Today's Tip - Balloons are for Clowns - Posted by John Behle


Posted by John Behle on November 04, 1998 at 14:03:11:

Previous message was cut short.

To clarify, there would be a simple $10 per year increase in the payment. So, after one year it would raise to $97.76, then $107.76 a year later, etc.

BALLOON ALTERNATIVE TWO - Balloon rollover clause. At the very least, if you are writing a balloon into a note, insert a clause stating that if the buyer cannot pay the balloon or find financing at that time, they can pay a percentage of the balloon (like 10%) and roll it over for another year. An increase in the interest rate is another alternative to make it worth the seller’s while or even a cash fee.

Using the concept of partials, the note could also roll over for a year for the cost of what the seller might need to discount the note (or a portion) and sell it for. The note could even be extended for a longer term, discounted and sold and the discount amount paid by the buyer/payor to the seller over time - secured by another note.

Of course, a graduating payment makes it a little more uncomfortable for the payor, but is easier to swallow than a balloon. At a convenient time, the payor is likely to refinance anyway to lower the payment. He just doesn’t have a stick of dynamite he’s holding with a lit fuse (the balloon).

Also, the graduated payment option alone makes the note more valuable if it were ever sold. By the way, as a note buyer, you could buy the note, solve the payor’s problem (the balloon) and profit. You could even buy it from note broker A, fix it and sell it to note broker B at the same yield and make a profit.

See the possibilities? This is one technique of over a hundred. You can make money in the note business without ever even needing to buy a note. You can even find someone with a portfolio of notes that will let you “play” with them to restructure them and increase the yields. Split the increase in the yield with them or have an option to buy the note at a profit when it is re-structured.

Just some options.


Today’s Tip - Balloons are for Clowns - Posted by John Behle

Posted by John Behle on November 04, 1998 at 13:47:23:

There are lots of discussions about the pros and cons of balloon payments. Balloons tend to be a great way to find some medium ground between a seller that wants to have his cash back very soon and a buyer that wants to pay a dollar down and a dollar a month for the rest of their lives.

Yet, balloons can be called “Nuclear Mortgages”, “Foreclosures in Embry”, etc. An alternative to just taking sides on the pros and cons, can be just to find a more palatable approach. A way to solve the needs of the buyer and seller while having less chance of a future explosion. I’ve had a lot of balloons and been through the pain of having to meet them. Sometimes it’s not easy or fun. I like the alternatives.

ALTERNATIVE ONE - GRADUATED PAYMENTS - A slight yearly increase in the payment on a mortgage can make a loan amortize much quicker with less pain or risk than a balloon. Let’s look at an example.

Original note - $10,000 10% interest payable $87.76 per month for 360 months. A ten year balloon payment would be $9,093.22.

A simple $10 per year increase in the payment would fully amortize the loan in a little over 10 years.

Other options involve balloon rollover clauses and other approaches to lessen the risk and still maintain the benefits.