# 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.

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