STRATEGY
LOANS
Loan Assumptions ASSUME EXISTING DEBT TO MAKE A DEAL WORK
by Eric Stewart, a Think Realty Resident Expert
T
he ability to assume exist- ing debt can be a great way to
makes sense to assume the existing debt when purchasing an asset. The most obvious reason is when the existing debt is more attractive than new debt being offered at that time. In a rising interest rate environment, it makes sense to assume the exist- ing debt at a lower rate. Conversely, in a relatively flat or declining rate environment, the loan terms are not the driving factor. There would need to be another compelling reason to assume a less attractive debt struc-
ture than what you could get in the current market. The most common reason to assume a less attractive debt struc- ture is to avoid additional cost of a prepayment penalty to the seller. The goal is to help keep the cost of sale low for the seller with the expectation of sharing in that benefit and sub - sequently buying the property at a reduced price. Most securitized fixed rate debt structures will have a pen- alty associated with paying the loan
make a deal work for both buyer and seller. In a relatively flat or declining rate environment as we have seen in recent years, prepayment penalties on securitized loans can be extreme- ly expensive. That additional expense will often diminish a potential sell- er’s returns to the point where a sale is not feasible. Why assume the existing debt? There are a few reasons why it
56 | think realty magazine :: november 2021
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