Assuming Debt on 56 Unit Deal?

[Michael K Gallagher]

Just perusing Catalyist and came across a 56 unit garden apartment deal in a solid area and the deal mentions the ability to assume the debt vs the early payoff fee on the current debt. Can anyone elaborate on the specifics of what to look for in this situation or what would guide your decision around to assume the current debt or bring your own?

[Charles Seaman]

@Michael K Gallagher The decision about whether to assume the existing loan or obtain new debt simply comes down to your return metrics.  With an assumption, you'll look at the same things you would with a new loan (principal balance, interest rate, interest-only remaining, maturity date, amortization period, etc.).

In general, assumptions have been very attractive to me lately because the only deals that I can get to cash flow well involve assumptions.  This is because of the lower interest rates that these existing loans have.  The biggest downside to assumptions is that the leverage might not be favorable if you're buying the property for a significantly higher price than the seller did.

[Jim Pellerin]

Quote from @Michael K Gallagher:

Just perusing Catalyist and came across a 56 unit garden apartment deal in a solid area and the deal mentions the ability to assume the debt vs the early payoff fee on the current debt. Can anyone elaborate on the specifics of what to look for in this situation or what would guide your decision around to assume the current debt or bring your own?

@Michael K Gallagher The main reason you would want to assume a mortgage is that the rates and terms are better than what you can get. Another reason is that there are penalties that the current owner would have to pay for early termination and they would be trying to pass those fees off to you. It's part of the negotiation with respect to price and terms.

[Anthony Chara]

All good info above. Another thing to consider is the gap between their remaining loan balance and your purchase price. i.e. - Let's say your remaining balance on the assumed loan is $1MM and your new PP is $2MM. Now, you'll need to come up with $1MM down plus closing costs to assume the existing mortgage. If you got a new loan at 75% LTV, you'd only have to come up with $500K.

Having said that, some lenders will allow you to do a supplemental loan on top of assuming the $1MM loan in the above example so you might be able to get back to a 25-30% down deal just like getting a whole new loan. However, a lot of lenders won't let you do a supplemental loan these days due to rising interest rates and cap rates. The only way you'll know is by contacting the current lender.

Lastly, even if the loan is assumable, you and/or your credit partner(s) and the property will still need to qualify per their guidelines to assume the loan as well. It's not like you just sign a piece of paper and the loan is yours.

[Michael K Gallagher]

Quote from @Charles Seaman:

@Michael K Gallagher The decision about whether to assume the existing loan or obtain new debt simply comes down to your return metrics.  With an assumption, you'll look at the same things you would with a new loan (principal balance, interest rate, interest-only remaining, maturity date, amortization period, etc.).

In general, assumptions have been very attractive to me lately because the only deals that I can get to cash flow well involve assumptions.  This is because of the lower interest rates that these existing loans have.  The biggest downside to assumptions is that the leverage might not be favorable if you're buying the property for a significantly higher price than the seller did.

 @Charles Seaman thank you for the information.  Thats an interesting point about the leverage being less on the buyers deal if you end up purchasing for more than the seller.  Is there any opportunity to say "stack" debt, and bring another lender to the party on the portion not covered on the assumed debt?  Even just typing that it seems a little convoluted but I'd be curious as to what you have seen happen. 

[Michael K Gallagher]

Quote from @Jim Pellerin:

Quote from @Michael K Gallagher:

Just perusing Catalyist and came across a 56 unit garden apartment deal in a solid area and the deal mentions the ability to assume the debt vs the early payoff fee on the current debt. Can anyone elaborate on the specifics of what to look for in this situation or what would guide your decision around to assume the current debt or bring your own?

@Michael K Gallagher The main reason you would want to assume a mortgage is that the rates and terms are better than what you can get. Another reason is that there are penalties that the current owner would have to pay for early termination and they would be trying to pass those fees off to you. It's part of the negotiation with respect to price and terms.

 @Jim Pellerin thank you for the information, I can see how the fees could become part of the negotiation, that is very interesting.  Thank you again.

[Michael K Gallagher]

Quote from @Anthony Chara:

All good info above. Another thing to consider is the gap between their remaining loan balance and your purchase price. i.e. - Let's say your remaining balance on the assumed loan is $1MM and your new PP is $2MM. Now, you'll need to come up with $1MM down plus closing costs to assume the existing mortgage. If you got a new loan at 75% LTV, you'd only have to come up with $500K.

Having said that, some lenders will allow you to do a supplemental loan on top of assuming the $1MM loan in the above example so you might be able to get back to a 25-30% down deal just like getting a whole new loan. However, a lot of lenders won't let you do a supplemental loan these days due to rising interest rates and cap rates. The only way you'll know is by contacting the current lender.

Lastly, even if the loan is assumable, you and/or your credit partner(s) and the property will still need to qualify per their guidelines to assume the loan as well. It's not like you just sign a piece of paper and the loan is yours.

 Thanks @Anthony Chara you addressed my question regarding getting additional debt.  Like everything in this industry it seems that it is very situational and specific to the deal.  Thanks again.

[Charles Seaman]

@Michael K Gallagher It's possible.  It all depends on the provisions of the existing loan.  Some loans allow for subordinate financing or supplemental financing, while others don't.  You'll need to review the loan agreement for the existing loan to find out for sure.