Is Assumable Debt a Positive Attribute in Selling a Property? – by Jason Punzel
One of the first questions we get asked by buyers when marketing a property is “What type of debt is on the property, can it be assumed, or must it be assumed?” Thus, sellers need to know, “Is assumable debt a positive attribute in selling a property?”
There are many different types of debt available; Fannie/Freddie long term debt, HUD, CMBS (yes, it is making a comeback), bonds, and commercial bank debt. Some debt must be assumed by a new buyer, some debt has high pre-payment penalties so it needs to be assumed (but doesn’t have to be), some debt has an option to be assumed, and some debt can NOT be assumed.
The best type of debt is when the buyer has the option to assume the debt, but if they don’t, the pre-payment penalty is very small, or none at all. Assuming existing debt can be very advantageous for a buyer in a raising interest rate environment, which has not been the case in recent years. However, if a property had long term financing at 5%, and the current interest rate to finance a property is 7%, obviously, this would have a monetary value to the buyer, and could be calculated using a discounted cash flow analysis over the life of the loan. Additionally, if the property is older, smaller, or in a rural location where new debt might be hard to obtain, assuming existing debt can also be very valuable to a new buyer.
One major challenge in assuming existing debt is the loan to value, or leverage ratio. If a current property has a sales price of $10,000,000 and the existing debt is $6,000,000, the new buyer may want to put down more, or less, equity than would be required by assuming the existing debt. This can become very problematic in some situations. The other challenge, of course, is when the current debt has a higher interest rate than the current rate, resulting in a negative value to the buyer, thus reducing the purchase price. When the assumed debt has a loan to value ratio that is not optimal, or if the interest rate is higher than current interest rates, assuming the debt will have a negative impact on the sales price. Conversely, when the interest rate on the debt is favorable compared with the current interest rates, assuming the debt will have a positive impact on the sales price.
Typically, we recommend that if the seller does have assumable debt that they give the buyer the option to assume the debt. If there is a pre-payment penalty, that should be reflected in the sales price so a buyer knows the value to the seller if they assume the debt at closing.
To learn more about how different types of debt can affect the price of your senior living community, contact Jason Punzel at email@example.com or 630-858-2501.