Re: assumption of existing loan - Posted by JPiper
Posted by JPiper on February 06, 2001 at 21:48:28:
Here?s what I would surmise from the information you?ve been given:
- The existing loan balance is $962,500.
- The equity is the difference between the selling price and the existing loan balance.
- Based on the asking price the owner does have equity of $412,500. If he sells for less then he will have less equity. All this other talk about equity confuses me?I?d have to question the broker more about it.
- The loan has a 10 year balloon?.10 years from the date of origination (a date that you don?t know evidently). A balloon means that at the end of 10 years (from origination date) the entire balance is due and payable.
- The interest rate is fixed for 7 years and adjustable for 3 years. What you evidently don?t know is what the fixed rate is for 7 years. Another important fact is to know the ?spread??.the amount that is added to the index (in this case the T-Bill rate) to arrive at the adjustable rate during that last 3 years. You also don?t know how often the rate adjusts, and what that index is?.90 day T-Bills, or something longer in maturity. It makes a difference on the volatility of the index.
- You don?t mention whether there is a cap, or maximum increase per period. All you mention is the cap on the rate during the life of the loan. Can it go there in one shot?
- You evidently don?t know the amortization on this loan?.if any.
- There?s a 1% fee to assume?.about $10K evidently.
I would have wanted to know some of the facts that I mention above so that I could figure out my cashflow on your deal. Frankly, if you?re new, and you?re asking these questions, this deal is no deal for you.
But keep something in the back of your mind. There?s a whole crowd of people out there that I call the ?white shoe boys?. These are the real estate brokers, mortgage brokers, Wall Street brokers of the world. These guys can talk a mile a minute?and get paid to do so. Their job is to sell, persuade, convince. Your job on the other hand is to understand?.and therefore your job is to SLOW them down, to get information, to probe until you know what you need to know. The white shoe crowd can throw terms around with such speed that they may intimidate you. Don?t you let them do that to you. Make them repeat themselves until YOU understand exactly what you need to understand. Understand that these guys may not know some of these answers?in fact, count on it. Also you can count on the fact that if they don?t know the answer they may well just make it up. And if they do tell you they?ll check it out, they probably won?t call you back. That?s the white shoe crowd for you.
What you basically need to know about loans is the bottom line?.how do the payments work?how are they arrived at. That?s an easy matter with a fixed rate loan. With an adjustable you?ll need to know some of the information I?ve mentioned above. But with an adjustable?figure out some different scenarios to see how the changing rates affect your bottom line. In other words, take the worst case rate and plug it in to your cashflow?.can you still make money?
And of course, you would want to inspect and approve the note and security instrument as a contingency in your offer?.just in case the white shoe crowd happens to leave something out that would be important to you?and to verify what you?ve been told.