Large multifamily loan assumption - who has done it?

Question

I'm very interested in buying a large multifamily with an assumable loan. I see deals on the market today that offer assumable loans but unfortunately the asking prices are so far from realistic that there is little to no chance of carrying the new debt without putting down very significant cash. I'd love to hear how people closed deals on large multi w assumable debt.

How much was the downpayment?

Was it FHA, small bank, large bank or private?

What did the terms look like?

@Brian Burke @Steve Olafson I cannot imagine that you guys have not done such a deal, would love some input.

Account Closed · Answer

Serge S. Brian Burke Steve Olafson We assumed a Fannie loan in late 2012 on a $17 million deal in St Louis. Seller was in distress and judge ordered a sale. We were fortunate that the loan balance came in right about 80% of our purchase price. We got it for about $5 million less than they paid in 2008. Rate was high for the time (5.69%), but numbers still made sense with that loan. Deal was 208 units in A+ location. Main issue was loan comes due in 2017, which was our only hesitation. We were fortunate to be able to create a lot of value due to our purchase price (and got lucky that the market took off).

Serge S. · Answer

@Sean S. thank you for the summary of your deal. I agree with you that seller carryback is virtually non existent at the moment. If available, you have to ask why. I have no problem working with a lender and based on what I'm hearing about assumable loans, this looks to be the better scenario. It sounds like you guys scored on your deal and I congratulate you. Have you been able to find anything that that works over the past 24 months? Are you guys syndicating your deals or just working on a small partnership basis?@Ben Leybovich ahhh Leybovich... all roads lead to no money down with you. Your statement though is in fact correct. I would love to leverage around $400k into a 100+ complex rather than a 40-60 unit. I was trying to figure out if an assumable loan could be a decent conduit. I have no issue working within a syndication with talented operators but also continue to look in parallel for a very specific complex in a very specific location. Its much easier to underwrite a quality buy and hold than a homerun syndication. I want long term quality and sustainability in a market I am bullish on and I am very willing to pay a fair price. Problem is that everyone is also bullish and whats a fair price to me is typically much less than what is fair for others.@Joel Owens thank you for the insight. Your experience and knowledge is very much appreciated. @Steve Olafson yes GSO are government sponsored loans such as Fannie, HUD, etc. I very much appreciated your horror stories working with them in Texas and learned some valuable lessons. How are you coming along on your reposition in PHX? Lets try to get something on the schedule, this time I'll show you mine:)@Brian Burke yes indeed, no easy way to slip into a deal. I will say that I've seen a heavy volume of off market deals come my way in 2015 compared to 2014. There is definitely a higher volume of sellers right now. Unfortunately these sellers are using off market brokers to peddle junk at inflated valuations to see if anyone will bite. Just bc its off market does not mean its a good or even fair deal. I'm getting tired of brokers trying to convince me how great a deal can be. How much better I "should" be able to run it than the last guy. Every deal I've analyzed over the past 6 months has had the same traits: Already repositioned (or half-ass repositioned), cap rate a multiple of proforma that the seller could not achieve, purchased 2-5 years ago and barely able to carry debt even at 25-30% down of asking price. The worst part about it all is that all of these deals end up selling relatively quickly. There is no shame in sitting on the sidelines but I do feel there is still a lot of room for both rent and price growth in certain markets and that interest rates will remain low for longer than most anticipate. It becomes a capital appreciation play rather than anything on fundamentals.

Ben Leybovich · Answer

Haha - let's analyze this:I went on the Cardone Zone and analyzed a 12-unit in Columbus Ohio on the air. The essence of my analysis was that raising money to take that down was beside the point since this was not a project I'd want to own in the first place for a gamut of reasons... @Serge S. is very interested in assumption...WHY? Simple, cause he doesn't have enough money to just buy what he wants, and he is trying to do a Ben Leybovich schtickle No-Money-Down :)Serge and I have spent countless hours discussing NMD creative finance, and the consensus is that 99.9% of the time, if the owner is providing financing it is because he can't otherwise get out - he's got a piece of shit that nobody is willing to deploy capital for...the underlying asset is typically not worth owning.Now - I do NMD, but I do it differently. I utilize a blend of institutional and private debt/equity. On smaller deals that I can get done with $200,000 or so of private money, I typically use debt. More - PPM. Here's the thing, instead of looking for owner-financing, like @Brandon Turner, and buying only cause I can, I look for the asset that I truly want for its intrinsic value, and then step back and figure out how to finance it NMD. And it's usually not owner-financing.What we are talking about in this thread is big deal equivalent of owner-financing. Assumable financing is most of the time onerous like hell - I looked into that. You will have to put money down - they'll let you assume the balance, but will most of time require a certain amount down, even if the LTV is there. And if you want to live your life dealing with the gov-nt, you are more crazy than I thought!Serge - you are looking for this because on one hand you don't have the ability to put down $3 mil, and on the other hand you don't specifically want to go through the rigors of floating a PPM, at least not on your own. You don't want to utilize a "blend of institutional and private money", which at this level is necessarily a PPM.It's up to you, but I see this differently:Step 1: Find a deal that makes sense - irrelative of financingStep 2: Figure out the financing. If the deal is good enough, the money always follows. And if this means floating a PPM, then float a PPM. Stick with @Brian Burke and me - I'll make you both rich!

