Wrap around mortgages (known as wraps) are a form of owner financing where the new buyer pays the seller directly for a property and the seller continues to make payments on the underlying mortgage.
There are many advantages to using a wrap-around mortgage. First, your buyer doesn’t have to apply for new financing. This means no appraisals and second appraisals, underwriting, red tape and bank delays. Second, you are still making your mortgage payments. This gives you control and you can be sure that the payments are being made in a timely fashion. If your buyer doesn’t pay you, you can still make the payments and ensure that the property does not slide into a foreclosure situation. Third, you can make a cash flow on the spread between the payments to your underlying mortgage and what your buyer is paying you.
Making The Spread On Wrap Around Mortgages
For example, you are selling a property with a current mortgage balance of $100,000 at 6%. Your principle and interest payments are approximately $600 per month. You have a buyer who will pay $140,000 for the property, with $20,000 down and you will carry the balance of $120,000 for him at 8%. That payment works out to about $880 per month. You pay your $600 underlying mortgage and bank the $280 per month spread.
Even if you charged 6% interest, because the new loan amount is larger than your mortgage balance, you would still make a bit on the wrap. $120,000 at 6% interest works out to about $720 per month.
Another Advantage To The Wrap Around Mortgages.
You are selling your property; that means you are not dealing with tenants, trash, or termites. You aren’t getting those middle of the night phone calls because the toilet is stopped up or requests for new appliances. All the maintenance and upkeep is the new owner’s responsibility. In effect, you are now the lender, not the landlord.
In addition, the new buyer is responsible for taxes and insurance. I like to add these onto the payment and collect them monthly. If the underlying loan escrows taxes and insurance, it only makes sense to collect on them monthly. But even if it doesn’t, you don’t want a big bill coming in at the end of the year and have your buyer unable to cover the expense. Put taxes and insurance into the payment and escrow those funds for your buyer. It’s worth the little bit of extra work.
Can a Wrap Around Mortgage Trigger The Due-On-Sale Clause?
Technically, you are selling the property and yes, that could possibly trigger the due-on-sale clause. It is very rare for a bank to call in a loan that is being paid on time, especially if the payments are still coming from the original borrower (you). In today’s environment, you would think that banks would just be happy to receive payments. However, they have assigned and re-assigned notes and mortgages as well as the servicing of those notes so often that the trail often looks more like a plate of spaghetti than an orderly assignment of an asset.
A way to get around that is to create sell the property using a Contract for Deed. You don’t sign over the deed to your buyer until all the payments have been made.
Making Your Real Estate Buyer Feel Secure.
Your buyer is going to want to make sure that the underlying mortgage is being paid in a timely fashion. You may want to give him online access to your mortgage information so he can check to make sure the payments are being made. Most buyers will check for the first few months and then check from time to time after that. You may want to set up an automatic payment account for the mortgage and set aside several months payments from the down payment.
To further protect your buyer, he can put a notice of contract in the public records. This is a one page statement saying that he has an interest in the property.
One More Advantage To Wrap Around Mortgages — The Down Payment.
Making a cash flow every month is very nice, but an even nicer benefit is getting a chunk of money up front in the form of a down payment. While I recommend that some of that money is set aside to cover any shortfalls in payments, taxes and insurance, you should still have enough left over to put a smile on your face.
There’s another advantage to the down payment. Not every buyer has 20% to put down on a property. You are more likely to find a buyer faster if you can offer some flexibility on the down payment. Sometimes getting a property sold is more important than holding out for big money.
Hopefully now you have a clearer understanding of what is a wrap around mortgage, and understand that they are yet another win/win scenario for buyers and sellers. If you are finding eager buyers but continually have conventional financing falling through on your retail deals, see if a wrap around mortgage will sew up the deal for you.
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