subject to loan or new financing?

Question

Does anyone have any advise on purchasing 5 unit rental via purchasing existing LLC and subject to existing loan (obviously the lender could call the loan if discovered) - saves transfer/recording fees for seller/buyer now and variable rate based on 12-month treasury currently around 3%. I would have to refinance as guarantor within 3 years (and then pay recording taxes anyway)  Prepayment penalty has since passed but technically bank could assess transfer penalty when called.

Versus, set up new LLC with myself as guarantor right now (local bank), fixed rate 6%, adjusts every 3 yrs amortized for 25 years 1% origination fee now no prepayment penalty and no fees when the rate is subject to change every 3 years (will have loan committment Monday).  I plan on keeping this for quite some time - fully rented and I leaning toward taking what I know and can count on right now (new loan) versus subject to and not knowing exactly what could happen in next 3 years.  Any thoughts/suggestions?

Jon Holdman · Answer

When you get a purchase money loan from a bank, they will use the purchase price or the apprised value, whichever is lower, as the "value".  Their loan amount is based on that value and their maximum LTV requirement.  So, if you manage to buy a building that's worth, say, $1.5 million for $1 million, and the bank will do a maximum of 70% LTV, they will only loan you $700K.

OTOH, if you've owned a property for at least a year and you do a refi, the bank will use an appraised value as the "value". So, if you own the property for three years, as Laura proposes, and the property still appraises for $1.5 million, the bank might loan you $1.05 million.  Now this will be tougher if you're taking cash out, but not so tough if you're just paying off another loan.

Using my example numbers, if the loan balance is $1 million, and Laura buys the property subject to (or, better, can assume that loan) the existing loan, then she would have no cash out of pocket.  She really is buying at this point, including paying any transfer taxes.  Three years from now, it appraises for $1.5 million, she does a refi (no change of ownership, so no new transfer taxes) and pays off the existing loan.  Now she has a loan in her own name and has put little money into the deal.

Now, that only works if the value is there.  If the property is only worth $1 million and the current outstanding loan is $1 million, its not such a good deal.  It might be OK, if its generating a lot of cash flow, but there's no equity.  When she goes to refi it its still worth just $1 million, she will have to bring cash to the table to complete the refi.

Shanequa J. · Answer

I would think the rates would be low if you live in the house and higher if it's a rental.

Manny Cirino · Answer

So if you do a refi since it's a new loan are the rates lower since you would need to have some sort of history paying of your first loan to even qualify?

Shanequa J. · Answer

What is the minimum amount of months a buyer has to wait to refi?

Jon Holdman · Answer

Refi means you're getting a loan on a property you already own.  A purchase loan is to buy a property.

Often when you refi, you get a new first mortgage.  That means all other loans have to be paid off, if there are any loans.  If is any cash left from the new loan after paying any costs that get rolled into the loan and paying off the existing loans, the borrower would get that cash.  If the new loan is not enough to pay off the existing loans and the costs of the refi, the borrower would have to bring cash to the refi closing.  I've had it go both ways.

Its also possible to get a new loan and not pay off existing loans.  HELOCs are the best example of this.  In that case the borrower gets the cash directly.  The new loan is junior to any existing loans.

Manny Cirino · Answer

Hey Jon,
I have a question about the refi. When you refi how exactly does that work were does the money go to the owners pocket or is just opening a new loans. Please elaborate! I here this all the time but I do not understand the motive to refi if. Thanks in advance.

Jon Holdman · Answer

Is the loan in the seller's name or the LLC's name?

Laura Rose · Answer

Thanks for your responses.  I am buying the property, but by way of buying a single-member LLC's full 100% ownership in the property.  In my state, there are no transfer/recording taxes on this if the price is less than $1m, which it is (the deed remains intact anyway since the LLC will still own it).  So I think you guys have all convinced me to go this way and subject to the existing loan for 3 years.

BTW I did try to assume the loan, and the lender, who acquired the loan from another bank several years back, kept putting up roadblocks for the assumption.  First 30% down, then 35%, then 40%, then didn't even know that they were willing to do 60% LTV.  I am bringing cash in hand of abt 25% for subject-to, to pay seller difference between selling price and what is owed on loan.

So I guess I will hope that since the name etc will still be the same, and nothing filed for property, that it will go smoothly for 3 years then will be a more simple refi at that point.  Thanks again for your insight.

Shanequa J. · Answer

Unlike hard money lenders, I thought banks cared more about the LTV than the ARV when getting a loan.

Jon Holdman · Answer

If you buy with a subject to deal, you have now BOUGHT the property and you own it.  When you go to refinance in three years, its a refi, not a purchase money loan.  If you buy buy it, subject to the existing loan, with little money out of pocket, and then it appraises high enough in three years to refi without bring cash to the table, you've just bought an apartment building with much less than the typical 30% (plus costs) down payment.  That's a huge advantage, in my book.

If you buy it outright with a new loan now, you're looking at probably 30% down and (if I understand correctly) a 6% rate rather than 3%.

Again, this loan may well be assumable.   Even if there's a fee, if you can get this cheap loan assumed, that would be the best idea, I think.

subject to loan or new financing?

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