A Beginner with Some Seller Financing Questions

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A Beginner with Some Seller Financing Questions

Jacob ZivanovichPro Member
Spokane, WA · Member since 2020 · 56 posts · 30 votes

The more I get into this, the more appealing it sounds, but I'm still cloudy on some concepts. This is regarding balloon payments.

So say you and the seller agree to begin this transaction and are discussing the type of financing that will occur. I usually hear of a 5-10 year balloon payment. How does the investor make this happen? How does someone get out of the balloon payment? Wouldn't that total amount be due at the end? I've always heard that balloon payments are risky.

Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

Not sure if this is the correct thinking. Thanks in advance!

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Andrew Kiel
Investor · Tucson, AZ · Member since 2017 · 208 posts · 235 votes
2y

I have a mentor that often says "Balloons are for clowns".  I've come to take this advice to heart.  It's amazing how fast 5-10 years goes by and suddenly a big payment is due.

Adding to @Chris Seveney's notes above.  I'm guessing we're talking theory here but I just recently called one of my note holders on a 10 year balloon (yes, I made the mistake and didn't follow advice on more than one occasion). The note holder was more than happy to extend the note an additional 5 years as I've always made timely payments.  In fact, he didn't want me to pay it off.

The fact is, if you don't pay off the note, the seller has the option to start foreclosure proceedings.

Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

Yes, you can of course get a new bank loan and pay off the balloon, but that equals risk.  You may be stuck with a much higher rate at the time of the balloon.  The property may not have the needed equity, personal credit issues, etc, etc...

Do your best to avoid balloon payments at all costs - really talk to your seller about this in detail as to why they may want one.  I've seen many colleagues that have offered balloon payments to a seller when it wasn't even needed or requested.  

If you do move forward with a balloon payment - yes, sometimes the deal is just that good - have a solid exit (refinance or sale) strategy.  And always best to take care of the payment early so as not to get into a foreclosure mess.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Jacob Zivanovich:

    The more I get into this, the more appealing it sounds, but I'm still cloudy on some concepts. This is regarding balloon payments.

    So say you and the seller agree to begin this transaction and are discussing the type of financing that will occur. I usually hear of a 5-10 year balloon payment. How does the investor make this happen? How does someone get out of the balloon payment? Wouldn't that total amount be due at the end? I've always heard that balloon payments are risky.

    Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

    Not sure if this is the correct thinking. Thanks in advance!


     To get out of a balloon as you mention you need to pay off the loan. The ways to do this are:

    1. Get other financing such as from a bank as you mention. (remember it takes 60-90 days to get bank financing so you do not wait until last minute)

    2. Pay it off with cash

    3. Sell the property

    If the property has negative equity or you cannot get financing, your best bet is to hand it back to the owner instead of getting foreclosed upon.

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  • Andrew Kiel
    Investor · Tucson, AZ · Member since 2017 · 208 posts · 235 votes
    2y

    I have a mentor that often says "Balloons are for clowns".  I've come to take this advice to heart.  It's amazing how fast 5-10 years goes by and suddenly a big payment is due.

    Adding to @Chris Seveney's notes above.  I'm guessing we're talking theory here but I just recently called one of my note holders on a 10 year balloon (yes, I made the mistake and didn't follow advice on more than one occasion). The note holder was more than happy to extend the note an additional 5 years as I've always made timely payments.  In fact, he didn't want me to pay it off.

    The fact is, if you don't pay off the note, the seller has the option to start foreclosure proceedings.

    Here's my answer that I think is correct, but please correct me if not: At the time of the balloon payment, the investor goes to a bank and applies for a loan on the remainder of that balloon payment. That way, the investor doesn't necessarily have to pay that amount up front, but can continue to use the revenue from the property to pay the loan.

    Yes, you can of course get a new bank loan and pay off the balloon, but that equals risk.  You may be stuck with a much higher rate at the time of the balloon.  The property may not have the needed equity, personal credit issues, etc, etc...

    Do your best to avoid balloon payments at all costs - really talk to your seller about this in detail as to why they may want one.  I've seen many colleagues that have offered balloon payments to a seller when it wasn't even needed or requested.  

    If you do move forward with a balloon payment - yes, sometimes the deal is just that good - have a solid exit (refinance or sale) strategy.  And always best to take care of the payment early so as not to get into a foreclosure mess.

    2Reply
  • Carini Rochester
    Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
    2y

    A variation to bank financing for the amount of the balloon payment would be to finance as much equity out of the property as possible. Use the cash as a down payment for another appreciating, cash flowing asset! I disagree with the fear of a balloon payment. Keep your finances in order. Maintain the property. Foster good relationships with lenders. There is no reason for there to be any problem financing the balloon payment when the time comes.

    2Reply
  • Jacob ZivanovichPro Member
    OP
    Spokane, WA · Member since 2020 · 56 posts · 30 votes
    2y

    @Chris Seveney

    Thank you for giving me the other options that can happen. Much appreciated, Chris!

    0Reply
  • Jacob ZivanovichPro Member
    OP
    Spokane, WA · Member since 2020 · 56 posts · 30 votes
    2y

    @Andrew Kiel

    Wow, thank you for the detailed response, Andrew. I never put it together that you don't necessarily need a balloon payment when doing seller financing, that opened my perspective a bit. Some people just want that monthly payment rather than one lump sum because of interest.

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  • Jacob ZivanovichPro Member
    OP
    Spokane, WA · Member since 2020 · 56 posts · 30 votes
    2y

    @Carini Rochester

    There always seems to be a stigma to the balloon payment, so it's nice to hear other perspectives and successes with balloon payments. 

    So, assuming that after 5-10 years, the house will have created some equity. You then use that equity to refinance in order to pay off the balloon payment? 

    0Reply
  • Carini Rochester
    Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
    2y
    Quote from @Jacob Zivanovich:

    @Carini Rochester

    So, assuming that after 5-10 years, the house will have created some equity. You then use that equity to refinance in order to pay off the balloon payment? 

    Assuming you aren't buying a complete mess there will be equity. You've made a down payment (I assume.) You're paying down the mortgage every month for five years (or whatever the agreement is.) The property goes up in value for five years. There should be plenty of equity to justify a loan. Five years of keeping the apartments rented, collecting rent, paying your bills. The bank will be interested in your success at the property.
    1Reply
  • Jacob ZivanovichPro Member
    OP
    Spokane, WA · Member since 2020 · 56 posts · 30 votes
    2y

    @Account Closed

    Hey, Ken, that was a great post you made about Subject To. The seller financing option compared to a traditional loan is insane. The savings are so obvious that I would feel silly not to spend the time learning how to operate privately with a seller. Thank you.

    0Reply
  • Jacob ZivanovichPro Member
    OP
    Spokane, WA · Member since 2020 · 56 posts · 30 votes
    2y

    @Carini Rochester

    Very informative, thank you!

    0Reply
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