Seller Finance Note Words of Wisdom

Investor · Member since 2021 · 113 posts · 56 votes

Hi BP'ers,

My partner and I are potentially buying a property that is being fully seller financed. 3% interest rate, 8% down, 900K purchase price, 5 year balloon. Numbers, cash flow, and upside work out well.

What are your thoughts on things to look out for when doing a cash out refi in 5 years to pay off seller note in full? Any pitfalls to potentially avoid ahead of time? Appreciate your 2 cents! Thanks.

-John

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Chris SeveneyBusiness Member

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

@John Boutros

Make sure you have plenty of equity and really good credit

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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
3y
Quote from @John Boutros:

Hi BP'ers,
My partner and I are potentially buying a property that is being fully seller financed. 3% interest rate, 8% down, 900K purchase price, 5 year balloon. Numbers, cash flow, and upside work out well.
What are your thoughts on things to look out for when doing a cash out refi in 5 years to pay off seller note in full? Any pitfalls to potentially avoid ahead of time? Appreciate your 2 cents! Thanks.
-John
When you refinance in 5 years you might be able to get 80% LTV or about $720,000. Where is the other money coming from?

Talk to a mortgage broker and see if your numbers actually work. I don't think they do.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@John Boutros
Make sure you have plenty of equity and really good credit
7e investments53 Reviews
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Kyle Tusing
Real Estate Agent · Northern Virginia · Member since 2019 · 79 posts · 33 votes
3y
echoing what Mike said. Will you be able to value add to the property to gain some equity to make up the difference? What would the property currently appraise for? Is it in an area of high appreciation? Additionally, I would suggest trying to add value or find ways to make up for that ~108k difference as soon as possible so if for some random reason rates drop you can take advantage of a low rate and refinance into that rate earlier than 5 years (as long as their is no pre-payment penalty).
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Balloons are for clowns. You need to hold that note for as long as possible.
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Jordan Alexander
Member since 2022 · 106 posts · 39 votes
3y
I agree with @Eliott Elias! Try to get rid of the balloon payment. You want to have long term, especially if you plan on holding onto the property.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
I would not argue with a seller who is financing a property for me at 3% for five years. Many sellers do not want to wait 30 years for their money.
A five year balloon at 3% is more than fair.
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Doug Smith
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
3y
I agree with Chris Seveney above. I was a banker for many, many years prior to opening up my private lending company. Banks do 5 year balloons for a reason. They can't accept the interest rate risk inherent in holding a loan longer than that. Longer-term loans are normally backed by Wall Street traunches and fixed, long-term Mortgage-Backed Securities that look a lot like a long-term Treasury. A 5-year balloon at 3% should have you acting like The Steve Miller Band...Take the Money and Run...provided the rest of the deal is a good one. The 8% down is odd. Remember, if this is a rental property, no institutional lender I know will lend more than 80%...or more likely 75% for a cash-out refinance (usually a 5% or so hit to the LTV). Just make sure you have a solid plan to fill that gap from 8% down to 25% equity during that 5-year term. Also, I wouldn't count on appreciation to fill that gap. The last big crash saw a 19% average dip in real estate prices that wasn't recouped for 6 years. We may not see a dip like that, but you don't want to get caught in a dip. Good luck to you.
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Randy Rodenhouse
Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
3y
You will have to be aware that you may have to come to the table with more money when the note balloons (or when you have to refi) since you may not have sufficient down payment if the market has stayed flat (has not appreciated). Second, the interest rate on the loan may be higher on the refi and therefore your debt service is possibly going to be higher.
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Brett Chupka
Member since 2020 · 13 posts · 5 votes
3y
John, I would also give a listen to the newest BP podcast episode that came out yesterday with Pace Morby. He mentions how he puts balloon payment extensions into his contracts in case that situation comes up where you can't refi and get all the money you need out.
Essentially he has a clause that if the house doesn't appraise for X amount needed to cover the original mortgage, then the balloon extends another term (5 years in your situation) with the same interest % etc etc. That was the first I had heard of them but if the seller agrees then it is what it is.
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