Six bucks for a lukewarm beer?!
Yup. That’s the price at most ballparks across the USA. And you know what? Most people will gladly pay that.
You can’t bring your own brew into the stadium. Beer and baseball go together so well. And while you’re enjoying those Buds with your buds, the vending company is enjoying it even more!
This doesn’t just happen with beer. When you recognize the beer at the ballpark effect, you’ll understand how private lenders can easily charge, and get, 12%+ interest on loans.
What is the beer at the ballpark effect?
The beer at the ballpark effect is any situation where people will gladly agree to a price that is much higher than a standard. They do so because the immediate benefits outweigh the other hesitations caused by the availability of a better price elsewhere.
Burly security guys turn you and your knapsack upside down before you get through the gates. There’s no way you can bring in the beer you got from the supermarket for 75 cents. You don’t even expect to. And when the vendor yells: “Beer Here!” you eagerly fork over your $6, sip and enjoy the game with your “ice cold”, 833% markup!
But you do get to enjoy the game so much better with the beer. This is the only way you could get one now. You accept the price based on the needs of the situation.
Similarly, private lenders can easily ask for and get rates of 10%, 12% or more, even though the going bank rate is over half that or better.
And the borrower will gladly fork over that rate.
The key here is to make sure that the beer at the ballpark effect is in action. The lender needs to be the means for the borrower to get that loan, right away.
I’ll take one, please!
When will the borrower gladly pay the higher interest rate? When time is crucial.
For example, when you see a hot property on the market. It’s price is great, and you know you’ll be able to turn it around quickly for a terrific profit. But time is of the essence. If you don’t act quickly, someone else will scoop it up.
If you go the traditional bank route for a loan, though the interest rate will be better, it will take at least 30 days for them to check your credit, process the paperwork, throw in their normal cautionary roadblocks, etc.
But, wait, coming down the aisle, there’s the private lender. With the 12% interest rate. Because he’s an asset based lender, he can get you that loan much quicker. You can get that property. And enjoy the returns when you sell it.
You raise your hand – I’ll take one please!
But wait – won’t high interest rates scare borrowers away?
The private lender’s interest rate is a lot higher than the bank’s. Won’t the borrower be nasty, grumbling, and generally peeved?
Take a look around you at the ballgame. No one is cursing out the beer vendor. There’s a tacit understanding going on, that the immediate benefits outweigh the disadvantages.
And it’s an even clearer case when it comes to borrowing. When you consider the profit the consumer might lose by not getting the property, the higher loan rate is not even a factor. The difference in interest becomes minimal.
The view from the stands
Let’s watch the action to really see how this works.
Say there’s a great real estate property out there. It’s worth $500K. You could buy it with a loan of $250K. But you have about 10 days to close the deal. It’s in a hot neighborhood, and a real steal. You know you could resell it in six months and double your profit.
You can’t afford it without leverage. The bank rate is 6%, but takes over 30 days to close. The private lender can close within ten days, but with a rate of 12%. You could ignore the deal because you don’t have the money. You could lose the deal because of the bank’s 30 day period. Or you can get the deal at 12%.
Yes, the interest from the private lender over six months would cost you $15K as opposed to the bank’s $7.5K. But if you know you’ll make $200K by getting the property, that 7.5 K difference is more than worth accepting.
Take me out to the loan game
People will happily spend a lot more for beer at the ballpark. They want the immediate gratification of ice cold beer to enjoy the game. Same with private lending. Because of the immediate benefits of borrowing from a private lender, borrowers will happily pay higher interest rates. They want the profits only that loan can enable.
Just like $6 beer at the ballpark. 12% loans delivered right to your seat will work. The borrower will be happy. And you, private lender, will be even happier. Now stand up, stretch and sing along –
Bloody brilliant article Sheldon! Love, love the angle carried all the way through. Very little for me to tweak here. Bravo!
_Marked as resolved_
very funny…like it as well