Sell before the balloon if you doubt the payer can raise the money, or if you need cash sooner than the due date. If the payer is likely to refinance and you can wait, keep the note, because a balloon paid in full costs you no discount at all.
It is a question about your payer
A balloon is a large final payment that clears the remaining balance at once, after a run of smaller monthly payments. Notes are written that way on the assumption that the payer will refinance with a bank or sell the property when the date arrives, not pay from savings.
So the decision turns on whether a lender will say yes to your payer on that date. A confident yes means waiting pays you the full balance. Anything less makes the balloon date the point at which your note is most exposed.
Reading the signs
| What to look at | Points to a payoff | Points to trouble |
|---|---|---|
| Payment record | Every payment on time, and you can show it | Late or uneven payments |
| Equity, the gap between the property’s value and what is owed against it | The property is worth well more than the debt | It is worth about what is owed, or less |
| Property type | One that banks lend on readily | Raw land, or a home in poor repair |
| The payer’s finances | Income and credit have improved since they bought | No better, or worse |
| Their plan | They have spoken to a lender, or told you the plan unprompted | They go quiet when you raise the balloon |
| Taxes and insurance | Current | Behind or lapsed |
If you cannot fill in the table, ask. A calm conversation with the payer several months ahead tells you more than any estimate. Bank lending matters as well: a payer who would have qualified when you made the loan may be turned down if credit has tightened since.
How a buyer reads a balloon
A buyer prices a note by the return it wants on the money it puts in. A balloon pulls two ways. It returns the buyer’s money sooner than a long note would, which helps, and it hangs a large share of that money on one refinance that may not happen, which hurts. Strong equity and a clean record tip the balance toward the first effect, while a balloon the buyer expects to extend or chase tips it toward the second. The mechanics are in balloon payments and note value. Which way your own note tips is something a buyer can only judge from the details, so tell us about the note and its balloon date if you want the figure to weigh.
The calendar matters
A buyer who comes in a year or more ahead can watch several more payments arrive and has time to work with the payer on a refinance, so the unknown being bought is smaller. One who steps in during the last weeks is buying the problem itself and will price it accordingly.
After a missed balloon the note is in default, meaning the payer has broken its terms. It can still be sold, though fewer buyers take defaulted notes and they pay less for them.
Choices between waiting and selling everything
You can extend the balloon, giving the payer more time in return for something such as a higher rate or a payment toward principal. The cost is a longer wait, and the change has to be drafted by an attorney and signed by both sides so that the note stays saleable later.
You can also sell part of the note: a block of the monthly payments, or the balloon itself, with the remainder staying yours. The gap between what is owed and what a buyer pays then applies only to the piece you sell. A partial needs enough monthly payments ahead of the balloon, or a balloon the buyer believes will be paid, so some balloon notes will not suit one. Our page on partials on a note with a balloon explains where the line falls.
When keeping it is the better call
With a strong payer, real equity and no need for the money early, keep the note. Selling would mean accepting less than the balance to avoid a risk that is small in your case, and we would sooner tell you that than price a sale you do not need.
Talk to the payer, then compare
If the date is close and the payer has already said no, you are in a different one of the situations we cover, and the page to read is what to do when the payer cannot refinance.
Otherwise, ask the payer which lender they plan to use and when they will apply. A named lender and a date tell you more than a reassurance does, and with them you can set a sale price against the odds of being paid in full.
Related questions
What happens if the payer misses the balloon?
The note is in default. You can extend it in writing, negotiate a payoff, sell it as a defaulted note or begin foreclosure. Each has a cost, and the legal route depends on your state, so speak with an attorney.
Does a balloon make my note worth more or less?
It can go either way. A buyer gets their money back sooner, which helps. A large share of the money also depends on one refinance, which hurts. The payer's record and the equity in the property decide which effect is stronger.
Can I extend the balloon and still sell the note later?
Yes, if the extension is written, signed by both sides and dated honestly. A buyer prices the terms as they stand, so an undocumented extension causes problems. Have an attorney draft it.