Balloon Payment is coming due. What Now!
by Steve Seward
Four and a half years ago I used your Land Contract info to sell my single-family investment property. All has gone well and the buyer has been making her regular payments. I'm a little concerned now though.
I've asked the buyer a couple of time as to her plans for the pay off and made a few suggestions, just so she doesn't forget and get surprised by how fast the deadline is approaching, but she has not given me a solid answer other than to say that the house is getting very small for them now.
I'm not convinced that she intends to complete the sale. I'm also not sure that she has improved her credit to the point that she can even get a loan for the balloon payoff.
The first 4 year's payments went great, but in the last 6 months there have been 3 late payments. I just want to be prepared for all possibilities and if possible maintain the win/win philosophy. I'm willing to help her if I can, but I am not sure how.
I'm also not sure how to handle the payoff, if it does happen. Do we need to go back to the Title Company or can I just hand her the Deed?
I would really appreciate your help and insight on this matter.
Answer by Joe Trometer
Thanks for the question Tom. Many investors are facing this same problem now days because walking away from a contract in buying a home is now commonplace.
Two Suggestions To Approach A Land Contract Default
1) Renegotiate the Land Contract. The Laws Have Changed!
2) Offer To Take The Property Back With The Least Amount Of Pain.
I've been using Land Contracts since the 1970s; buying and selling of property on land contracts between myself and another private party person or family was fairly simple and easy to construct. But the Laws have changed.
Now, in order to sell a property on a Land Contract the parties involved must be in compliance with the Secure and fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act). Failure to do so is now a Felony and the fines are expensive.
The "Safe Act" was covered in my real estate continuing education class and the real estate investor on-line forums are all buzzing with ways to get around the new Laws. I would advise against that!
Find out for yourself and do an online search on "The Secure and Fair Enforcement for Mortgage Licensing Act (Safe Act)".
Also do searches for "Land Contract Law Changes".
The Safe Act Laws are too comprehensive for me to advise any one particular website, version, or interpretation.
What I do suggest if your Land Contract is to be renegotiated is to have a Licensed Mortgage Loan Originator prepare the contract.
Here’s My Opinion on Land Contracts
Here’s the problem…
In a recent conversation with a novice real estate investor that has money from a different business other than real estate took a real estate investor's course on investing through land contracts.
He explained his terms to me and I was shocked!
He Was Setting The Buyers Up For Failure!!!
He said, "Land Contracts are a good investment because the buyer Thinks they’re buying". He continued, "I get a big down payment, high interest, and they’ll probably never be able to pay off the short term balloon payment". Then with an evil smile on his face he said, "then I get the house back and repeat the process".
The S.A.F.E. Act protects buyers in that situation.
That investor's properties were junk properties, he did No fix-up or repairs on them, and sold them as-is.
My prediction is that he's going to get most of those properties back and lose money in the process.
In the years past and of the many Land Contracts I've been on either side as the buyer or seller, only two of my buyers defaulted. The contracts were fair and reasonable with many options to negotiate including;
- Reductions in price
- Reductions in interest rates
- Term extensions
- Full rebates of total interest paid and applied to principle
I would do just about anything to help a person keep their home.
The Problem Was…
They had different plans and simply did not want the house even if I gave it to them at a huge loss.
So… How Do You Renegotiate Your Contract?
In my opinion, you’re probably not going to like the terms you’ll be facing that you’ll have to give to your buyer, if they still want the property.
1) Contact or Hire a Licensed Mortgage Loan Originator
2) Find out the terms of the Land Contract you must follow
3) Decide if you can carry the contract full term at the current rates
4) Present the offer to your buyer
My Understanding Of The New Laws
I now picture a Land Contract the same as a New Mortgage.
Interest rates, the years of amortization, balloon payments, late payments, foreclosure periods, redemption periods, etc., all follow the same criteria as a home mortgage with a lending institution.
In other words, a seller can not set up a home buyer for failure.
I do not believe balloon payments and higher interest rates are allowed.
The way I understand this if your buyer wanted an extension;
you would have to offer a full term contract,
with No balloon payment,
at interest rates current with market mortgage standards.
Note: I am not a licensed Mortgage Loan Originator or Attorney. My statements and comments are only my opinion. Seek professional advise before taking any actions after reading my articles.
2) Offer To Take The Property Back With The Least Amount Of Pain
In my opinion, your question above stating the comments of your Land Contract buyer shows all the signs that, they no longer want the property.
"Late payments and stating the house is too small" and following your own "Gut-Feeling" that, "you’re not convinced the buyer wants to complete the sale".
Well, you may find your answer in your own question.
This is what I would do if this were my property.
By the way:
I just took a property back from my buyer on land contract last year because of the real estate bubble and they could get a bigger house cheaper and fix it up themselves...
...The house I sold them was fully restored with $20,000 in material improvements (not including labor).
Fortunately I was able to negotiate a friendly agreement and take the house back without issue.
In fact, they made additional improvements and returned the house to me in perfect and clean condition. I didn't have to vacuum or even dust and put the house up for sale the same day I got it back.
Maybe because I was friendly and made offers in their best interest First, then settling for a less costly outcome on my end.
"It Sounds Like You Want Out Of The Contract, Can I Help You With That?" I would ask.
According to your question, your buyers are Not asking for help to complete the deal.
Have you asked them if they need help cancelling the contract yet?
Are you willing to offer them a Deed In Lieu of Foreclosure?
Did you ask them if they qualified for a mortgage yet? If so, and your house is too small for them, do you have another house they can buy (with a mortgage) from you?
It sounds like they need a bigger house, Or, Want a bigger house.
I'm just guessing here, but I'd bet that your buyer doesn't know:
- What to do
- How to do it
- What they want and afford
- What their options are
- Or how long they can live in your house for FREE
Do you have a Full-Time, Expert Level, Real Estate Agent, with High Standards, with a Support Team available to you? If not, fill out the referral form and I can refer one to you or your buyer.
Last year I took my house on Land Contract back with a Deed In Lieu Of Foreclosure.
My buyer wanted to maintain their credit!
Interestingly, they were able to buy a house with a new mortgage while concurrently defaulting on a Land Contract.
I complied with the necessary paper work to make that possible for them.
I'm making no recommendations here, it's just how I served my buyer wanting out of their contract on their terms.
Did anyone notice I used the word "Serve"?
In the eyes of the Courts, from years of Case Studies, I understand the Judge and Jury is in favor of the Home Buyers or Tenants than they are the real estate Investors and Landlords.
- Real estate Investors and Landlords are in it for Profit!
- Home buyers and Tenants simply want an affordable home.
I believe the outcome of your Land Contract Buyer's problem will be mutually solved, as you said, in a "win/win" situation, by how well you serve them.
I've been in your situation and it's highly stressful not to make the profits anticipated. As an investor, I had that problem too!
Now then, we are the professionals here! We are in the problem solving business, are we not?
Nobody cares if an investor makes a profit.
It will make National and or Social Media News when a buyer loses a home even if it is their own fault when dealing with an investor. And the new S.A.F.E. Act Law allows some protection for the home-buyers.
It sounds like your buyer has a problem, which would be my first attention.
If nothing is done and your buyer defaults, they may get up to a year and maybe more of free housing at your expense.
Your Last Question, If They Pay You Off
If your buyer gets a loan from a lender, the Deed goes through the Title Company for an Updated Title Search and Title Insurance to satisfy the Lender.
If your buyer happens to have free and clear cash to give you, I would still contact the Title Company and get Legal advise.
Hope this helps some.
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