Lots of owner-financed notes have a balloon. The payer makes monthly payments for a few years, then owes the rest in one big payment. That's often when they're supposed to refinance with a bank.
You can sell a note with a balloon. You have a few ways to do it.
Short version: You can sell the whole note, balloon and all. You can sell just the monthly payments and keep the balloon. Or, in some cases, you can sell just the balloon. The right choice depends on how soon it's due and whether the payer can really pay it.
Your three options
1. Sell everything, including the balloon. You get one lump sum and you're done. The buyer takes the risk that the payer can't pay the balloon.
2. Sell the monthly payments, keep the balloon. This is a type of partial sale. You get cash now for the payments before the balloon. When the balloon comes due, it's still yours. This is how I handle partials on balloon notes.
3. Sell just the balloon. You keep the monthly checks and sell the big payment at the end. Fewer buyers do this, and it depends a lot on the equity.
The big question: can the payer pay it?
Most payers can't write a check for the balloon. They plan to refinance with a bank or sell the property. So a buyer will look hard at whether that's likely.
- Is their credit good enough to refinance? On-time payments to you help build that.
- Is there enough equity? A bank usually wants the payer to owe much less than the home is worth.
- How soon is it due? A balloon due next year is a near-term risk. One due in seven years leaves time.
If the payer can't refinance, the note holder has choices. They can extend the balloon, change the terms, or foreclose as a last resort. Extending is common. It's often the best outcome for everyone.
How the balloon affects your price
A balloon can help or hurt.
It can help. A big payment that comes soon is worth more today than small payments spread over 20 years. If the payer has strong equity and good credit, a near-term balloon can raise your price.
It can hurt. If the payer clearly can't refinance, the buyer is really buying a future problem. The price leans more on the property value.
Example: selling the payments and keeping the balloon
The note: $70,000 balance at 8%, payments of $585 a month, with a balloon in 5 years.
- You sell the next 48 payments for cash today.
- The last 12 payments before the balloon come back to you.
- The balloon itself stays yours.
You get cash now, a year of checks later, and the big payoff at the end. The buyer takes on less risk, because they don't depend on the payer refinancing.
I always leave at least 12 payments coming back to the seller on a partial.
What a buyer will check
- The balloon date and amount in the note
- The payer's history and how long they've paid
- The property value and the equity at the balloon date
- Whether the balloon was ever extended before, and if so, in writing
- Any state rules on balloon notes. Some states and federal rules limit balloons on certain seller-financed homes.
Frequently asked questions
Can I sell a note if the balloon is due soon?
Yes. The buyer will look closely at the payer's ability to refinance and the equity. If both are strong, a near-term balloon can bring a good price.
What happens if my payer can't pay the balloon?
The note holder can extend it, change the terms, or foreclose. Many holders extend. If you've sold the note, the buyer handles it.
Can I keep the balloon and sell the monthly payments?
Yes. It's a type of partial sale. You get cash now, and the balloon stays yours.
Is a balloon note worth more or less?
It depends. A soon balloon with strong equity can be worth more. A balloon the payer can't pay is worth less.
Can I extend the balloon before I sell?
You can, if you and the payer agree. Put it in writing and record it if needed. Tell the buyer about any changes.
Want a number? Try the calculator, which has a balloon box, or get a free quote.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.