Sam Epperson

Here’s a cautionary tale about 1) Seller Finance 2) Balloon payments 3) Cash flow on rentals 4) Gurus with limited experience I just spoke with someone who at the advice of inexperienced gurus bought some SFR and MF properties on seller finance. They purchased in 2021, 2022, and 2023. They negotiated at low down payments and 6% interest, amortized over 30 years, with various balloons. You might be thinking wow! That sounds amazing. Their guru told them it was amazing, and on the surface it looks great. Here’s the problem, they were so caught up in 6% interest and low money down, neither them nor their guru thought about the future. They did all of their underwriting based on 6% and didn’t think rates would get worse. They also didn’t look at the past balloon agreements to stagger the balloon due dates (a mix of 3, 4 and 5 years) . They currently have 1.2 million dollars in debt at 6% with a PI payment of $7,195.00. They did not negotiate optional extensions with the seller (their guru did not know about this). These are balloons with hard due dates, all within a few months of each other. Their current cash flow is $4,200.00 a month. Their new payment in this rate environment is approximately $8,597.00. They’re going to lose approximately $1,402.0/m in cash flow or 1/3 of their net income on these properties. They also lost the thousands of dollars they paid someone for help. ****Important note when you’re working with short term balloons underwrite at a higher rate to protect your cash flow **** **** Important note number 2, when you’re working with a guru (it’s best not to do this you can probably get information for free from smarter people ) who is charging you, make sure they have more than a few years experience in the Real Estate business, and have been part of multiple market cycles ****