Owner Financing Term payable at the end of balloon

[Grace B.]

Could you advice this Odd owner financing term? I have a highrise condo under contract. The buyer ask for owner financing because they are retired and difficult to get a loan and yet don't want to used up all cash. I am happy to owner financing, not needing money at this point of my life. They have perfect credit scores 830 and 790 ( I received the credit reports) (They are a retired couple 69 and 62 no children).  They also are living in the same building for many years. they want to buy several units for investments.  In a nutshell they are credit worthy. The current term is $184,900, 10% down, 7.75 %, 5 yr ballon, 30 yrs amor. It is scheduled to close at the end of month and title company is still getting the condo transfer doc ready. There are realtors on both sides. But I have good open communication with the buyers directly.

A crazy idea came to me today. I am still working, not needing monthly income, do you think it is ok to propose change the term to receive one payment at the end of the 5 years (say the 90% principle plus the interests compound yearly)?

This benefits them that there are no monthly payment, reduce their hassle of managing payments. Do you think I can justify that asking a little higher interest rate say 8%? Am I nickel and dime ?  This will be my retirement saving plan. (and try not to spend it yet)

Am I taking too much risk by not getting payments for 5 yrs .till the end? knowing they are getting the title from day one  and I get a promissory note? The only assurance are that 1. title company handles the transaction so it will be recorded 2. I know they have some financial base 3. They have good scores. and they have a unit in the building already. 4. I will get the 10% down to start with.

What do I need to look out for? What if they want to pre- paid a big chunk during the 5 yrs term? Do I need to give them incentive to let the loan stay unpaid till the end and let it generate interest for me?

[Jon Holdman]

As a buyer there is NO way I would go for this unless I intended to default.  On a $184,900 loan at 7.75% interest compounded annually the interest after five years would be $83,684.86.  You want that plus 90% of the principal at the end of five years.  So, in addition to paying interest on the unpaid interest, I have to write you a check for $250,058.86 at once, five years from now.

As a seller and lender, no way either.  Even on a hard money rehabber loan I want payments.  If I (as buyer) was just looking to live there for five and a bit years I might sign up with no intention of actually paying.  Especially being older.  Maybe I die before the five years is up and leave nothing in my estate.  You get the house back, but I lived for free.  Or, maybe I just plain plan to default and walk away rather than paying you the $250K.  You foreclose.  If the house is worth enough, someone bids and wins, you get paid off and again, I lived there for free.