Balloons Kill More Deals Than Rates Ever Will
Balloons Kill More Deals Than Rates Ever Will
Most investors obsess over interest rates.
They should be obsessing over balloons.
I’ve watched deals survive:
8% rates
9% rates
Even double-digit debt
And I’ve watched better-looking deals die at 5–6%.
The difference wasn’t the rate.
It was what happened when the balloon came due.
If your deal doesn’t clearly answer the question:
“What happens when the balloon hits?”
You’re not underwriting.
You’re guessing.
Let’s walk through a real deal to show why.
The Deal Everyone Thought Was Fine (Until It Wasn’t)
This was a small retail portfolio in New Braunfels, Texas.
Headline numbers looked solid:
Purchase price: ~$2.2M
Trailing NOI: ~$140K
Apparent cap rate: ~6.25%
DSCR loan in place
Seller financing layered in
On paper, it “worked.”
But the entire deal hinged on one structural assumption most people gloss over:
The seller carry had a 5-year balloon with $0 monthly payments.
No payments feels safe.
Until the clock runs out.
Why Balloons Are More Dangerous Than Rates
Rates hurt you monthly.
Balloons hurt you all at once.
A balloon doesn’t care:
How hard you worked
How confident the broker sounded
How “temporary” the structure was supposed to be
When it hits, only three outcomes exist:
Refinance
Sell
Renegotiate
If you don’t control at least one of those paths before closing, the deal controls you.
The Hidden Trap in “No-Payment” Seller Financing
In this deal:
Seller carry was ~$1.32M
Monthly payment: $0
Term: 5 years
Extension option: Yes (for a fee)
This made the deal cash flow temporarily.
But here’s what most people miss:
Deferred payments don’t increase a future lender’s willingness to refinance.
A refinance lender doesn’t care that you “survived” five years.
They care about:
Stabilized NOI
Global DSCR
Loan-to-value at today’s cap rates
When we modeled the refi realistically:
Any interest-bearing replacement of the seller note broke DSCR
One tenant vacancy wiped out margin
A modest cap rate expansion erased refi proceeds
The deal didn’t fail on day one.
It failed on day 1,826.
The Right Question to Ask Before Accepting a Balloon
Every balloon deal must answer one of these with certainty:
1. Refinance Path
Does today’s NOI already support the takeout?
Or are you betting on perfect execution?
What cap rate are you assuming — and why?
2. Sale Liquidity
Who is the buyer at balloon maturity?
Are they rate-sensitive?
Will they inherit the same structural risk?
3. Renegotiation Leverage
What leverage do you have when the balloon hits?
Can the seller actually say no?
Is there documented extension language?
If the answer is “we’ll figure it out later,”
that’s not a plan — that’s exposure.
Why Rates Get Blamed (But Balloons Do the Damage)
When deals blow up, people say:
“Rates moved.”
What they mean is:
“Our refi assumptions didn’t survive reality.”
Rates don’t kill deals.
Unsolved exits do.
High rates just reveal which deals were never durable.
How This Changes the Way I Structure Deals
I don’t avoid balloons.
I avoid unengineered balloons.
That means:
Modeling refis at conservative caps
Stress-testing NOI before value-add
Structuring extensions up front
Ensuring the deal still works if nothing goes perfectly
This is why I focus more on capital stack engineering than price negotiation.
Structure determines survivability.
If You Want Help Engineering the Exit Before You Buy
This is exactly the kind of issue I help investors solve before they commit capital.
If you’re working on a deal with:
Seller financing
Deferred payments
Balloons
Refi-dependent assumptions
You need structure clarity early — not hope later.
You can see how I work here:
👉 https://chadchoquette.com/how-i-work
And if you want help stress-testing, restructuring, or engineering exits before you go under contract, my deal structuring services are here:
👉 https://chadchoquette.com/deal-structure-services
Balloons don’t kill deals by surprise.
They kill deals that were never finished being engineered.
