Hard Earnest Money Risks: Are Loan Assumptions a Safer Option Than New Financing?

What many limited partner real estate investors don't know is that the loan term sheet is not necessarily the final terms that are set.

The term sheet outlines the expected loan proceeds, interest rate, interest only period, etc. The general partners will select a loan from the term sheet and base their business plan on that. This selection is what is presented to limited partner investors in the presentation.

However, the official loan terms aren't finalized until a few days before closing. On large multifamily deals, the closing timeframe can be 60 days or sometimes longer. As we've seen in the period between 2022-2024, loan conditions can change quickly.

If interest rates increase a half point or more in the time you're under contract, it can sometimes break the returns of the deal. In this case, if you have hard earnest money, you'd be faced with a decision to buy the deal with worse returns to investors or lose the earnest money.

This is where loan assumptions have an advantage. The loan terms are fixed and aren't subject to change. The risk of loan conditions changing while you're under contract is completely eliminated.

Could this loan variation go in your favor? Absolutely. Interest rates can lower while you're under contract.

In conclusion, I would not fear new financing just because of this risk factor. If the numbers work on a loan assumption however, it may be in your interest to put up much more hard earnest money than normal to present a better offer. This is because the risk of loan condition variance isn't there.