Yesterday was another roller coaster ride on Wall Street and outside of your mutual funds, stock and bonds, what happened yesterday has a major impact on your real estate business. For months now we have been talking about buying and selling properties with seller financing. There was one particular article that now has a greater impact on your seller financing business in real estate: Balloon Payments
If you are the holder of a seller financed note and have set a balloon payment sometime in the near future, I want you to brace yourself for a hard reality. Your buyer is not going to be able to make that balloon payment! Sure there will be instances where the balloon payment is small enough where the buyer can gather the funds needed to pay you off but if you are expected the buyer to be able to get a loan in this market, you need to rethink your strategy.
Yesterday when the Fed decided to freeze rates until 2013 that was a signal to the market and the general public that there is a lack of confidence in this economy. Knowing that the government and the stock market has no confidence in this economy, do you think banks will have confidence in creating lending standards in the real estate market? What is going on in the economy is unprecedented and is a strong signal that real estate is going to continue to stay flat for some time in the future, and one of the strongest factors in keeping the market flat is the lack of lending on real estate there will be.
Knowing this piece of information you will want to be proactive with your notes that have an upcoming balloon payment.
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Things to Consider for Notes with an Upcoming Balloon Payment
Contact the Buyer: The best strategy up front is to get an accurate analysis of the buyer balloon payment situation. If the buyer is confident they can cash you out then maintain the contract in its current format.
Refinance: If the buyer is less than confident that they cannot make the balloon payment at its due date, negotiate a new term contract. This is not an opportunity to raise the sales price, but is an opportunity to keep the balloon payment on both of your radars, but in a more realistic timeframe. Use the refinance to adjust aspects of the contract that are important to you, for example your late fee policy is 15 days and you would rather give a 5 day grace period. Make changes like this in the new contract, but make sure everything is fully disclosed to the buyer.
Enforce the Contract: Balloon payments are a good way to enforce the essence of the contract. If you have a buyer that has been very difficult, maybe you have taken then to court a few times only to have them catch up at the last minute, or they are habitually late and refuse to pay late fees. If you have buyers such as this, the balloon payment is your opportunity to enforce the contract as it was agreed upon at the outset.
Those are but a few suggestions to get you started proactively planning for balloon payments that will not occur if your buyer is expecting to use bank funds to cash you out. If you are a buyer of property with seller financing and have an impending balloon on your horizon, use this time to get in contact with the seller and work out an extension or a new contract. By being proactive you will be in control.
Photo Courtesy: Sebastien Bertrand