Expert: Terrence Cullen - 12/17/2010

Question
QUESTION: The sellers of an apartment complex are asking $5.7 million dollars on an assumable loan. I was taught to never pay asking price and drop your offer 10-15%. If they are offering an assumable loan does that mean that they cannot drop the asking price? How do I approach them if I want to pay less than what they are asking.

ANSWER: Leon,
  What is the asking price? What is the NOI? What are the terms of the note. Is it locked or can you pay it off? Is there a prepayment penalty? What is the occupancy? Where is the property located?
   I must know the value and the terms before I can advise you on how to negotiate. TC

---------- FOLLOW-UP ----------

QUESTION: Hello Terrence,
The asking price is $5.7 million dollars. The NOI before debt is $390,004.00. After debt is $176,185.00. The terms of the note are as follows: $4,150,000 loan originating on 4/11/05. The interest rate is 5.050% with 3 yrs interest only payments. Maturity date is 4/11/15, pre-payment available 2/11/15. Current balance is $4,015,757 as of 7/31/10. Reserve deposit is $4,600/month. remaining term 4.6 years. Assumption costs $5,000 application fee, 1% assumption fee, plus legal and administrative costs. , The loan is not pre-payable without defeasance and must be assumed. The occupancy rate is 91.3%. The property is located in Greenville, SC. That is the info I have so far.
Leon

Answer
I do not have the current cap rates for Greenville, SC, but based on the NOI I see a very viable deal. The issue being is the Greenville SC which is not a particularly strong market. If you have some comfort with Greenville which I do not and this is is not the sole investment, I would consider an offer of 10%-15% below asking should open the discussions. Is it a Fannie/Freddie Note? Find out what the original purchase price was in the tax records and look up comp sales to help establish cap. Good Luck Tc