Seller-Financed Balloons, In-House PMs, and Why Payoffs Drag
Seller financing looks cheap until you read the balloon date. On this episode, Dylan Koch walks Mike DeHaan and Dan Austin through a 36-unit deal outside Cincinnati he's trying to buy with seller financing, and the conversation quickly turns into a clinic on what can go wrong between closing and refinance. The crew also digs into when a portfolio is big enough to hire your own property manager, why loan payoffs take weeks to produce, and what the current retail slowdown looks like from the flip side.
What's the real risk in a two-year interest-only seller-financed balloon?
Dylan's deal: 36 units in a Cincinnati suburb at a $2,340,000 acquisition price, 4% interest only for two years, with an expected value around $4 million once stabilized. He plans to use that window to knock out major CapEx, raise NOI, and refinance into agency, non-recourse debt. On paper the numbers are conservative — he's underwriting a 45% expense ratio, which leaves NOI at 55% of revenue after vacancy and CapEx, and still shows a 1.46 DSCR.
Mike's problem isn't the price, it's the clock. He called a two-year payoff "sketch" on a 36-unit, because even if the property is worth more than the purchase price today, it can still take six months or more to get proper debt in place. Lenders want to see the property stabilized, and Mike says right now they want a longer history than they used to — roughly a twelve-month actual ledger of performance after stabilization, not a pro forma. Stir up a building with renovations and tenant turnover and you can burn a year before the track record even starts.
The fix all three agreed on is contract language, not optimism. Negotiate it into the purchase agreement before signing, not after.
- Bake in extension options — Mike suggested at least a year; Dan floated two or three six-month extensions tied to financing availability
- Consider partial principal paydowns as a lever if the refinance isn't ready
- Mike notes some private lenders are now doing DSCR loans on 30-unit and even thirty- to forty-unit deals, a newer product than the 10-unit cap Dylan had heard about
- Mike says those lenders underwrite the operator hard — they'd rather fund the buyer bailing out a bad deal than refinance the person who created it
When does it make sense to hire an in-house property manager?
Mike raised an odd wrinkle: because Dylan self-manages, he has no relationship with a third-party management company, and lenders may question whether he can pick one that doesn't suck. Dylan's response was that he's fired three property managers in three years.
Dylan was underwriting an 8% of gross rents management fee and wondered about giving a PM five to 10% equity to keep them invested. Dan pushed back — he thinks a third-party PM is incentivized toward their own cash flow, not your equity, and would still underperform. Mike's alternative: with roughly 50 units today and about 86 after this deal, hire someone on salary and bonus them on the performance of the whole portfolio. Dan added that housing that person on site during the renovation is an option, and that he's heard the general crossover point is around 100 units — past that, he argues, a third party costs you more than the management fee because everything they do is less efficient.
The counterargument came from Mike himself. An in-house manager means you own compliance. In Washington, he says the rules change constantly, and paying a professional company to track legislation is worth making less money to him.
Why do loan payoffs take weeks to get?
Dylan had three closings stuck waiting on payoff statements, one of them three weeks out. Mike explained the chain: most lenders sell their debt, so a payoff request goes to the note servicing company the investor requires, back to the lender, then to the investor. Some investors buy enormous volumes of debt with a dozen employees. If the one person who handles payoffs is out, nothing moves — and if they come back and flag an error, the process restarts.
Mike and Dan both pointed out the incentive problem: servicers run on thin margins and make money on default interest, so nothing pushes them to hurry. Dan compared it directly to the property management business — low margins, high volume, complex regulations, low-wage staff.
Dylan's other gripe: getting a payoff "good through" a date that's already passing, with a stated per diem that title won't simply add. Mike said the reverse happens too — title overpays because nobody backs out the per diem, creating a bookkeeping mess on the lender's side.
What does the slow retail market mean for flip underwriting?
Dylan has two retail listings sitting quiet. On one condo, two nearly identical units sold within six months of each other, his finishes are nicer, he's already dropped the price below both comps, and he had one showing scheduled at 42 days on market. He gave $8,000 in concessions on the last one he closed. Agents tell him it's seasonality; Dan doesn't buy that, since seasonality gets blamed nine months out of the year.
Mike's take is that this is closer to normal than 2021 was. His mentor told him in 2018 to plan on sixty to ninety days on market and build it into holding costs. What has changed, he says, is buyer behavior — offers well below ask, long inspection lists, and constant threats to walk. Dylan is now underwriting 5 to 10% off ARV and stretching hold times from three or four months to six or eight.
On the macro side, Dylan flagged Berkshire Hathaway's homebuilder purchase under new CEO Greg Abel, plus roughly $1.2 billion in D.R. Horton and Lennar stock, against national new-build sales down 10% year over year, D.R. Horton down 13% and Lennar down 36%. Dan wondered whether the play is the land on the balance sheet or the builders' in-house financing. Mike's opinion on the product itself was blunt: he thinks those tract neighborhoods are the mobile home parks of the future, based on how quickly he's seen two-year-old ones age. Dan pulled back slightly — he says people buy them knowing what they are, because it's an affordability problem, and Dan has talked to buyers who said the house was still nicer than the neighborhood they left.
The full episode has more on DSCR products moving up-market, inspection disclosure rules, and the sewer line surprises that eat flip budgets. Worth a listen if you're negotiating seller financing this quarter.
Frequently asked questions
How much extension should you negotiate on a seller-financed balloon?
Mike suggested at least a one-year extension baked into the purchase agreement; Dan preferred two or three six-month extensions tied to financing availability.
At what portfolio size does an in-house property manager make sense?
Dan says he's heard roughly 100 units is the general crossover point, and Mike suggested Dylan could justify a salaried manager at around 86 units.
Why do payoff statements take so long?
Mike explains that most loans are sold, so the request passes through a servicer, the lender and the investor, and servicers earn on default interest rather than speed.
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Educational content from the Collecting Keys podcast. Not financial, legal or tax advice.