Owner Financing for 5 years With Balloon Payment?

Question

I have a seller that has agreed to owner financing on a few properties he owns. I have come up with 100% financing for 5 years with a balloon payment at the 60th month. Will I be shooting myself in the foot with terms like these? Does anyone have experience with this sort of agreement?

Thanks

Chris Seveney · Answer

Impossible to determine.Its not the financing component in this instance it is the following:

1. What is the rate on this 100% financing

2. How much cash do you have to cover repairs, maintenance, capex and vacancy.

3. In five years if a lender will only lend on 75%, would you be able to cover that?

Those are the questions you need to be asking, not about how you buy but how are you managing the asset and what is your exit strategy.

Matthew Crivelli · Answer

@Michael Eybs

No one knows if you are going to shoot yourself in the foot. Is there a chance? YES. Could it also work out just fine? Also YES.

Taking a 100% loan on a 5Y balloon term in the current market conditions. I would label the transaction as HIGH RISK. The seller is likely thinking the same thing, he knows if you fold because you can't refinance or sell down in the midterm he has the ability to take back the properties after you paid them 5 years of interest payments. Sounds like a win win for the seller.

I would have at least couple different iron clad exit plans in place if you do decide to roll the dice.

James Blair · Answer

Assuming you are getting the properties at a good price and competitive rate, this is a great deal for the buyer. Typically, seller would require some kind of down payment in case property deteriorates or market falls over the 5 year time period. Most importantly buyer needs to have a solution in place for when the balloon payment is due as there is a high level of interest rate risk.

Daren H. · Answer

It depends on a lot of factors. Are you paying interest and at what rate? What is your exit strategy? Do the properties need rehab (I would assume they do)? Do you have the rehab funds? Will the properties cashflow? Are you buying with enough equity that if something does not go as planned you can still escape and make a little dough? All financing is not good financing.

In some instances it can work well with short term financing and balloon payments. I have bought several properties with 4 month and 8 month 0% interest seller financing terms and balloons. It just depends on what you are trying to do and the underlying numbers.

Suzanne Player · Answer

Try giving yourself an option at the 60 month mark for long term fixed rate financing at a rate slightly higher than the current rate in the applicable market.  If rates go up you're obviously protected.  But the seller would also benefit by having a loan at a generous rate if the rates went down but you didn't sell.  When the time comes, the seller might want to continue getting predictable payments and you might not want to sell (or face a difficult market to sell in).Also, the seller might not want to foreclose if the market for the property is not conducive to selling at the 60 month mark.  (After all, if the seller foreclosed the property is now his/her problem & they have to pay the carrying costs on the property.)

Yiwei Cheng · Answer

I think that's a great deal and I would take it.  Are you paying him any interest?  If not, there's nothing for you to lose.  It would have appreciated already in 5 years in NY.

Owner Financing for 5 years With Balloon Payment?

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