There's a 283-unit apartment complex on the water in Tiburon, California, across the bay from San Francisco. In 2020 the owners borrowed $210 million against it, interest-only, five years. Then rates went up, occupancy slid from about 92% to about 80%, and they signed new leases at lower rents to keep units full. The lender gave them an extension last November. Last month the loan went delinquent anyway, and now they're talking about extending it another six months.

Down in Los Angeles, a 64-story, 785-unit tower that opened in 2023 had its $360 million loan default, and the owner handed the lender the keys. Downtown LA added more than 10,000 apartments in five years.

Wall Street calls it extend and pretend. The lender doesn't want the loss, the owner doesn't want to give up the building, so everybody signs an extension and hopes rates come down.

The national picture in plain English

A lot of apartment loans get bundled and sold to bond investors as commercial mortgage-backed securities (CMBS). In October, 8.09% of the apartment loans in those bonds were at least 30 days late. In 2024 that number was under 2%. To be fair, after 2008 it got to about 17%, so we're at about half of that. And it's concentrated: agency-backed apartment loans were only about 0.80% late in August. This is mostly big buildings, heavy borrowing, short-term or floating-rate loans bought when money was cheap.

The problem: nearly $300 billion of apartment loans come due in 2026, at borrowing rates roughly double 2021.

Why the math broke

A cap rate (capitalization rate) is a building's yearly income after expenses divided by its price. A building that nets $50,000 a year and sells for $1 million is a 5% cap.

In early 2022, the average apartment building traded around a 4.6% cap and the 10-year Treasury was about 1.8%. Borrow cheap, buy, make money on the gap. This August, apartment cap rates were about 5.4% and the 10-year was about 4.7%. It's around 5% now. Agency apartment loans were running about 6.25% to 7.25% in October.

When your loan costs more than the building earns, every dollar you borrow makes your return worse, not better. That's negative leverage. Smaller buildings, 5 to 50 units, averaged about a 6% cap in the second quarter. Here in Louisville, that's most of what trades.

Same building, four ways

Say a building is listed at $500,000 and nets $30,000 a year after taxes, insurance, repairs and everything else, before the mortgage. That's net operating income (NOI), and it's a 6% cap. Put 15% down every time, payments on a 30-year schedule:

• Full price, bank loan at 7.25%: you lose about $399 a month

• Full price, seller carries the loan at 5.5%: you make about $87 a month

• 90% of asking, bank loan at 7.25%: you lose about $109 a month

• 90% of asking, seller carries at 5.5%: you make about $328 a month

Same building. A $727 a month swing, about $8,700 a year, just from asking for two things instead of one. That's negative leverage flipping to positive.

Why a seller might say yes

A lot of small building owners here have held 15, 20, 30 years and owe little or nothing. They don't need a lump of cash. They need the building sold, a steady check, and a smaller tax bill. With seller financing they collect interest, and getting paid over time can usually spread out their capital gains (an installment sale). Their CPA will know it. I'm a Realtor, not a CPA, so they should run it with theirs.

A seller-financed offer can even come in at a higher price than your cash offer. Price and terms are two different levers. When a bank loan doesn't pencil, terms are how the numbers work for both sides.

For anyone getting seller financing accepted on small multifamily right now: what rate and term are sellers actually agreeing to? And do you lead with terms in the first offer, or bring it up after they turn down your cash number?