Wrap arounds in Texas?

Question

Hi all--

New to the board with a quick question.

I have a nice older home with a garage apt. in a depressed area that cashflows marginally... great for awhile, but the area is flat, taxes and insurance are going up (still feeling the effects of Hurricane Rita) and rents are maxed out. My current tenant loves the place but will never qualify for a conventional mortgage.

We generally buy, rehab and hold but I'm thinking about cutting this one loose. The house is highly leveraged with a first and second in place. If I listed on MLS, it might sell for 90K which just wouldn't make sense. I'd like to offer this to our current tenant at a higher price with owner financing, but I've heard that Texas has some of the worst laws in place for this type of transaction.

Could I do a wrap around mortgage here? Anyone know or know where I can find out?

TIA :)

Jim Slack · Answer

Strickland?

Account Closed · Answer

The DOS clause is a civil/contract issue. Most lenders will not care about triggering it if you did a wrap.

More of a problem is how the laws changed in TX over a year ago. They wanted to eliminate the ability to provide seller financing using lease options if there is existing financing on the property. As I do not invest there I am not really on top of the fine details.

Consider contacting a RE attorney. They may be able to explain how you can legally set up what you want even with the TX laws. Or ask around at a local REIA meeting as the changes in the laws was a very hot topic for a period. Other investors will know what you can do.

John Corey

N/A N/A · Answer

john,

i wouldn't do a deal unless i can afford to make the payments out of my pocket.  that's the good thing about getting started small (for me, anyways), that i can afford a vacancy (like the one i've had for a year now) without having to live under a bridge.  it hurts, but i can still manage.

and as far as a mark-up, i would only price the property a few percent higher than FMV, with an interest rate hovering near 9% or 10%.  i figure to give them about 5 years and then call the balance due (as per the contract, of course).

of course, it all depends on what a lawyer tells me.

-dean

Account Closed · Answer

Thanks for the complements.

Note that we are mostly talking about legal issues.

With any wrap be prepared for a default by the tenant buyer. They will be on title so you will need to foreclose while keeping the underlying 1st and 2nd current.

If it goes well then you have a winner. If it goes pear shaped (British for when the S hits the fan) then expect to spend some money.

I would not suggest a large mark up. You want the price to be correct enough so that when the buyer wants to refinance they can do so and pay off the underlying loans. Do not set the price so high that you can guarantee they will walk from the property.

There is no profit if you can not collect.

John Corey

Jim Slack · Answer

John, I want to second what Dean said... Thank you.

N/A N/A · Answer

john corey,

thanks for taking the time to answer.  although, as you stated, you are not overly familiar with the texas market, i'm always amazed at how much information you have about different aspects of investing in different parts of the country.  thanks for being such a regular contributor.  as for my problem, i've resigned myself to the fact that i'll be needing an re attorney with some time on his hands.  i want to do all my research on escape plans before i need them.

-dean

Jim Slack · Answer

I'm glad you could attend.  Give me a call anytime.

N/A N/A · Answer

yeah jim,

that's the one.

btw, i went to a meeting at dfwrein last night.  pretty good stuff on "investor financing."  it was supposed to be 2hrs, but went on for 3hrs.  the one i really want to attend is on "seller financing."  unfortunately, i'll be back out of the country prior to that...

hope to see you for lunch before i head out.

-dean

N/A N/A · Answer

ryan,

i'm gonna play devil's advocate here for a sec, so bear with me...  the due on sale issue is a civil law issue, not a criminal law issue, so if you're willing to risk the chance of the loan being called due, is there any legal reason keeping you from being able to wrap a mortgage.

i'm asking because i have a house that's been sitting on the market forever, and i'm thinking about owner financing to get rid of it.

-dean

Ryan Webber · Answer

Well a wraparound will technically require the permission of the lienholders, and unless they are very investor friendly that probably won't happen.  Does your lender happen to be a local bank that is very open to creative investment deals? :D

The first issue is the Due On Sale clause that gives the lienholder the right to call the entire note due if title to the property is transferred.

The second issue is Texas' laws around creative strategies that are common for circumventing the Due On Sale.  Texas does have some very stringent laws around different types of owner financing that don't normally require public recording, such as contract for deeds, lease options, and really any type of executory contracts where the buyer is not getting immediate title to the property.

If the lienholders are not open to a wrap then you will be walking a fine line to accomplish your goal.