Don’t Let a Balloon Payment Burst Your Bubble

Selling a property on contract usually includes some form of a balloon payment in five, seven or ten years. While putting a balloon into a contract is exciting, you should also know that most balloon payments do not come to fruition. In most cases, you either re-write the terms of the contract or you enforce the contract and take possession of the property again by following through on the judicial ruling of the contract.

Now, I am not here to burst your balloon (pun intended) but, I want to give you a few strategies to consider once your contract is in place

Refinance: Because we are in a difficult financing climate right now, this is an idea you should always help your buyer plan for. Work with a local lending institution to get the ball rolling so your purchaser can get into a traditional mortgage from your contract. This can be a quick process or a lengthy one. Either way, you want to be prepared. Know exactly what the lending institution needs from you and the note holder so the refinance doesn’t get caught up in red tape. The last thing we need is more red tape!

Offer Letter: One of the more effective strategies we have employed here over the years is sending an offer letter that gives the purchaser a discount on the end price if they take action by a certain date. Holding a contract with a balance of $50,000 that is going to be paid out over 15 years is great for cash flow, yet if you can incentivize them with say, a $10,000 discount on the end price if they can cash you out of the property within 6 months, it becomes a win-win scenario, right?

Enforce the Contract: Enforcing the contract can be your best exit strategy for delinquent payers. Do you have someone who is a notorious late payer? Someone who waits till the last second to pay, just so they stay within the guidelines of the contract, only to repeat the process again and again? That would be a good instance where, if they cannot make their balloon payment, it would be a good idea to follow the agreement of the contract. Good payers, who can’t come up with the balloon payment, would have, at your discretion, the opportunity to re-finance into a new contract. Having a choice in this instance can help you maintain proper control of your contracts.

It’s always a good idea to include a balloon payment in your contract sales. However, it is more important to be realistic in your approach: Not everyone will pay your balloon off. Most people are either looking for a discounted sales price on the back end or want you to carry and/or extend a new note for them.

Photo Credit: Brandi Sims

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.