"Mortgage Must be Assumed" & "52% of sale price downpayment" Why?

Question

I've recently reviewed an apartment complex that looks interesting however the current mortgage must be assumed.  Also, the deal is requiring a downpayment of $1,175,000 (52% of the sale price - asking price is $2,250,000).  The current mortgage balance is $1,075,000 fixed at 6.25% due in April 2016 and amortized over 25 years.

Here's my questions - any insights would be greatly appreciated

1.  Why must it be assumed - is there a pre-payment penalty?
2.  Why must there be a 52% down payment?
3.  How is the mortgage factored into the purchase price?
4.  Could this be refinanced somehow?
5.  How do you see this making sense for a buyer?  (i.e. would a buyer assume and then refi if possible?  Offer a lower purchase price to make up for the higher mortgage interest rate?)

Jon Holdman · Answer

1.  A prepayment penalty is probably a good guess.  The seller doesn't want to have to pay that.
2.  Its the difference between the loan you'll have to assume and the asking price.  Doesn't necessarily mean that all has to be cash.  You might get a loan for part of it or have the seller carry part of it.
3.  Same as if you were getting a new mortgage with the same terms.
4.  Sure, if you can get the refi loan.  Not easy.  And, once you assume it, any prepayment penalty becomes your problem.
5.  Hard to say.  Is it a deal?  Do you have the cash?  Can you get a loan for the shortage if you don't have the cash?  These terms do appear to make the deal less attractive than if you could just get your own financing.

Bill E. · Answer

Ok I've got some more details from the broker-

The mortgage is a CMBS loan and the fees to defease are too big.  The only thing that makes sense is for the buyer to assume.  Also, the mortgage prohibits secondary financing.

The deal also includes 13 acres of developable land, including some commercial frontage.  They have apportioned $200k for the land.

So, say you can get it for 1.5mm (9.6% Cap using 50% rule) which seems possible, or perhaps you could do even better, considering the limited pool of buyers the financing terms create.  Then you subtract out the assumed mortgage of $1.07mm and you are left with $425k cash that you need to bring to the table.  That comes out to about a 28% down payment.  You can also refi the whole thing in 2016.

Thoughts?

Jon Holdman · Answer

If you buy the property for $2.25million (I know what you mean by mm, but I but very few people do anymore) and you assume the $1.075 million loan, you would bring the difference, $1.175 million in cash.  Not $2.25 million.

OTOH, if you were paying cash and bring $2.25, the owner would use some of that money to pay off the existing loan.  You would not assume the existing loan in that case.  Same if you brought, say, $750K in cash and a new loan of $1.5 million in the form of a new loan.  For whatever reason, the seller doesn't want this alternative.

Have you tried just asking the seller or their agent why they want you to assume the loan?

Bill E. · Answer

Thanks for the replies.

Here's where I'm getting confused.  If the Seller is transferring the mortgage to me, then they aren't paying it off and instead are keeping all of the money they receive.  So, if I pay the full price of $2.25mm then Seller keeps it all?  And, I still owe the balloon payment for the balance of the loan in 2016?  Seems like the balance of the loan should be credited back to buyer at closing or something.  I'm just getting tripped up on the mechanics of how this works.

Also, I agree this financing makes the deal less attractive which makes me think you could offer much lower than market rate.  And then if you could refi somehow this could be a great deal.

Ann Contorno · Answer

Hey Bill - IMHO in response to #5, I don't see  this as being a very appealing deal for a buyer.  I might move on...that is a heck of a lot to come out of pocket with in order to pick up a property.  The only way that I would pursue this deal is if you were picking it up at a huge discount (50%) then it might be worth that kind of capital outlay.  Good luck!

Wayne Brooks · Answer

I've seen some apartment complex loans in the past, from insurance companies, that do not Allow a pre pay, even when market rates were 2-3 points above the existing mtg rate.  The seller will probably need to do a wrap/carry a second for most interested investors.

"Mortgage Must be Assumed" & "52% of sale price downpayment" Why?

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