The saying “looks can be deceiving” is more pronounced in today’s real estate market than ever before. If we focus on apartment buildings, specifically the financing aspect of property acquisition, we notice that many properties listed on the market offer owner financing or the assumption of existing financing.

As I have described in past articles, when someone offers owner financing, it means the seller acts as a lender on the property. The seller will “carry back” paper, which means the buyer agrees to pay the seller according to a promissory note. This can be beneficial to both parties as the seller does not have to deal with a large capital gain at one time and the buyer does not have to deal with a conventional lender.

The other term used in property listings today is assumable financing. When a buyer assumes a loan, they are taking over all of the existing terms from the current note, unless terms are changed by the lender. This seems like a great way to go for a buyer especially if they can attain a lower rate than the current market offers. However, some lenders make buyers pay loans down to meet loan-to-value and debt service coverage ratios.

Normally a commercial real estate buyer would calculate what amount of principal needs to be paid down and count that amount in their down payment. However, some lenders do not allow a simple pay down on an existing loan. When a loan is assumed, it is usually tied to a prepayment penalty.

If the loan has to be paid down to the meet the lender’s current loan criteria, it is possible that a principal reduction would trigger the prepayment penalty. For example, if a loan was assumed for $1 million but had to be reduced or paid down to $800,000, $200,000 worth of principal would have to be paid off by the buyer.

Let us say that the loan has a 5 percent prepayment penalty for the first five years and the loan was assumed in the third year of the prepayment penalty. The lender may require the buyer to pay a prepayment penalty on the amount of the loan that was paid down, $200,000 in this case, which comes to $10,000.

Another popular property listing offers buyers assumable financing along with a seller carry back. The idea here is that the seller will carry back paper for the difference between the assumed loan and the down payment. This sounds great, until you begin to do the calculations.

Once you add in financing from the seller, the property loses more money. Moreover, lenders may not allow a second trust deed behind their first trust deed and may call the note due when they find out.

Of course, there are great deals in the marketplace today. An intelligent investor will understand when a deal makes sense or not. Furthermore, a sophisticated investor may understand something about the marketplace that a novice investor or the seller of a property does not. Remember that just because something looks like a great deal does not mean it is a great deal.

Mike Heayn is a Commercial Loan Consultant, specializing in Multi-Family Lending. He can be reached at 310-428-1342 or emailed at

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