Anybody ever sell or buy a house from a private seller on a balloon note?

muncybob

So time has come for my sister and I to sell the home we own that was our parents home for many years. We have an offer to do a balloon loan over 24 or 36 months with a 20% upfront payment. I have been the lender in the past(was a banker) but have never personally been the "bank". Other than the risk of property damage or a default and having to foreclose, what other cons are there in this deal?

Of course I will be retaining a real estate atty. for the process if we verbally come to terms. Just curious if anybody has been down this road.

tonyb

Why a balloon note ? If they have 20% cash, why can't they get a regular mortgage and you get all your cash ?

They have a poor credit history ? If so, what is the likely hood you will ever see that balloon payment ? They want to flip it ? Did you under price the property ?

Balloon notes were done as creative financing techniques, or investor options. I would assume you want your coin and walk away from the property, if that's the case, walk away from anything other than a situation where you get all your coin at closing.

DaveHo

+1. If they have 20% to put down, they should be able to get a conventional mortgage. If they can't, then there's a good reason for that. If the bank won't loan them, I wouldn't either.

pitdogg2

Many credit unions only offer balloon loans. I always thought the seller got their money like any other loan, and the the buyer made payments like any other loan except at the end needed to come up with the balloon or refinance into another morgtage type loan.

Interesting

rooftop59

Huh. Never heard of this one of loan, which alone gives me pause.

I would be seriously hesitant unless you are in a real hurry or the house has been on the market for two years and this is your only good offer...

mrbigbluelight

I have been the lender in the past(was a banker) but have never personally been the "bank". Other than the risk of property damage or a default and having to foreclose, what other cons are there in this deal?

That would be enough to make me avoid being the "bank".
You might suggest to the potential buyers to put 5% down to obtain a conventional loan and then set their other moneys aside to pay theirmortgage payments for 24 or 36 months.

It is just my layman opinion that if technically you are the owner, then you are responsible for everything.
Looking at housing over a wide area around here (Zillow, etc), there are a number of houses that are going for 20% of market value.
The reasons why aren't due to "normal" house problems, ie, termites, cracked foundations, mold, etc.
Nope. The problems are not infrequently due to the house was being used as a meth/crack lab.
Besides the potential of having the State seize YOUR property (even though you rightfully had no knowledge or involvement in the operation), you will have the ENORMOUS expense of having the house professionally decontaminated and professionally cleaned and professionally certified for occupancy.
Then good luck trying to sell that property which was known to be used to manufacture drugs.

I'm not saying that your potential buyers are involved with anything illegal but I wouldn't do a balloon note if they put 90% down.
Just my totally layman opinion.

As they say, GLWTS.

aprazer402

Is the property in marketable condition (no major structural issues other than cosmetics?) Is your local real estate market strong like many others in the country with marketing times of 30 days max.? If so, I would NOT carry a note, short term balloon or otherwise. I've seen too many homes damaged and the contract buyers evicted when they can not perform on the balloon. Just list it and sell it. Or FSBO it and just wait for a better buyer. 34+ years of licensed real estate experiences here. Best wishes.

Derf

muncybob wrote: »

Other than the risk of property damage or a default and having to foreclose, what other cons are there in this deal?

I agree with the others above--don't do this. I'm a lawyer doing real estate work for 20 years, so I've been down the road many times, on both sides of it. But you wanted to know about other cons, so here you go:

Your buyer doesn't pay real estate taxes, so you have to pay them to keep from having a tax sale/foreclosure. Now he owes you the money--good luck collecting.

Your buyer doesn't make an insurance premium payment, best case is you find out and pay insurance premium yourself (where you again have to try to collect), worst case is you don't find out and house is damaged or destroyed from wind/fire/flood, and your collateral is then seriously diminished in value.

Your buyer makes late payments, comes up with lame excuses and begs forgiveness, so you don't hit him with a late fee. After doing this for a few months, you get tired of it and decide to charge late fees and maybe even foreclose. He now uses your good nature against you as a defense to not pay you the late fee or even claim you can't foreclose because you accepted late payments in the past (waiver and estoppel--they can work as defenses for LONG delays).

Your buyer makes payments on time, or at least within the grace period of the note. But you still wonder, each and every month, whether they will be late. You wonder if they will make the tax payment on time. You wonder if they will pay the insurance. You wonder if they are keeping the house in good repair, because if you do have to foreclose YOU will have to get it back into shape. You worry about a million little things because this is not what you do for a living--you are not a bank. You cannot be a SWAN--Sleep Well At Night.

When I can't talk clients out of acting like the bank, I tell them to get a higher down payment (at least 40%) and charge an interest rate at least two points higher than a bank. YOU are not a bank, YOU are not in the business of lending money, but if YOU are going to take the risk of doing this, then YOU should be well compensated and be in a little better position financially if you have to foreclose. If buyer can't meet your terms, wait for another buyer. It's rare that I've had to foreclose when 40% or more is put down. Keep in mind the risk of foreclosure is related to the amount of down payment--low down payment, high risk of foreclosure; high down payment, low risk of foreclosure.

All of the above is dependent on your state law, of course. And if you do it, make sure buyer also has their own lawyer--this way buyer can't later say you and your lawyer took advantage of him.

coolsax

Agreed with all the above.. . I am a mortgage Underwriter, if they have 20% down, but can't get a conventional loan there is a reason why. Usually Credit related, but sometimes if they are self employed and the tax returns don't show enough income, or they have too many properties currently financed, then that could be an issue as well. If you are all in on being the "bank" then I would follow the attorney's advice.. also you could look at some thing called a contract for deed, where you actually retain ownership of the property until they pay off the note. But all in all check with your real estate attorney before agreeing to anything.

muncybob

We learned from a 3rd party that this guy and his brother are house flippers. I think the reason they wanted the balloon is to get the house with minimal $$ upfront, take the balloon period to renovate(it is dated) and then sell to payoff the balloon.

