Mortgage Loan Transfer (Assumption) Deal - Is it a good deal for me?

Question

Hi,

First post here after reading amazing content by you guys.
	
	I am thinking of assuming a mortgage by the owner in a city in NJ. The owner bought his house in 2002 with a normal interest rate but later refinanced it after taking out equity. This took his interest rate to a whooping 7%, due to which he is paying around $3300 before tax every month on his mortgage.
	
	The remaining amount on his loan is $460,000.
	
	Now, some pointers about the property.

• It's a multi-family property with a very good location.
• It is very close to NY, hence the commute is easy.
• It's a multi-family house with a combined rental income of around $4200 per month.
• The Lot is size is double than usual (compared to the average size of City).

Current monthly payments being paid by the owner:-

• As told before, the remaining loan amount is $460,000
• I've had appraisal done on the house, and it came out to be $390,000.
• Mortgage ($3300) + Tax ($1000) is $4300 every month.
• Water bill is around $150 every month.
• Insurance is around $100 every month.

Hence the owner is paying $4550 every month.
	
	The current situation:-

• The Owner has this house on sale at the moment at $500,000. It's been one week and he got two offers. One was for $430,000 and the other one was $440,000.
• It's still on market.

Now, my question(s):-

• If I have this loan transferred over my name, would the interest rate be changed according to the current interest rate (4%)?
• If the interest rate doesn't change and I refinance the house, would they refinance it (without me putting any money down), keeping in view the current value of the house is lower than the loan on it?
• Do you think there is any way I can reduce the interest rate on it ?
• If the interest rate is lowered to 4%, the monthly payment of the house would be $2000 + Tax ($1000) + Insurance ($100) = $3100; give me a positive equity of $1100 from rentals. Do you think it'd be good deal then?

I'd appreciate any pointer, advice and feedback from you guys.
	
	Best.

Account Closed · Answer

Not sure why you are contemplating taking over a bad interest rate loan, for more than the value of the property.  The only person this would help is the seller.  If the seller has legit offers for $430K and $440K and doesn't get anything better, he's either going to have to bring cash to closing to pay the difference to the lender and his agent, or he's working a short sale with his lender. He'd be very lucky indeed if you would assume his crappy loan.

I suggest you don't make his problem your problem.

Jon Holdman · Answer

If you assume the existing $460K mortgage you are effectively paying $460K for a property that's only worth $390K.  Its very unlikely that's a sensible thing to do.

Most mortgages are not assumable.  But since this is a multi-family it might be.  If its 5+ units, this will be a commercial loan and those are sometimes assumable.  If its 4 or less units it may be a conventional loan and those almost never are assumable.

Assuming it is assumable (ha!) then:

No. Loan terms won't change.

If by "they" you mean the current lender, who knows.  If you mean will some lender refi it, probably, if you find the right lender.  However, you have a big problem with values.  You will owe $460K on a property that's worth $390K.  If this is commercial, a lender is unlikely to go above 75% loan to value (LTV).  So that would mean the maximum loan is about $292K.  And you'll have some costs.  So you would need to bring about $180K to closing to do the refi.

With the existing lender?  Unlikely.

Your $3100 is what I call "phoney cash flow".  You've neglected a BUNCH of expenses.  With rental income of $4200 a month, and assuming you use a property manager, your total expenses, capital and vacancy will be around $2100 a month.   That's on average over the long term.  If you do a good job managing the property.  With a P&I payment of $2000 your cash flow is $100 per month.  If you do the PM job yourself, you can earn that cut.  That would give you another $400-600 a month.

The big issue is assuming a $460K loan for a property that's only worth $390K.

Dion DePaoli · Answer

Some of this is nails on a chalkboard.  Steve it is pretty clear this is pretty new to you in many ways.  It is not quite clear why you are so interested in this asset and so it is hard for any prudent investor to give you any positive affirmations which you seem to be on the hunt for.  To that I affirm for you, we are not the keeper's of your "good deal".  That decision falls onto your shoulders.
	
	There are many contradictions in some of the information and perhaps the real picture is not being communicated well.  The only reason I see you want this property is "...is at a very good location...".  Why do you think this is a good location and what is your subsequent plan for the property?  
	A rise in the value from appreciation?  
	Are rents at market or can those be increased?
	
