Seller Financing and Loan Assumptions in Apartment Building Sales
Apartment sales do not always come together with a new first mortgage and the buyer’s cash alone. Sometimes the buyer’s new loan falls short of the gap between price and equity, sometimes the seller wants to receive part of the price over time, and sometimes the existing loan on the property has terms worth keeping. Multifamily seller financing and the assumption of an existing loan are two tools that may help bridge those gaps, though each comes with conditions and risks that buyers, sellers and lenders need to understand.
This article is general information for buyers and sellers of existing, stabilized multifamily properties. Every transaction is different, loan documents control what is permitted and the tax treatment of installment sales and other structures depends on individual circumstances. Buyers and sellers should work with qualified attorneys and tax professionals. Nothing here is legal, tax or financial advice or a commitment to lend.
What Seller Financing Is
In seller financing, the seller accepts a promissory note from the buyer for part of the purchase price instead of receiving all cash at closing. The note may be secured by a junior lien on the property or by other collateral, and its terms, including interest, payment schedule and maturity, are negotiated between the parties.
How Seller Financing Works Alongside a Senior Loan
When a buyer also uses a new first mortgage, the senior lender will want to review and approve the seller note. A seller note is typically subordinate to the senior loan, and the lender may require an intercreditor or subordination agreement that limits when the seller can be paid or take action if the buyer defaults. Some lenders limit or prohibit secondary financing on the property altogether, so the structure needs to be cleared with the lender early. Our article on multifamily loan requirements explains what lenders review.
Why Sellers May Consider It
- It may widen the pool of qualified buyers
- It may help close a gap between the seller’s price and the buyer’s financing
- It can provide income over time, with tax considerations to discuss with a tax professional
Risks for Sellers
A seller who carries a note takes on credit risk. If the property underperforms, payments on a subordinate note may stop, and the seller’s rights may be limited by the senior lender’s agreement. Sellers should evaluate the buyer’s experience and financial strength and have counsel prepare the note and security documents.
Assuming an Existing Loan
Some existing apartment loans permit a qualified buyer to assume the loan, keeping its rate, amortization and maturity. An assumption may be attractive when the existing terms compare favorably with what is available today or when prepayment costs would make paying off the loan expensive. Assumptions generally require lender approval, may involve fees, legal costs and new guaranties, and the buyer must still qualify. Many loans also contain due-on-sale provisions that prevent a transfer without consent.
Gaps in an Assumption
If the assumed loan balance plus the buyer’s equity falls short of the price, the parties may consider seller financing or additional financing to cover the difference, if the existing loan documents and lender allow it. Our article on non-recourse multifamily loans explains guaranty and recourse questions that may arise.
How Structure Affects Price
Favorable financing terms may affect how buyers think about price, and a seller who provides financing may negotiate on that basis. Our guide to multifamily property valuation explains how income drives value.
Larger Transactions
Larger apartment sales and portfolios may involve layered capital and more complex arrangements. Our page on middle market financing describes options for larger transactions.
For Sellers Preparing a Sale
Deciding early whether you would consider carrying a note, and gathering your existing loan documents, can help buyers and their lenders evaluate a deal. See our article on how to sell an apartment building.
US Professional Funding helps investors finance the acquisition of existing, stabilized apartment buildings and can help evaluate how seller financing or an assumption may fit alongside new financing. Learn more about our multi-family acquisition financing.
