What are my options when the balloon payment is due?

Question

I am negotiating a deal right now where the seller is willing to carry 90% of the loan for me for 10 years. Is my only option at the end of the 10 years is to sell? My goal is to hold onto these properties to build my wealth, not sell every 10 years.  Please help!  :D

Andy J. · Answer

Your future plans are almost definitely going to be different than those in the present.  Therefore re-negotiation may be a good option.

If the seller or the heirs are looking for immediate cash out prior to balloon maturity you can offer them less than remaining principal as a payoff.  They may be motivated in the future to accept such an offer, and if not you can continue with the monthly payments until the balloon comes due.  Of course you could also work with a note broker to extend the note, sell it, get the owners/heirs paid and maintain your financing.

If when the balloon comes due they still want monthly payments you can renegotiate for more favorable terms on the note, interest rate, amortization period, cross collateralization, the possibilities are endless.

Either way when the issue comes to hand, you'll have a good idea of what the owner/heirs wants, but they won't necessarily know what you want.  You can have the upper hand in negotiation if you play your cards right.

Bryan Hancock · Answer

You can always refinance the property at that point.  You will need to qualify for financing at the time.

Bryan Hancock · Answer

If you track down a knowledgeable broker you can develop a strategy for lining up your debt products to finance your portfolio.

Fannie/Freddie products start getting dicey past 4 loans.  The requirements change on how many you can get past 4 with the waxing and waning of the market.  Past 4 you should start developing relationships with portfolio lenders so that you can roll debt over efficiently if you need to.  Keep in mind that this assumes you are buying residential properties.

What will likely happen is that you will want to finance some commercial properties later on as well.  This introduces new loan types that are somewhat more sophisticated, but the principles are pretty much the same.

Regarding cost of debt, private loans don't necessarily HAVE to be more expensive.  With seller carrybacks you can often get some pretty sweet deals on loans.  The private money refinance's cost will be largely a function of how connected you are with your lenders and how much time you want to spend raising money.

1031ing the asset to trade up for higher-priced assets will keep you under the radar for your Fannie/Fannie bullets, but you will likely want to trade little green houses for red commercial properties at that point anyway.  I think exchanging for life is the best strategy absent some some cash out refinances to provide liquidity.  Refinancing is not a taxable event so this makes sense in most cases from my experience.

It is good you are thinking through your debt strategy up front.  Seek out some experienced brokers and they will work with you as your portfolio grows.  Having a strategy for debt will keep your powder dry for subsequent deals and allow you to grow your asset base responsibly.

Tony Nguyen · Answer

Thank you so much for everyones reply! I am a new member so seeing the instant support and response is pleasant.

From what I've read so far from you all, if I want to hang onto the properties at the 10 year mark, here are my options;

- sell the property
- get a conventional loan
- get a private loan
- ask the seller/lender to extend the balloon date

I guess my only concern with getting a conventional loan is how it really limits your growth when you reach a certain number of loans. Also, with a private loan, chances are rates and cost will be very high. I guess selling and then 1031ing  the property could be advantageous in this case or best case, having the seller/lender agree to more mailbox money.

Steve Babiak · Answer

If the seller passes away before the balloon date, the heirs would have been getting the cash flow.  Some might want to continue getting mailbox money, some will want to get cashed out.  But nothing lost by trying the same approach with them.

Mark B · Answer

IF he or she is still alive. :)  I have the same deal with one of my properties and he insisted on the 10 year call because he was 84 at the time of the sell.  I guess he is optimistic about making it to 94.  (side note: he's going to have some happy offspring - the man owns a big chunk of ABQ.)

Steve Babiak · Answer

You can also try to persuade the seller (but now after 10 years he's your lender) to continue with the "loan" - especially if you have performed on time.

Sammy Johnson · Answer

hello Tony  you can search here on BP and find a private lender or commercial to refinance or go conventional  after your time is up as you will have paid principal down to fit these lending criteria

What are my options when the balloon payment is due?

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