons but primarily because I was responding only to the “lost profit” statements (which were not taxed based statements).

I suppose someone brighter than I could agrue both sides of the tax benefits by getting into Dealer Status, the lack of Installment Sale treatment, raising arguments that the higher interest rate which lowers sales price might be of value etc.

But as far as actual profit (income) from the deal itself, I still find no validation for the higher rate. But I am continuing my pursuit!

Thanks Jeff,