Does a lay-away plan that allows exchanges favor the dealer or give the buyer downside protection?

Longacre

I was reading a dealer’s website and they allow for lay-away plans. The terms are that 1/3 is paid down, and the balance in two equal payments over the next three months (no interest, too!). Any cancelled lay-away purchase will forfeit 10% of the purchase price. There is a no return policy on the coin, but you can exchange for another coin without penalty.
Let’s suppose the coin is selling for $15,000 and you do the lay-away plan. You pay $5,000 on Day 1 of Month 1. Let’s suppose there is a down-turn on the market for that coin by 50% on Day 1 of Month 2.

Questions:

1. If you cancel the lay-away on Day 1 of Month 2, you will have paid $6,500 ($5,000+$1,500 penalty) so far for a coin that is now worth $7,500 in the open market. Have you created down-side protection for yourself as a buyer in this scenario?

2. Let’s assume you really like the coin pay the full $15,000. At that point, you invoke your right per the terms to exchange for another coin. The terms are silent as to value, so one has to assume the exchange will be for the $15,000 that you paid since you both agreed on the lay-away terms. Let’s assume you exchange for another coin in inventory that is selling for $15,000. Have you created downside protection for yourself as the buyer since you were able to use your $15,000 exchange out of a coin worth only $7,500, and able to get one worth the full $15,000? And you saved the 10% penalty since you did not technically cancel the lay-away.

Please discuss.

Sonorandesertrat

An interesting thread. First, I agree with the analysis, provided that the dealer agrees to this (I think that there might be a fight....). Second, any dealer reading this will likely modify the terms of his/her plan to cut off the buyer's escape route.

robec

1. If you cancel the lay-away at the start of the second month the value of the coin in the open market is still $15,000. You are refunded your $6000 minus the $1500 penalty.

2. If you paid the $15,000 for the coin why do you feel the coin is worth only $7500.

telephoto1

in scenario 1, If you cancel on day 1 of month 2, you have only paid $5000 at that point and the $1500 cancel fee would come out of that money paid, leaving you with $3500 to be either refunded or applied to a different coin. Thus there is no downside protection outside of "in the technical sense" (the act of having bailed out of the coin prevents you from losing any further value, but you are already $1500 in the hole due to the fee).

Scenario 2...yes, by trading for a coin of equal value you have created downside protection as you have bailed out of the now lower market value coin for a coin presumably of full $15k value and have no cancel fee.

Coinosaurus

I think most dealers will not do layaway plans on coins with a significant downside (ie. bullion). Anytime a dealer does a layaway plan they are risking that the coin will come back into inventory.

MGLICKER

A few buyers have requested a layaway over the years and with one exception I have refused them.

If a buyer does not have the resources now, he may well not have them in 30 and /or 60 days?

For the credit worthy buyer, many third party financing options are available. If that is not an option, maybe he should not be buying the coin.

Coin dealers are not banks and are inviting trouble by wearing that hat.

Having said that, I have given customers a week or two to scrape the money together, that is about the limit.

DaveG

It seems to me that you're assuming coins will be marked-to-market immediately by all participants in the market, as stocks would be.

If the dealer's cash flow position is strong enough, why should he reduce the prices of his inventory by 50% now? Perhaps he can wait a year or more to see if this down-turn is in fact widespread and long-lasting?

If the coin is that desirable, can you really purchase another specimen at half price? Generally speaking, one has to pay "too much" for a very desirable coin - that is, one has to outbid all the other potential buyers at auction or one has to snap up the coin immediately when it appears in inventory. (In which case, the dealer is probably doing you a favor by letting you buy on lay-away.)

I could imagine the number of buyers for a $2 million coin is pretty small, but perhaps there are four times as many possible buyers for a $15,000 coin. In the case of a $2 million coin, if two examples were to appear at auction, there could be a six-figure difference in the prices the two coins realized. On the other hand, in the case of a $15,000 coin, there could be relatively little fluctuation. Are you willing to wait several years for another example to appear? What if you have to pay $25,000 in five years to acquire the coin?

Those of us who were around for the last coin market downturn in the early 1990's remember that it took many dealers years to reduce the prices of their coins in inventory (which is why the coin market was so slow: collectors wouldn't buy at the old prices and dealers wouldn't sell at the new prices). The people who really needed to sell put their coins in auctions, which is where the action was. A bidder still had to out-bid all the other bidders to win the coin, however.

pennyannie

I have no problem letting customers use a 90 day lay-a-way, I have a lot of long time customers that are loyal and buy more than they would without the lay-a-way. I have 20k tied up in lay a ways now. I have the material so I see no real downside. I have never had one cancel but if I did I would most likely refund ALL the money back.

I would be more concerned with a dealer that could not handle a short lay a way. If they are running on such a tight shoestring I would be careful of what business I do with them.

earlyAurum

i agree with the analysis but these boundary conditions seem very unlikely. Also, who will custody the collateral (coins) while payments are pending? Lastly, defaulting will make you PNG. Another consideration is recourse too. In the end, this transaction favors the dealer IMO. I would rather be the house.

Lakesammman

I would take the 10% penalty - cheaper than attorney fees.

Cougar1978

A layaway plan is a way to retail a coin to someone who does not have the ability to pay in full for the coin. If the person backs out of the deal the penalty is subtracted from whatever they put down when this is refunded to them.

I don't do these and my philosophy is if someone does not have the money to pay for the coin in full they need to taper down their coin budget accordingly. I have seen a dealer do this, he set 3 payments over a 90 day period. A $12,000 coin was put on layaway for three $4000 payments and a 10% penalty calculated on the entire price of $12,000 in event of default described as a "lost opportunity fee". The customer defaulted after the first payment and was refunded $2800 with a sort of thank you note and too bad so sad disclaimer. The dealer made $1,200 on a coin he only had to put away for a month. I would be very careful about entering into these types of agreements.

Goldbully

Good to hear from you Longacre.....