Beware Of Loan Assumptions!

by | 23, Oct 2021

For today’s episode, we will be talking about a topic that has come up in multiple conversations recently, Loan Assumptions!

This week we’re going over why you would or would not want to pay off a loan that is not under your name.

We will talk about these things…and more in another episode of Multifamily Investing Made Simple in under 10 minutes.

The audible version Passive Investing Made Simple: How to Create Wealth and Passive Income through Apartment Syndications coming soon!

Tweetable Quotes:

Usually someone has some incentive to do it, otherwise, it wouldn’t happen” – Dan Kreuger

That’s why you hear us harp on this on the show as well. We always say you’ve got to match the right debt with the deal you’re doing” – Dan Kreuger

“If I could leave you with one thing to walk away from this episode with is never going into a deal until you know how you’re going to get out and don’t go into any deal if it only has one way out.” – Anthony Vicino

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Anthony Vicino and Dan Krueger
Passive Investing Made Simple – Available NOW!

Beware Of Loan Assumptions!

Anthony Vicino: [00:00:15] Hello and welcome to multifamily investing made simple, the podcast, it’s all about taking the complexity out of real estate investing so that you can take action today. I am your host, Anthony and I have the longest arms in the room. You joined, as always by Dan Stubbs Kruger Stubby Arms.

Dan Krueger: [00:00:32] I thought it was Dan interrupting your intro, Kruger today.

Anthony Vicino: [00:00:35] Do you remember when we first started the podcast like we couldn’t make it through an intro without interrupting each other? Couldn’t do it. Yeah, yeah, it was horrible. I’m just kidding. By the way, Dan does not

Dan Krueger: [00:00:45] Have voice way better than yours. I just insert it mid-sentence.

Anthony Vicino: [00:00:52] Listen to me, listeners, I need your help here. I need you to go right now. Drop it, you’re doing everything, this is important. Go to iTunes and leave a review. And in that review, I need you to let me know who has the better radio voice. Is it me? Anthony Smooth-talking Vecino or Dan? Dave Earl Jones Jr. Go leave a review, let us know your vote matters, and back to the episode now,

Dan Krueger: [00:01:18] Pretty much nailed it.

Anthony Vicino: [00:01:20] Dave Earl Jones, I know that man is anyways, OK, this is I think this is an under 10-minute episode, so we actually got to get on the horse right here because sometimes we go a little long on these episodes and our customers get our listeners, get little cranky customers.

Dan Krueger: [00:01:33] Are we charging people for this? I hope not. No, this

Anthony Vicino: [00:01:35] Is a free service brought to you out of the goodness of our hearts? Now, Dan, today we’re going to talk about a topic that we don’t really think about very often personally. But it came up recently. It came up twice in the last week. One I was on a coaching call. Somebody asked me about it and then two, we had a potential seller say, Hey, I got something. Maybe you want to take a look at this? And he said, loan assumption. Now, Dan, what is a loan assumption?

Dan Krueger: [00:02:02] Well, I assume that joke that was an attempt at a dad joke. I’m working on it right right now. A loan assumption for those of you who are not privy to what this is is where you want to buy a property. Someone already owns it. So you had to buy it from them, but they don’t want to pay off their loan. For some reason. We’ll get into why that might be in a second here. They want you to just take over their loan instead of paying off their loan and exiting in that manner, which is typically what happens when you buy a property from someone, whether it’s a house or an apartment building, the proceeds coming in from you and your bank pay off that person’s loan and they’re done. But sometimes that’s not advantageous for them for some reason. Or maybe it’s advantageous for you, the buyer, to assume their loan. So usually someone has some incentive to do it. Otherwise, it wouldn’t happen, but it could be on both sides. It could be the buyer who wants it for some reason or the seller who wants to have the buyer assume it. And that’s pretty much it. You kind of just jump in where they left off. Nothing starts over. Wherever they were at in their term is where you jump in and it just kind of continues. So I mean, it sounds pretty good in theory, right? That sounds simple. And if someone’s got really great terms, that sounds like a pretty good deal.

Anthony Vicino: [00:03:11] Yeah, that could be one of the reasons to do the loan assumption is maybe you’re buying from a seller who got Killer Killer terms and you’re like, I can’t get better terms than that. I’ll take your loan. Thank you very much, please, and thank you. But often it’s more to do with the fact that the seller probably is locked into their loan in some way. That makes it so that if they sell and they try to pay off the loan, they’re going to get hit with a prepayment penalty. So maybe they. So actually, in the coaching call I was on earlier this week, the guy specifically, they had bought the property two years ago with a Freddie loan. So they went agency, which usually has like five years worth of prepayment penalties, which is probably the wrong loan to put on a product if you’re expecting to leave it in two years. So something probably happened there. So now the only way that they can realistically sell this property is to have somebody assume the loan. Otherwise, they’re going to get nailed with a big prepayment penalty, which might just kill all the profits that they could hope for.