	There is a little hint you may be blinded by your desire for this asset as well.  Two offers came in already 10%+ of the appraised/not number you were working with.  It seems like that number is wrong.  The Mortgagee is due $460k.  The shortfall is not that large ($30-$20K [5%]+/-) and the property has not been on the market that long.  If the neighborhood supports purchases made in cash or with cash supplements, there may be no need to worry about this shortfall at all.  Clearly that idea levels the playing field a bit more.
	
	As far as the partner/sale ideas.  If you move forward with this, you really need to get an attorney involved.  Details matter and this post does not do well to articulate your understanding of such. 
	
	If you take title, you will have an interest in the rents.  That is not really the highlight reel here.  How the property is administered and the rest of the details of your partnership structure would play into all and is the idea which are the real talking points.  
	
	The general plan here:
	
	1.  Merge onto title
	2.  Refinance *
	3.  Ride off into sunset splitting 50/50 (We do not understand the investment term)
	
	*The refinance plan doesn't have enough details for any of us to comment.  The rate quoted seems low for an investment property.  (I am also not in the market)  It is not clear if both partners would even be able to qualify on a loan.  This concept then changes risks for each party which may render the 50/50 idea inequitable for either or both parties.  
	
	It makes little sense to bother with  any type of assumption pursuit if the end goal is to refinance.  Just go refinance and save a couple bucks.  
	
	It is not clear when you will join title or in what manner.  The two of you can join as natural persons or create a company and hold title.  At refinance or before.  When do you get credit for rent?  When do you have capital at risk?  These ideas are simple tangents on the lending side and on the partnership agreement format.  None are really addressed.  
	
	So there can be no real answer to your question about the deal as we have not yet spoken about a specific deal only ideas of deals.  Like I said, details matter.

Steve Saussier · Answer

Actually now that we are planning to go 50%-50%, we wouldn't involve the lender (Ocwen in this case).

We might sign a deed which would have a written consent that the 50% proceeds of this property would go to me.

Do you guys have any better idea which can be between me and the owner to share the property without bring Ocwen in the middle?

Lastly, do you think this deal makes sense for me financially?

Thanks.

Bill Gulley · Answer

The questions asked: No, No, No and No

And, from what you have mentioned, if you are correct, is this is no deal.

No lender will allow a true loan assumption, release the previous borrower and not modify the note and not charge fees of do so financing 100% of your purchase, well, there could be cases, like if you had 500K in the bank they might for a special customer, who doesn't really need the loan, but in reality, no. :)

Steve Saussier · Answer

We both would do the refinancing.

So the plan is that we'll become 50%-50% partners in the property and we both will refinance the property.

For refinancing, we'll need $80K; $40K would come from my side and $40K would be paid by him.

Furthermore, the profits from the rental income and/or expeses would be shared equally too.

what do you think?

Tom S. · Answer

@Steve Saussier

Who would do the refinancing - I'm assuming the owner? Does he qualify?  Is it anything he's even interested in?  You mentioned he's looking to sell it.  Plus as mentioned above, a lot of money would have to be brought to the table to refinance.

- Tom

Steve Saussier · Answer

Ok, a quick update. Upon hearing your advise, I decided not to go with this deal.

Thank you very much for this.

Here is another plan. I am still pondering over it and would be grateful of your advice.

What If I take a 50% stake in the property and 50% stays with the owner. We do that by refinancing the property to reduce the interest rate. Half the refinanced amount is paid by him and half of it is paid by me. (That comes out as $40,000 for each person).

The reduced interest rate would be 4% then and would bring the Mortgage payment to $2,000 from $3,300 (before tax).

Do you think it'd be a good investment decision for me?

Thanks.

Steve Saussier · Answer

So I guess it's a no from both of you ? :-(

Jon Holdman · Answer

20% down is about the least you can manage these days on investment mortgages.  If someone gets a loan on a property that's worth $390K, but their offer is $430K, then they will need to put down 20% of the $390K plus 100% of the difference between $430K and $390K. $118K in this case.

Mortgage Loan Transfer (Assumption) Deal - Is it a good deal for me?

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