Real Deal #142 – Balloon Note in Florida

Welcome to Real Deals!  It’s always easier to learn from real life so here we share information from actual owner financed transactions. 

It was a nice home in Florida with the seller asking $234,000.  The buyer was eager to purchase the property and had saved almost 10% for a down payment.  There was only one problem. The buyer was unable to obtain a conventional mortgage loan due to some past credit issues, primarily attributed to medical bills.  Seller financing was the solution.

The seller agreed to accept payments from the buyer for five years.  This allowed the buyer sufficient time to correct the credit issues before seeking a refinancing loan to payoff the seller.  

The buyer put $22,000 down at closing and the seller carried back the balance of $212,000 at a 7.25% interest rate.  The buyer would make monthly payments of $1,391.72 for 5 years and then the full remaining balance became due.  The balance or balloon amount after 5 years would be approximately $204,010. 

When the last payment on a note is larger than the standard monthly payments, it is considered a balloon payment or a balloon note. An amortized note is when the monthly payments continue until the note is paid in full, with the last payment being pretty close to the same amount as the regular monthly payments. 

After receiving 15 monthly payments the seller desired to sell all future payments for cash now.  The seller contacted a note broker that was able to place the note with an investor.  The investor agreed to purchase the remaining 45 monthly payments plus the balloon payment with the seller receiving $176,016.

Prior to closing, the investor performed research on the note.  This included a drive-by appraisal of the property value, verification of current taxes and insurance, title insurance, payment history, credit check on the payer, and review of documentation (note, mortgage, settlement statement, etc).  When the investor’s due diligence was complete, the note and mortgage were assigned to the investor and the funds disbursed to the seller through an outside title company closing.

Real deals are based on actual transactions completed within the past ten years. Market conditions change frequently resulting in pricing and underwriting changes by note investors.  Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters.