Lesson 20 of 25 · 6 min

The cost of the cure itself: fees, interest, and the spread paid

Five small frictions on one sale came to two percent of the gap they were closing, and a sixth arrives every year.

The forced-sale multiple describes the size of the sale, not its cost. The cost is a separate layer, and because the multiple has already enlarged the sale, every friction charged as a percentage is enlarged with it.

Follow a $149,000 sale, which at a 66 percent threshold cures a shortfall of $149,000 × 0.34 = $50,660. Half the bid-ask spread at an illustrative 0.11 percent costs $163.90. Commission at 0.05 percent costs $74.50. Market impact at 0.35 percent costs $521.50. A flat call-processing or liquidation fee adds $150. Interest continues to accrue between the sale and the application of proceeds — three days at an illustrative 7.94 percent on $149,000 is $149,000 × 0.0794 ÷ 360 × 3 = $98.59.

The total is $163.90 + $74.50 + $521.50 + $150 + $98.59 = $1,008.49. Against the sale that is 0.68 percent, which sounds trivial. Against the shortfall it is meant to cure, $50,660, it is 1.99 percent — and the shortfall is the thing that was actually wrong.

A sixth cost arrives later and is usually larger. Pricing is often tiered by facility size, so a balance that falls below a tier boundary can reprice upward: a line dropping under a $500,000 tier and picking up 0.35 percentage points on a remaining $320,000 balance costs $1,120 a year, indefinitely. The cure was a one-off; the repricing is not.

Costs charged as a percentage of a sale are multiplied by the forced-sale multiple before they are charged. The friction is levied on the enlarged number, not on the gap.

Key terms

Bid-ask spread: The gap between the best buying and selling prices. A seller crosses roughly half of it on each trade.
Liquidation fee: A flat charge some agreements apply for processing a call or executing a forced sale, separate from commission.
Tiered pricing: A rate schedule that improves with facility size. Repaying below a boundary can raise the rate on what remains.

Worked example

Every friction on one $149,000 sale

A $149,000 forced sale at a 66 percent threshold, curing a $50,660 shortfall. Illustrative rates throughout.

Half-spread at 0.11 percent: $163.90
Commission at 0.05 percent: $74.50
Market impact at 0.35 percent: $521.50
Flat liquidation fee: $150.00
Three days of interest at 7.94 percent: $98.59
Total, and as a share of the shortfall: $1,008.49 = 1.99%

Two thirds of one percent of the sale, and two percent of the problem. The multiple enlarged the base on which every percentage was charged.

Check yourself

A $92,000 forced sale incurs a 0.09 percent half-spread, 0.22 percent of market impact and a flat $39 commission. What are the total frictions?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.