Doing an analysis for a seller on whether it is better to prepay a loan or lower the price to make an assumption by a buyer palatable? Looking at a deal now and if you price in the assumption by solving for similar LIRR as free and clear scenario, the COC takes a big hit. Guess the question is really how is a buyer going to underwrite an assumption? Will they be more focused on COC or IRR? Or is there a better way to look at this? Thanks!
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Keep the same price and assume the seller pays of the financing as a condition of closing so they can offer it free and clear. That way the buyer can do whatever they want with financing.
It's going to depend on your buyer - some care more about COC whereas some care more about IRR. When looking at an assumption deal, also look at 'trapped equity' which the assumer will eventually access. If you are assuming a loan with interest rates and leverage which aren't market, for instance, an above market interest rate, you will probably pay less for the deal. In 3 years when the loan expires (or whenever it expires), the buyer will realize the equity by rightsizing the loan and rate. This sometimes is the incentive for doing an assumption deal. You need to be willing to give on one aspect of the deal or gain later, and usually favors more patient capital.
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