Balloon payment due on building

13 Replies

Hi,

A few years ago I purchased a 7 unit building with seller carrying the mortgage with 2% interest for 3 years that ends with a balloon The price was $310,000 and I put down $30,000. I made a mistake of not getting an inspection and took the sellers word on the condition and age of things. Immediately after I took over, tenants complained that there has been roof leaks that the owner attempted to fix himself, without good results. I paid for many repairs but water kept getting in. I eventually ended up replacing the whole roof.

At the end of last year, I talked to him about extending our agreement because I spent a lot more money than expected and had credit things to get in order. We verbally agreed on 18 months if I pay an extra $5,000 towards balance when original agreement expires. I sent him a written agreement, which I got my notarized signature and emailed over to him. It's been months and he hasn't gotten it back to me signed. I emailed him about this and he says he agrees to it but we have a few months before we need to sign. I didn't want to wait until last minute and don't feel good about this.

My question is, what are my options to get out of this situation the best I can? I know I can go refinance but do have the credit challenge. an I request the contract be voided for not disclosing the roof situation? What would you do?

Thank you

You can't back out of the contract now. It was up to you to have an inspection done. Hopefully you will be able to refinance. Rates are MUCH higher now, and you will have to get a commercial loan. The value of the building will have to be more than what you owe on it, and the mortgage company WILL do an inspection. If you have credit challenges, and are unable to get refinancing, I'm afraid he may be able to take back ownership of the building and you lose your $30K. Check the terms of your contract. Contact me privately about the credit issues.

Word to the wise for future reference, NEVER fall for the old "you can refinance" trick!!!

I am sorry to hear you are being taken advantage of in this way. If you need some creative finance ideas please ask I might have some ideas. Just let me know by tagging me so I can see ou need more help.  

seller has all the leverage, and you've not built yourself enough exit strategies.

start pounding pavement and talk to lenders to get out of this loan. It seems the dynamic has been set, and unlikely to swing in your favor. Don't assume what a bank will do, go ask a few directly.

@Greg W. Dont wait get working on this now. Do whatever you can tied get him to sign the extension or at least get a written statement from him saying he agrees like email or text. Might help you when he doesn't sign and tries to foreclose. In the meantime talk to as many lenders as you can and try to get a refi going. There no way you are getting out of this contract and getting you down payment back. You might be able to convince seller to let you out for even or something but if you still like the property and want to hold on you need to get alternative financing in place because this seller seems unlikely to actually grant the extension.

You’re likely being played, which is what I think I said on the other post. You should refinance as soon as possible to be done with this guy.

I doubt you have any legal recourse over the roof especially since you’ve owned it for 3 years. However if you don’t pay the balloon payment, you can definitely be foreclosed on

I was finally able to get him to sign extension with notary.  This gives me some time to get things in order and pay down balance a little more. 

I appreciate everyones thoughts and will make sure I'm better prepared in 12 months. I've definitely learning a lot,  even though it's the hard way and won't make the same mistake in future deals. 

One thing you can think about in the future as the "nuclear option" is to go after the seller for violating Dodd Frank or the Safe Act. There are a lot of disclosures required for seller financing and if he didn't do it exactly right he could be liable as predatory or worse, fraudulent. I would not enter into something like this lightly though because it gets lawyers involved, can be subjective in a court of law, and can be very expensive but if he tries to foreclose later if you are not able to refinance it may be a last resort. 

@Greg W. and @Peter M. , Dodd Frank seller financing rules do not apply to rental properties, only consumer residential properties. That means owner occupied.  Apartment seller financing is not subject to Dodd Frank seller financing rules. There are other parts of Dodd Frank that apply to apartment financing, but those parts have to do with banks, risk ratios, and the Basel III guidelines.

@Greg W. , you said you had some credit issues. That WILL prevent you from refinancing unless that property is worth way more than you owe. Contact me to see how to maybe get some of those issues taken care of.

Originally posted by @Ray Harrell :

@Greg W., you said you had some credit issues. That WILL prevent you from refinancing unless that property is worth way more than you owe. Contact me to see how to maybe get some of those issues taken care of.

 Yes,  it's some things I could clear up. 

I will have a decent amount of equity from down payment, 4 years of higher payments at 2% interest,  and appreciation from bettering the condition of the building and increasing rents. 

I have some experience with refinancing residential properties but this is my 1st commercial. I'm learning a lot, even if its the hard way.

I will send you a message. 

For future readers considering seller financing I'll add these comments, not ment to berate this poster, since its easy as a novice to make these mistakes when buying with seller financing.

#1 problem with seller financing:  the price is often over market... IE if an appraisor was hired invarably the price is way over what it should be.   Why is does this sow the seeds for future failure?  (later).

#2 The term / baloon is way WAY too short. Even when over paying (the price) you can dig your way out by increasing the value through NOI improvements (new roofs do not improve NOI). Commercial properties are valued via 2 metrics: NOI and cap rate. Value can increase via no rent increases if the industry is going through cap rate compression (dropping cap rate will raise value price).

5 yr term baloon is almost always killer as in this case.  7 yr better, 10 yr is best.

The todo in seller financed deals:

- Increase value via increased NOI and hopefully enjoy free increases from industry cap rate compressoin so that when you apply for refinancing, the appraisal will come back so that the LTV being offered (70%, 75% maybe 80%) will cover the balance on the sellers note. Given most seller financing is often for 90% even higher it means you need to close the gap between the REFI lenders 70% (what ever) and the sellers note LTV through value improvements. This the rub!!!!! You are often low on the appraisal and you can't REFI without bringing cash to closing often an impossibility.

The fix:

- Make sure you agree to a price that is "market" with the seller.  And that the price is in the range that an appraisor would calc.  Best; hire an appraiser.

- Make sure the term and baloon is >>5yr like 7 or best 10yr.

- Make sure the property can really be increased in value through rent increases as easily as the seller says.  Often you need to remodel units to have tenants be willing to pay higher rent, thus more cash in thatn you have.  So you are really stuck at the current rents...  :(

Are there NOI improvements you can make, eliminate expenses, improve turn over (lower it), reduce damage etc etc. Its hard work forcing appreciation and takes skill and experience. One can learn these tricks at boot camps for the asset type.

In general be weary of seller financing.  Punch the numbers carfully, seller financing is often lipstick on a pig.... LOL or ese some financed buyer would have gotten the deal before you.  :) :) :)

OP best of luck!!!! I hope your appraised value is way up to cover the LTV gap.

@Greg W. , property values only appreciate if the real property is improved, AND the neighborhood improves AND the housing market is in good shape. There are a lot of people who bought property at $300K, made payments for 20 years, and found out that their property is now only worth $100K. So they have ZERO equity, even after 20 years (remember 2008?). Don't count on time being in your favor for the value of the building.

$310K for a 7 unit (depending on unit size), sounds like a deal even in a D neighborhood/D property IF and ONLY IF, you paid cash or already had terminal financing. What area is this in?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you