Dan Krueger: [00:04:08] Yeah, that’s why you hear us harp on this on the show as well. We always say you’ve got to match the right debt with the deal you’re doing because some debt might have really great terms. Like Anthony mentioned, agency debt, in this case, was Freddie, or it could be Fannie Mae. They have really great terms. There’s not a lot of flexibility there, so you sign up for a certain loan term and you’ve got a fixed rate for a certain amount of time. And if you pay off your loan before then, you’re going to get dinged right. And that’s why they’re able to get you. Such a low-interest rate is because they’re going to get their money one way or the other. If you sell early, they’re going to catch you on the prepayment penalty and make their money. And so they know for sure you’re going to be stuck paying them something so they can give you a really low rate. Now it might be advantageous like it is for us usually where we’d like to have options, right? So we choose local community banks to do our debt because then our rate might be, you know, a few basis points higher than agency debt might have a little bit shorter amortization. But we get to pivot and change very quickly, and it’s not going to be detrimental to the deal to do so. So we kind of sacrifice a little bit of on the terms for that flexibility. But that payment, that prepayment penalty can be a doozy. And I’d say that’s 90 percent of the time. If a seller wants to do a loan wants you to do a loan assumption, it’s because of a prepayment penalty. It’s almost always, almost always.

Anthony Vicino: [00:05:22] And the thing if I could leave you with one thing to walk away from this episode with is never going into a deal until you know how you’re going to get out and don’t go into any deal if it only has one way out. And if that one way out is, I’m going to need somebody to assume my loan, you’re going to have a very hard time getting that deal done. It’s not impossible, but it’s going to be a difficult one. So number one, pair the right debt with the right deal and give yourself maximum optionality going, Freddie and Fannie. That really locks you in. They give you great terms, but it really defines how you’re going to exit the deal. So just be cognizant of that before you sign on to any loans. Because here’s the thing as a buyer, I’m not wild about the idea of assuming somebody else’s loan for a lot of reasons. The. The biggest one is, we really have no control like the bank wields a big stick in that equation, and we’re just at their mercy and the bank always wields a big stick. But in this case, it’s particularly big.

Dan Krueger: [00:06:20] But typically you’d have a relationship with that bank, you know, in a deal that you found normally and you went and got debt yourself, you’d go to your bank. It wouldn’t work with somebody that you have a relationship with. When you’re assuming debt from somebody, you probably don’t have a contact at this institution to help you out with this right. So there may or may not be any incentive on the bank side, you know, help you out and work with you, right? They might just see you as a no and there’s no relationship. So that’s not really the best scenario to be coming into my opinion. And I’ve also heard that it’s we’ve never done a loan assumption, but from what I’ve heard from people who actually do them, they’re not that easy. It’s not just a quick and easy like, Oh, here’s the new guy. Here’s his name and Social Security number. Just slap him on there as they vet you pretty well. So it’s not going to be the most administratively efficient process, and a lot of banks don’t really like to do them. Hi there. From what I guess they really don’t.

Anthony Vicino: [00:07:06] They don’t. We haven’t done a loan assumption. So take all this with a grain of salt that we don’t know what the heck we’re talking about. But we did talk to Charles Dobyns, who is the multifamily attorney, and he has seen quite a few loan assumptions in his day. And he is a very big proponent of not doing them because they get very complicated, very quickly. You really have no leverage in the equation and you’re entirely dependent on the seller and the bank all coming through and doing this thing. And so for me, I’m not actively seeking out those opportunities personally.

Dan Krueger: [00:07:42] Yeah, the only people I’ve heard that have been pro loan assumption are the people trying to get you to assume their loan.

Anthony Vicino: [00:07:47] That’s about it. Well, that or the other group. And this is somebody like the gurus, the teachers out there who specifically teach, Hey, you can get into multifamily assets with little or no money down as they will, they will push. Maybe you could do a loan assumption and then the seller carries back a portion

Dan Krueger: [00:08:04] Of they probably have to pay them a fee to go to their conference and they’ll sell

Anthony Vicino: [00:08:07] You. You got to go to the workshop and then go to the boot camp, which I mean, I’m not pooh-poohing education programs, guys.

Dan Krueger: [00:08:14] Like, Yeah, well, that’s an upsell scheme. That’s an upsell

Anthony Vicino: [00:08:16] Scheme. So just be cognizant. Like if anybody is trying to sell you on getting into multifamily with no money down like they are lying to you.

Dan Krueger: [00:08:23] Yeah, you need capital doesn’t have to be yours, but you do need capital. There’s no money down anyways.

Anthony Vicino: [00:08:30] All right. So that’s one assumption I have talked about as much as I possibly can on the topic. Yeah, before I start making stuff up,

Dan Krueger: [00:08:37] Skip the loan assumptions. Skip it.

Anthony Vicino: [00:08:39] Yeah, it’s probably just not worth it at the end of the day, OK?

Dan Krueger: [00:08:42] Structure your debt the way you want it.

Anthony Vicino: [00:08:44] Yep. All right. That’s going to do it for us, guys. We appreciate you taking a little bit of time out of your day to join us here. Now, remember, you got to go in and cast a vote. Who’s got a better radio voice? Me and my silky smooth tenor or.

Dan Krueger: [00:08:57] Dan and his coffee voice,

Anthony Vicino: [00:08:59] You didn’t even put any effort into giving them a radio voice.

Dan Krueger: [00:09:03] I’m just being rude.

Anthony Vicino: [00:09:04] I’m not trying to put on a late-night DJ Dan. I could do NPR, give me, give me NPR. I’ll take that.

Dan Krueger: [00:09:09] Hi, this is Garrison Keillor. Now that’s creeping me. I am not comfortable

Anthony Vicino: [00:09:13] That we’ll do it for us, guys. We’ll see. Not doing

Dan Krueger: [00:09:15] Npr Voice. No.

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