A Beginner with Some Seller Financing Questions

[Jacob Zivanovich]

The more I get into this, the more appealing it sounds, but I'm still cloudy on some concepts. This is regarding balloon payments.

So say you and the seller agree to begin this transaction and are discussing the type of financing that will occur. I usually hear of a 5-10 year balloon payment. How does the investor make this happen? How does someone get out of the balloon payment? Wouldn't that total amount be due at the end? I've always heard that balloon payments are risky.

Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

Not sure if this is the correct thinking. Thanks in advance!

[Andrew Kiel]

I have a mentor that often says "Balloons are for clowns".  I've come to take this advice to heart.  It's amazing how fast 5-10 years goes by and suddenly a big payment is due.

Adding to @Chris Seveney's notes above.  I'm guessing we're talking theory here but I just recently called one of my note holders on a 10 year balloon (yes, I made the mistake and didn't follow advice on more than one occasion). The note holder was more than happy to extend the note an additional 5 years as I've always made timely payments.  In fact, he didn't want me to pay it off.

The fact is, if you don't pay off the note, the seller has the option to start foreclosure proceedings.

Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

Yes, you can of course get a new bank loan and pay off the balloon, but that equals risk.  You may be stuck with a much higher rate at the time of the balloon.  The property may not have the needed equity, personal credit issues, etc, etc...

Do your best to avoid balloon payments at all costs - really talk to your seller about this in detail as to why they may want one.  I've seen many colleagues that have offered balloon payments to a seller when it wasn't even needed or requested.  

If you do move forward with a balloon payment - yes, sometimes the deal is just that good - have a solid exit (refinance or sale) strategy.  And always best to take care of the payment early so as not to get into a foreclosure mess.