Few weeks ago I was watching the TV show The Lottery Changed My Life. If you have not seen it, it shows real people and how their lives have changed after winning a lot of money in their state or national lottery. Some folks handle it real well, for others it’s like misery walked in the door and became their best friend.
I have never bought a lottery ticket. The day after the TV show and out of curiosity, I went to the California Lottery website. What captured my attention was the posting about the California Super Lotto Plus and how the payout worked. It got me thinking about note discounting, and the similarities and differences between the two. Here’s what I am talking about:
According to the California Lottery website, the Super Lotto Plus payout begins at 7 million dollars. So, if you win the 7 million dollar jackpot, you can take a cash option and receive 3.7 million dollars today, or you can choose 26 annual payments that escalate over time. The Lottery is obligated to deduct federal income taxes at the 25% tax rate. You could pay more if your bracket is higher.
So, if you receive 3.7 million before taxes, that represents a 47% discount from the advertised jackpot of 7 million. Applying the 25% federal tax rate, you will receive 2.78 million. That’s a 60% discount from the 7 million. California applies no state income or personal tax.
2.78 million is a lot of money – but it’s not 7 million!
How does it work with a note? Let’s say you have a current balance of $100,000. You have at least 20% equity in the property, your payor has decent credit (650+), and you have nice seasoning( 12 months+). You will probably be offered $75,000 – $80,000 – a discount of 20-25%.
20-25% is less than 47-60% !
Either way, if you want dollars today, those dollars will be discounted. A dollar today is worth more than pennies paid out every month for the next few years. That’s the concept.
I know the numbers are different and the reward is greater with the lottery. But do you follow me here? The lottery may not be your money that is being played with, but the net result is much lower than the public is led to believe. A professional note buyer, on the other hand, will be upfront in working with you, and probably give you the most aggressive pricing your note deserves in the current market.
When it comes time to sell your note, try to keep your situation in perspective. Just remember the lottery discount, and be pleased you have a marketable asset generating cash flow that you can exchange for cash.