They said they were buying the house for their father but when I requested the sales contract state he is to be the only resident...and when I requested an interest rate be applied to the balloon loan they dropped us like a hot rock.

Emlyn

Flipper looking to sponge off a seller. That was my guess.

tonyb

muncybob wrote: »

We learned from a 3rd party that this guy and his brother are house flippers. I think the reason they wanted the balloon is to get the house with minimal $$ upfront, take the balloon period to renovate(it is dated) and then sell to payoff the balloon.

They said they were buying the house for their father but when I requested the sales contract state he is to be the only resident...and when I requested an interest rate be applied to the balloon loan they dropped us like a hot rock.

That was my guess....a flipper. These guys take these get rich quick schemes by real estate gurus and use their creative financing techniques. Worked well when interest rates were 18%, not now. They want little risk while controlling the property and pray on the people who are not all that knowledgeable.

msg

^^^ yeah, sounds like it. I know a guy and his family who were "Real Estate Investors". They did really well, until they didn't. All it takes it a couple of bad decisions and you're done. Along with all the people who invested in you.

Selling to a flipper isn't necessarily a bad thing, is it? Unless you want to see your home go to a nice family. Sounds sketchy, though. Investors have other ways of getting money - "hard money lenders" for example? Aren't they the mob of the real estate world? (I'm asking you, Tony)

Obviously seems safer to go with a more conventional deal where you're paid in full and not being a lender.

And definitely don't take payments in balloons. The person could throw you out after they get your signature, and then fly away with both.

Jstas

I've seen people who are getting in to flipping houses with no real capital of their own do this because they already have a mortgage or pending short sales and the bank won't give them a second one.

What they basically do is put down the 20% or more and then sign a payment deal to you for the rest with the house as collateral. They aren't going to live in it, just refinish the interior with the cheapest crap they can get and have it look presentable. They will do their best to get in and out within 6 months and sell it for more than they paid for it. They pocket the difference and pay you off.

If you have a mortgage on the house, there will be no dice on this. If you don't, your home owner's insurance won't go for it without a copy of the flipper's insurance policy because if they screw up, they just default and leave you stuck with the bill. They get away free because you won't necessarily report to a credit bureau unless you take them to court and obtain a judgement against them.

The only way I would do this would be to do it with immediate family that I know isn't going to bone me. Otherwise, unless you can establish some kind of credit history and know that they will be living it in, I'd sooner do a rent-to-own agreement than a seller financed on a balloon note. Because even if they are legit and just trying to build their own capital stream, a balloon note means increasing payments per month to you and if something happens to throw them off their timeline, they're gonna get in arrears to you quick and it will end badly on all ends.

Since you were a banker, you should tell them to look into a short sale or a construction loan. Then you are out of it completely once you get payment and the papers are signed.

You know what a short sale is, obviously, I hope.

A construction loan, or at least the way they work around here, is you get a high rate loan to buy the house at a severely reduced rate plus an extra lump sum to finance construction on the house to bring it to a point where it can get financed. This usually happens when, say, a house has been neglected for a number of years and due to the deterioration or amount of work involved (i.e.: bad septic system, severe foundation issue, mold abatement, fire damage, etc etc etc) cannot get financed because the risk of the bank taking a bath on it is way too high. It's rarely used to do "curb appeal" type stuff or put lipstick on a pig. It's typically reserved for major issues on a property that isn't marketable as anything other than a residential dwelling. So you get this short term construction loan to buy the house and make the repairs. While you are paying on that loan, of course. The idea is to get the work done and get the house in a condition where it can pass the COO inspection and satisfy the lender before the construction loan bankrupts you. Then you go back to the lender, show them everything is in tip top shape again and apply for a mortgage which should hopefully, if you did it right, be less than the value of the construction loan and work you put into it so you can either make a profit on a flip or see some equity from your work.

If they do actually want to live in it then my first question is why are you afraid of the paper trail? Even with poor credit, you can secure financing. It will be expensive but the point of that is to give you a chance and if you do good, you refi in a few years and get something more conventional that has less risk for the lender and you for that matter. If you can't even get that you have no business buying a house until you get your affairs in order. So on that front, I'd run screaming.

tl;dr...Tell them to secure their own financing and you'll talk, otherwise, not interested in assuming the risk, thank you for your interest. Good luck and have a nice day.

muncybob

We'll be taking a 6% hit and will list with a local realtor. Sis wants the easy way to do things here and it will probably be a quicker deal than if I try a seller sale, esp since I'm 2 hours away from the house. If I were nearby I would renovate it myself and be the flipper.

I normally wouldn't have a problem selling to a flipper under certain circumstances but when they tried the ""we're buying this for dear ole dad" routine and I find out otherwise......

Jstas

Selling to a flipper is not a bad idea. Especially if you're just trying to get rid of the asset. The flipper does all the work and takes on the responsibility of recovering the costs.

But if you're only taking a 6% hit, that is stellar! Take it and run, man! You can claim the loss on taxes and recover a large portion of that in rebates and refunds.

muncybob

...rebates & refunds?

aprazer402

The commission will be money well spent, unless you buy and sell many homes a year, you may not be up with the market and selling requirements... The trick is getting the right agent. Someone full-time and not a newbie. You should know somebody, everyone has (or had) a relative in the business! I'm sorry, don't take that last remark too seriously. There are many excellent agents.

muncybob

Yep, know what you mean. No worries, we will be signing with a seasoned agent.

tonyb

muncybob wrote: »

Yep, know what you mean. No worries, we will be signing with a seasoned agent.

Good call....like I said, at closing you want your money and wash your hands of the property....clean, no B.S.