Joel Owens · Answer

"If your networth is not as strong as the seller, they may turn down the request."Or they may require the seller to stay on the hook for the guarantee which is a negative.The lender in this case double dips and keeps the original borrower on the hook along with the new purchaser for double security.I have not bought an assumption but have done some with clients on the triple net side. Depending on the loan size there is a lot of qualifying for the borrower. The lender might even require a bankruptcy legal opinion letter from an attorney on the borrower.Assuming is just not some easy no money down type thing. There has to be qualifying and a process that happens.The REFI risk is even more heavily a factor in NNN properties because the rent bumps tend to be 1 to 2% a year versus the multifamily at 3% annually. So assuming a loan and putting a bunch of money down say 40% just doesn't make sense when you can get a regular loan at much lower rates for 20 to 25%.Now sometimes as mentioned if the property has a reposition play to increase the equity a bunch or the seller is selling at a higher cap rate due to the assumption then it might make sense.On assuming the loan you can ask the sellers to pay the assumption fee, split it between the two equally or unequally in percentages, or the buyer pays it all. You can also do this with a pre-pay penalty if you want to break the loan.With CMBS specifically the reason it's hefty to break the loan is because the loan is sold off in slices on Wall Street. The investor purchasers are guaranteed a certain return for a certain period of time on the loan. This is where the pre-pay penalty comes in.

Steve Olafson · Answer

GSO.... Is that a HUD loan? If so, HUD has a lot of control. They can make decisions and they don't always make sense. You may be able to get a very low down deal but any assumable loan is going to require strength from the borrower. The lenders have that choice. They will certainly qualify you. If your networth is not as strong as the seller, they may turn down the request. They will want to see liquidity as well.

Brian Burke · Answer

I haven't done one. @Steve Olafson is right, FNMA can sometimes be upsized and there is a possibility that you can get sellers to carry back some paper to get down payments to a reasonable level. That just adds one more complexity to the deal, however, and in a competitive acquisition environment you probably wouldn't be picked as the buyer if you asked for the seller to carry unless the property was tough for the seller to sell such as a Class D with a flat roof.For me, if I see an assumption deal I typically just kick it off my list which explains why I haven't done one. Assumption deals are usually offered because the seller has yield maintenance and can't pay off the loan and it's too early to economically defease. I want the ability to put on my own debt so that I can structure it such that I can refi after doing a repositioning and capture proceeds to distribute back to my investors. An assumption would probably work fine if the deal was a coupon clipper but I don't buy those. It might also work if the maturity was short, such as in 2 or 3 years. In that case I could refi out and take proceeds then, but this adds a lot of uncertainty and risk to the deal because if the repositioning doesn't go as planned or the economy or lending environment moves against me, there's big trouble that I'd rather not have.On the other hand, if the assumption is not because of yield maintenance but because you want to assume it out of convenience or because it's such a great loan (and you can pay it off at any time) I suppose it's a good move. I just don't see that as the case very often.

Account Closed · Answer

Serge S. I'm one of the head acquisitions guys at a private investment firm. We own approximately 9,000 units. We raise equity in funds and then go out and find deals. Typical fund in the $40-50 million range. It's definitely tough to find good opportunities these days. We've been fortunate and have acquired 2,200 units over the past 14 months. Typically deal is 200-300 units.

Account Closed · Answer

Serge S. Our equity requirement was about $3.4 million, which conveniently was 20% of purchase price. As has been mentioned here, the challenge on an assumption is you are usually required to come up with much more than 20%, which hurts your COCR. On the deal, it wasn't a major turnaround, instead, we renovated a portion of the units and increased rents. We bought a solid deal in a great location far under value. The sellers bought it for $21 million in 2008. We paid $16,750,000 plus about $600,000 for deferred maintenance. We will likely refinance in 2017 due to the A+ location and age of the property (built 1988). We will likely put a new 10 year loan on the deal and enjoy double digit COCRs for the next decade. We are usually long term holders for cash flow. Are there other specific questions you have on the deal or structure? Happy to share, just not sure what else you are wondering about. We don't typically buy many deals with assumable loans, this one just happen to work out. Even if you assume a loan you need to bring equity to the table, so you are still raising money. Seller carry backs on large apartment deals these days are completely non-existent. I've looked at and underwritten well over 500 large multifamily deals in the past 3 years and not once was a seller carry an option.

Ben Leybovich · Answer

@Steve Olafson - he'll show you yours...?!?! I've seen his, and it's impressive...@Serge S. - we are still talking RE, aren't we...just checking?

Account Closed · Answer

Forgot to add, loan was full term I/O. Helped the cashflow but that was the concern on the exit.