Silent wrap-second mortgage-how easy is it to refinance?

Question

silent wrap-second mortgage-how easy is it to refinance?

I have a seller offering me a silent wrap second mortgage. He says I'll get an affidavit of equitable interest at closing and my payments to him are escrowed and from there the seller pays the bank that holds the lien or mortgage. My question is how easy is it to refinance this into a standard long term loan? This is a very large commercial multifamily apartment building. Realtor says seller is out of state and got in over his head and just wants out. Deal seems almost too good to pass up. I'm just wondering how easy it will be to get a standard loan and pay him and his current bank off. I've done a lot of transactions but never one like this. Any feedback is greatly appreciated. Thanks!

Wayne Brooks · Answer

In a ttpical purchase with the seller carrying a wrap around mtg....title gets transferred to your name....that is the Only way I would do it.  There IS a risk of the due on sale clause, which I Assume is why they’re wanting to structure it this way.  What you’re talking about is more of a land contract, where title stays in seller’s name...no way, too many potential risks.Absolutely sit down with a local RE attorney.

Peter Walther · Answer

You really need to spend the money to get an real estate attorney's opinion if your even considering moving forward.  Getting opinions here are fine if you're looking for a reason not to move forward.

I'm concerned the Seller's broker appears to be suggesting recording an affidavit of interest has the same legal affect on title as recording a deed, but if true why not just record the deed?

Next I'm also concerned you wrote the Seller is going to hold a silent wrap second mtg which suggests the mtg from you to the Seller is not going to be recorded.  Again I'm not sure why that would be advantageous to the Seller and more importantly to you other than recording it could trigger a due on sale clause in the first mtg, but again your affidavit of interest is supposed to be recorded.

Also, you wrote your payments to the Seller will be escrowed and from there the Seller will make payments to the first lender and you wrote the Seller is in over his head.  I'd be uncomfortable having the Seller making the payments, particularly if he's financially in over his head.  Since your not on the first mtg the first you may hear of a default is when you're served with a notice of foreclosure.

Lastly, I'd check with an insurance agent and see if you'll be able to obtain a landlord's policy since your deed is being held off record.

Jay Hinrichs · Answer

YUP commercial mortgages need to be reviewed .. these are not the vanilla SFR type mortgages we all use..  there can be all sorts of covenants in those loans.. violate one and your in default.

Karen Schimpf · Answer

@David Capote  I highly recommend that you utilize a note servicing company to make the payments to the lender, the seller, insurance company and pay the taxes. There have been situations in the past where the seller collects the payments and do not make the payments which forces the property into foreclosure. The note servicing company will protect your interest in the property.  The note servicing company charges a small fee to not only make sure everyone is paid but they track your payments.  When the time comes to refinance ,the note servicing company will easily provide the lender payment history and provide a payoff amount.

Hope this information helps.  Wishing you the Best.

David Capote · Answer

This is what the sellers broker is telling me:

Deed will not be recorded until there’s legal need or the property is paid off, it will be held in escrow. There will also be a note that also will not be recorded. Until there is legal need or the property is paid off. What will be filed is an affidavit of equitable interest, which means anything from a loan against the property to him trying to sell would require your approval. You control the property with affidavit of equitable interest.

Before I even spend time or money on an attorney I'd like if you could provide feedback please.

Jason Dillard · Answer

@David Capote I have done something similar to this twice on multifamily.  Your risk is low, if you get ownership of the property.  You have to go on title with owner's title insurance.  Don't allow the seller's problems to follow your property by leaving him in ownership.  Give him a 2nd for his equity and let him move on.

As a matter of fact, I'm UC on one right now that's a cash down and take over loan on a 68 door complex.  After I see it Monday, the next step is title work to verify there is only one loan/clear title.  In the meantime, I'm supposed to get the loan docs(note) today.  I want to examine the exact loan terms.   The property's occupancy and condition are important, but those things are fixable.  I'm concerned about a prepayment or a balloon  in the note.  I'm not concerned about being able to refi in the future.

Danny Randazzo · Answer

@David Capote are you able to just do a normal purchase loan in the buyers name and a second loan in the form of seller carry? Something seems off because the seller wants to collect your payment then hold in escrow and pay the first position lien. I’m not following why you want or need to do this.

Jay Hinrichs · Answer

I am dealing with  a vendor who filed chapter 11 now.. and he did a bunch of these equitable interest things.. the BK court and the creditors are not recognizing these as legal instruments.. I would be very cautious on this one and for sure get with a very good attorney to review the legality of said instrument..  Again this is in a particular state and that state law is what is at issue.. Every state is different.

Rick Pozos · Answer

You would have to see what the terms are on the underlying mortgage. Is there a balloon coming up? when? Is there a prepayment penalty? There are lots of things that can go bad for you if you dont know the terms of the loan.

The really big question is why. What do you mean that the seller got in over his head?? Is the loan too big? Is there too much to manage? Is the property in bad shape?

There are lots of questions to ask. The refinancing is not the issue. Any lender will refinance as long as the loan is about 75-70% of value. You may have to personally guarantee the loan also. It is the terms of the original loan and what is really wrong with the property or the seller.

Silent wrap-second mortgage-how easy is it to refinance?

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