What is Net Payoff?

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 Does Net Payoff Work?

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 Does Net Payoff Matter?

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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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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