One of our seller clients recently received a solicitation, 'offering' to 'purchase' their listed property at full list price. We quickly recognized the 'offer' as a marketing solicitation, and a commonly-used approach by investors who practice wholesale acquisition methods.
The 'offer' is for the sellers to move out of their home while they keep their existing mortgage in place. This is called a 'wrap' -- where the 'sale' is subject to' the existing financing. Investors who are either unable or dont care to qualify for traditional financing -- or who lack cash funds -- find this method attractive, as it allows them to purchase with little to no money down.
Wholesalers will also use this technique to legally bind a seller into a sales contract while they try to flip the paper to an assignee (assigned buyer; successor buyer; and/or assigns). Since most wholesale investors are neither attorneys nor licensed real estate brokers, the only way they can receive money (commission / fees) in a Texas real estate transaction is to be a party to the transaction (contract) as a principal.
Wraps can be problematic. To be done properly and to protect the parties involved, the seller's lender must first be notified and agree (in writing) to the wrap. On good wraps, an attorney and escrow account are involved to make sure payments are collected and directed to the lender, as agreed.
Wraps that do not follow proper provisioning can result in harm to both seller and buyer.
- Risk: Seller walks away from the home with a small amount of cash in hand, gives up possession of the property, and keeps the mortgage debt in his name. Seller's credit will still be tied to the home, and affect his debt to income ratios, and limit his ability to obtain financing for other purchases.
- Risk: The filing of the deed when the property is 'sold' can automatically trigger the due on sale clause for the existing mortgage. The lender goes back to the owner of the mortgage (the note is called). If he cannot pay the full amount, the lender may initiate foreclosure. Both buyer and seller may lose the home. Buyer may lose the 'money down' he paid the investor to get into the home.
- Risk: An investor may effectively persuade parties that Risk 2 is a low risk, and assure buyer and seller that lenders don't care who is making the payments. The premise may hold true until the buyer is late, skips, or defaults on payments, and the lender may initiate foreclosure. Both buyer and seller may lose the home.
Caveat emptor. While there are legitimate wraps and investor solutions that truly help both buyers and sellers find a win where traditional real estate methods don't well serve, both buyers and sellers should use caution. A 'happy investor' might happily place a 'happy buyer' in a property with the ' happy promise' to make payments on a seller's existing mortgage, but a savvy seller will recognize that the investor is acting a middle man, and a 'purchase contract' could be a marketing solicitation dangling a baited offer to engage in something that may best benefit the investor.
*Not inteded as legal advice. For informational purposes only. We claim no knowledge of the identity, business practices, or reputation of the person(s) or company(ies) generating offer solicitation letters, and have no affiliation with any investment groups who may be connected with the letter our client received. If you have questions or concerns about how this information might affect you, please seek the advice of a qualified attorney.
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