Posted by John Behle on January 01, 1999 at 16:26:40:
Be the “Paper Pro”
(By John D. Behle, EMS)
Earlier I shared the first five of the techniques I teach agents to help them see the potential uses and options when it comes to seller financing. One of the most important tools when it comes to paper are the various options available for avoiding balloon payments. Balloons have been called “foreclosures in embryo”. I shared some techniques about 14 years ago in a Creative Real Estate Magazine article I titled “Balloons are For Clowns”. Here are a few more.
All four of these techniques relate to ways to avoid or minimize the impact of balloon payments. This is just a sampling, there are many more options we’ll talk more about later.
BALLOON PAYMENT - EXTENSION RATE
Instead of a balloon payment, an increase in the interest rate could take place at a certain time period. For example, at 60 months, the 10% interest rate may jump to 15% or some other rate that the seller might be happy with. What would the seller do with the cash if he or she were paid off? Plug into the note a rate that might make the seller happy with their rate of return. A higher rate may encourage the buyer to refinance, which would accomplish the same purpose.
BALLOON PAYMENT - SELL THE NOTE
Five years into the note, the note may be well seasoned with a good payment history. At that time, the note could be sold for cash to a note investor. If there were originally a balloon, it could be structured that with a good payment history and an acceptable “Loan to value” ratio (based on current property values), the note could be extended for another 5 years. This seasoned, short term note with a good payment history could be sold for little discount.
BUBBLES INSTEAD OF BALLOONS
A small balloon payment for less than the full amount of the note is sometimes referred to as a bubble. What are the seller’s needs? Could smaller lump sum payments over a few years actually meet their needs? Do they have kids in college or other special needs? As a note broker, it is sad to see sellers sell a large note and take a big discount just to get a small amount of cash. At other times, sellers receive their balloon payments and then turn around and put it in the bank at half the rate they were receiving on the note. Be sensitive to the seller’s needs.
PARTIALS INSTEAD OF BALLOONS
One way for a seller to receive cash at a particular time period is to arrange to sell the next few years worth of payments to a note investor at that time. For example, instead of a balloon payment in 60 months, a few years worth of payments are sold at that time.
Agents find these techniques valuable and note investors find that they are a good addition to teach in a sales meeting to agents.