Are Commercial Real Estate Loans Assumable?

28 Jun Are Commercial Real Estate Loans Assumable?

Posted at 13:35h in Uncategorized by ELIFIN® 0 Comments

Getting a new loan for a commercial property can be complicated and time-consuming. Figuring the finances can make or break a deal, especially with interest rates on the rise. There are some loans, however, with considerably lower interest rates for the current market: Assumable Loans.

What is an Assumable Loan?

We sat down with Mark Segalla, a partner at ELIFIN specializing in Multifamily Sales, to break down assumable loans. An assumable loan is a special type of loan where the buyer can take over the seller’s mortgage with the same terms.

“An assumable loan,” Segalla says, “is a special type of commercial real estate loan where the buyer can take over the seller’s mortgage with the same terms. The buyer doesn’t have to get a new loan on the property, they just take over the existing one.”

This includes the interest rate and how long the buyer has to pay it off. It can save money for the buyer and make the property more attractive to potential buyers.

Pros of Assumable Loans

Assumable loans have several advantages in commercial real estate deals. The main advantage is that these loans often come with fixed interest rates that were set when rates were low. Buyers might get a lower interest rate than they would with a new loan and pay fewer fees to the lender. “Even if the rate is lower than it would be on a new loan today, you get to keep that lower rate,” Segalla says. “It can save a lot of money for the buyer.”

There are advantages for sellers as well, Segalla explains. “The buyer owes the seller the difference between the purchase price and that assumable loan amount. Offering an assumable loan can help sell the property faster because those rates are attractive to potential buyers.”

“You avoid having to go through the process of getting a new loan. The debt stays the same, and you save a lot of time for everyone.”

Cons of Assumable Loans

While they have a lot of benefits, you can only assume a loan under the right circumstances. Lenders look closely at the buyer’s finances and the loan’s original terms. “You have to be able to qualify and get approved for whatever that loan type is,” says Segalla. “The borrower or buyer has to be strong.”
Changes in property values or interest rates can also affect how good of an investment an assumable loan is, so it’s important for buyers to be careful and get advice from experts. “You’re beholden to all of those loan terms. There’s no flexibility there,” says Segalla. “So, if you wanted a longer amortization or longer term, you can’t change that at that point. You’d have to refinance.”

Segalla also notes that only specific types of loans, like government-backed loans, are assumable – local banks typically don’t have assumable mortgages. And the main downside? You might have to put down more cash up front.

“Let’s say you’re getting a new mortgage at 80% loan-to-value. You’ll need to put down 20%,” says Segalla. “On a $1 million property, you’ll need $200,000 to close. But if the assumable mortgage has a balance of $700,000, then you’ll have to bring $300k to close it. That’s really the only downside is potentially needing more cash.”