A balloon can raise or lower what a buyer pays for your note. It brings the money back sooner, which buyers like, and it depends on the payer producing a large sum on one date, which buyers discount. The price turns on how likely that payoff looks.
A balloon payment is a lump sum due on a set date, before the regular payments would have paid the loan off. A balloon note might call for monthly payments sized as if the loan ran 30 years, with everything still owed due at the end of year seven.
How a buyer takes a balloon note apart
A buyer prices the monthly payments between now and the balloon date the way they would price the payments on any other note: small, regular and near. The balloon is priced separately. It is one large payment on one date, and it can make up most of the money still owed.
Opinions differ on that second piece. Two buyers can agree to the dollar on what the monthly payments are worth and still be far apart on the note, because one expects the balloon to arrive on time and the other does not.
We have left dollar figures off this page for that reason. To see where your own note falls, have a balloon note priced and ask for each offer to state the balloon date and amount it assumed.
The case for a higher price
Buyers discount distant money harder than near money. A fully amortized note, meaning one paid down to zero by its regular payments, can run for decades, and the payments at the far end are worth little today.
A balloon cuts that tail off, since all of the principal comes back by the balloon date. This matters most when your note’s interest rate is lower than the buyer’s yield, the yearly return they need on the money they pay you. A shorter wait gives that gap fewer years to work against you. On paper, a balance due in seven years is worth more today than the same balance spread over thirty.
The case for a lower one
That arithmetic assumes the balloon is paid in full and on time. A payer who does not have the cash on hand can raise it by refinancing with a bank or by selling the property. Both depend on things nobody controls today: the payer’s credit on that date, what the property is worth then, and what lenders are willing to do.
So a buyer asks what happens if the date arrives and the money does not. The realistic outcomes are an extension on new terms, a long negotiation or a foreclosure, and each one delays the buyer’s money and may cost them legal fees. A buyer who sees a real chance of that prices the balloon as if it arrives late or in part.
The payer’s reason for borrowing from a seller matters here too. If a bank would not lend to them when they bought, a buyer will want evidence that something has changed since.
What makes a buyer trust a balloon
| Factor | Supports the price | Weighs on the price |
|---|---|---|
| Equity in the property | The property is worth much more than the balloon | The balloon is close to the property’s value |
| Payer’s credit | Improved since the sale, with a clean payment record | Unchanged or worse, with late payments |
| Type of property | A house a bank would readily lend on | Raw land, a mobile home without land, or an unusual property |
| Time until the balloon | Far enough off for the payer to prepare | Close, with no sign of a plan |
| Size of the balloon | Modest next to what has already been paid down | Nearly the whole original loan |
| Wording of the note | A clear date and amount, with default terms spelled out | A vague or handwritten balloon clause |
Equity carries the most weight, for a reason that is easy to follow. If the property is worth far more than what is owed, the payer has every incentive to refinance or sell, and the property covers the buyer if the payer does neither. The page on equity and investment-to-value explains how buyers measure that cushion.
How close is the date?
Several years away
The buyer has time to watch the payer perform, and the note behaves much like a regular one, judged on the same things that decide what any note is worth. The balloon is priced with a discount for uncertainty, though the monthly payments still carry much of the offer.
Due soon
Now the price rests largely on a single event. Buyers will ask whether the payer has started a refinance, and some will wait to see. If the payer has a lender’s approval in hand, tell the buyer, because it answers the question they care about most.
Already passed
If the date came and went and you kept accepting monthly payments, the note says the balance was due while the payment record says business as usual. Buyers find that hard to price. A written extension, signed by you and the payer and prepared by an attorney, turns it back into a note with a clear schedule.
If the date is close and the payer cannot pay, read what to do when a balloon is coming due and the payer cannot refinance before you decide anything.
Selling around the balloon
A balloon note does not have to be sold in one piece. A partial purchase is the sale of some of the payments, with the rest coming back to you, and a balloon gives it more than one shape.
| What you sell | What the buyer is pricing | What stays with you |
|---|---|---|
| The monthly payments only | The part they can price with confidence | The balloon, and the job of collecting it on the due date |
| The balloon only | One distant payment, so the price reflects the wait | The monthly income until then |
| The whole note | Both pieces, on that buyer’s view of the balloon | Nothing, and you are finished with the note |
Selling the monthly payments and holding the balloon gives up the least to the discount, because the piece you keep is the one a buyer would have marked down hardest. It also leaves the balloon’s risk with you: if the payer cannot pay it, that problem is yours. Whether a buyer will take either kind of balloon or back-end partial depends on the note.
Before you ask for offers
- Find the balloon clause and check the date and the amount against your own records. An amortization schedule, the table that shows how each payment splits between interest and principal, will give the figure owed on the balloon date.
- Ask the payer, without pressure, how they plan to handle it. A payer who is already talking to a lender is useful news to a buyer.
- Gather proof of on-time payments. A balloon is easier to believe from a payer who has never been late.
- Put any extension or change in writing.
- Ask every buyer how they treated the balloon in their price. If one assumed full payment on time and another assumed a delay, their offers cannot be compared until you know that.
The first two items are enough to start a conversation with a buyer. The payer’s plan and the proof of payments can follow, and each one that arrives gives a buyer less reason to assume the balloon will be late.
Related questions
Will a buyer purchase a note if the balloon is due next year?
Some will, and some will wait to see whether the payer refinances. With the date that close, most of the price rests on one event, so buyers look hard at the equity in the property and at any sign the payer has a plan.
Can I extend the balloon to make the note easier to sell?
An extension agreed in writing with the payer can help, because it replaces an uncertain date with a clear schedule. It also changes your note, so have an attorney prepare it. Buyers will ask to see the signed document.
Is the balloon amount the same as the balance on my note?
It is smaller if the payments between now and the balloon date pay down principal. The balloon is the principal that will still be owed on that date, after those payments. An amortization schedule shows the figure.