As high interest rates continue to shape the commercial real estate landscape, buyers are increasingly exploring alternatives to traditional financing. One such strategy—assuming the seller’s existing mortgage—can offer significant savings when the seller’s loan terms beat current market rates.

But executing a loan assumption isn’t simple. It requires close coordination with lenders, detailed contract language, and a clear-eyed view of the risks and responsibilities involved. Buyers and sellers must address these issues early—ideally in the purchase agreement itself.

Key Takeaways:

• Lender Approval Is a Must: Most assumptions require lender consent. Sellers should promise only good faith and reasonable efforts to obtain lender approval.
• Protect Against Hidden Defaults: Buyers should negotiate seller representations confirming no loan defaults exist or are likely by closing.
• Split the Costs Clearly: Loan assumption fees can be significant. Clearly allocate responsibility and adjust the purchase price for any assumed equity.
• Address Escrowed Reserves: Assign any loan reserves held by the seller to the buyer at closing to avoid confusion or disputes.
• Be Ready for Lender Scrutiny: The buyer becomes the new borrower. Expect full underwriting and commit to responding promptly.
• Plan for Document Execution: Both parties should agree to cooperate in signing all documents reasonably required by the lender and allow for limited buyer input on loan amendments.

Assuming a seller’s loan can reduce borrowing costs—but only if both parties structure the deal carefully. Addressing these issues upfront in the purchase agreement helps ensure a smoother path to closing.

Read the full article for a deeper dive into drafting successful loan assumption provisions in commercial real estate purchase agreements.