Wrap-Around Mortgage vs Subject 2 - I need advice please!!!!

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

3y

Hello fellow BPs,

I'm currently in the process of doing an off-market deal with someone who prefers a type of seller financing in order to save money on closing costs, but they currently have a mortgage on the property.

Here's the deal:

- Asking: 240k

- Current mortgage balance: ~100k

- Rehab needs: 40k

- Value after reno: ~350k (I own the house next door and it was appraised at that after renos)

Talk to a mortgage broker and ask them if they prefer a Wrap to refinance or a Subject To to refinance and at what LTV & seasoning before assuming 12 months will be enough time.

1) A Wrap is where you have an attorney write a new loan to the seller for eactly the same terms and conditons he has with the lender. Just make sure you do a title report and close through escrow. You pay the seller the monthly payment. They continue making the payment to their lender. The bank can foreclose on them if the seller stops making payments. AND The seller also can foreclose on you if you start missing payments to him.

2) A Subject To means you start making the payment to his lender and you skip having an attorney write a new loan with the seller. Just make sure you do a title report and close through escrow. The seller has no recourse with a Subject To and the seller can NOT foreclose on you, if you start missing payments, but the bank can still foreclose on him if payments are missed.

He is in violation of the Due on Sale Clause either way, but it is rare, but not impossible, to have the note called.

Here's a post I did on Subject To that may help

Using Subject To, to Get "Free" Properties

https://www.biggerpockets.com/forums/311/topics/1060320-using-subject-to-to-get-free-properties-a-quick-guideline

1 Reply

Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

3y

A subto is merely you taking over payments of the current loan, nothing more nothing less. A wrap is a loan with a purchase price and terms (interest rate/down payment/balloon) different from the current loan, that loan is paid with the original loan still in place, not paid off. You can refinance both, the property will be deeded in your name in both scenarios.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

If your sure U can refi in one years time.. then don't worry about the loan being called.. by the time any NOD and then foreclosure would happen takes at least a year or more.. takes them some time to figure out the title has transferred then they write a few letters ( the lender does) then they threaten then they have to do the mandatory 90 day notice .. then they can file the NOD and depending on state that takes at least 4 months or more. etc etc by the time that all happens you have refinanced.. Now from the sellers position SUB TOO is stupid way to risky for a seller . Sellers should only do Wraps as @Account Closed Noted if you default they have a clear path to get the property back.. the risk in these deals is all Sellers.. Buyers have no risk.. if buyers default its their own problem and deserve to lose their down-payment.

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JLH Capital Partners51 Review

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Wes Martinez

OP

Member since 2021 · 8 posts · 0 votes

3y

Quote from @Account Closed:

Quote from @Wes Martinez:

Hello fellow BPs,

I'm currently in the process of doing an off-market deal with someone who prefers a type of seller financing in order to save money on closing costs, but they currently have a mortgage on the property.

Here's the deal:

- Asking: 240k

- Current mortgage balance: ~100k

- Rehab needs: 40k

- Value after reno: ~350k (I own the house next door and it was appraised at that after renos)

Talk to a mortgage broker and ask them if they prefer a Wrap to refinance or a Subject To to refinance and at what LTV & seasoning before assuming 12 months will be enough time.

1) A Wrap is where you have an attorney write a new loan to the seller for eactly the same terms and conditons he has with the lender. Just make sure you do a title report and close through escrow. You pay the seller the monthly payment. They continue making the payment to their lender. The bank can foreclose on them if the seller stops making payments. AND The seller also can foreclose on you if you start missing payments to him.

2) A Subject To means you start making the payment to his lender and you skip having an attorney write a new loan with the seller. Just make sure you do a title report and close through escrow. The seller has no recourse with a Subject To and the seller can NOT foreclose on you, if you start missing payments, but the bank can still foreclose on him if payments are missed.

He is in violation of the Due on Sale Clause either way, but it is rare, but not impossible, to have the note called.

Here's a post I did on Subject To that may help

Using Subject To, to Get "Free" Properties

https://www.biggerpockets.com/forums/311/topics/1060320-using-subject-to-to-get-free-properties-a-quick-guideline

@Account Closed thanks so much for the insight, this helps a lot! I’ve read your article (last night) and was very helpful! Based on your experience, are low down payments typical for wraps? How do you sell a low dp? Seems like it would be by letting them know it’s risky for me as well?

Thanks in advance!

0 Reply

Wes Martinez

OP

Member since 2021 · 8 posts · 0 votes

3y

Quote from @Jay Hinrichs:

If your sure U can refi in one years time.. then don't worry about the loan being called.. by the time any NOD and then foreclosure would happen takes at least a year or more.. takes them some time to figure out the title has transferred then they write a few letters ( the lender does) then they threaten then they have to do the mandatory 90 day notice .. then they can file the NOD and depending on state that takes at least 4 months or more. etc etc by the time that all happens you have refinanced.. Now from the sellers position SUB TOO is stupid way to risky for a seller . Sellers should only do Wraps as @Account Closed Noted if you default they have a clear path to get the property back.. the risk in these deals is all Sellers.. Buyers have no risk.. if buyers default its their own problem and deserve to lose their down-payment.

@Jay Hinrichs thanks for this… I kind of figured the same thing. I already qualify under a conventional loan so I could purchase it if need be, but the closing costs and leveraging that for a lower purchase price is really appealing to me! This house is 100sqf bigger than mine so I could see it being closer to 360-370k ballpark but trying to be conservative.

as a broker/pro opinion… are wraps frowned upon by lenders? I’m starting to build a relationship with a really good lender, but don’t want to change his perception of me as an investor. This may be a very naive question, buuuut I’m Ned to this seller finance/creative finance thing. Thanks!

0 Reply

Wes Martinez

OP

Member since 2021 · 8 posts · 0 votes

3y

Quote from @Eliott Elias:

A subto is merely you taking over payments of the current loan, nothing more nothing less. A wrap is a loan with a purchase price and terms (interest rate/down payment/balloon) different from the current loan, that loan is paid with the original loan still in place, not paid off. You can refinance both, the property will be deeded in your name in both scenarios.

Nice! Thank you for your comment. Similar to what I asked someone here… do you know if traditional lenders frown upon these or turn them down for whatever reason? Trying to stay in good standing with my current lender but we’re fairly early in our relationship.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @Wes Martinez:

Quote from @Jay Hinrichs:

If your sure U can refi in one years time.. then don't worry about the loan being called.. by the time any NOD and then foreclosure would happen takes at least a year or more.. takes them some time to figure out the title has transferred then they write a few letters ( the lender does) then they threaten then they have to do the mandatory 90 day notice .. then they can file the NOD and depending on state that takes at least 4 months or more. etc etc by the time that all happens you have refinanced.. Now from the sellers position SUB TOO is stupid way to risky for a seller . Sellers should only do Wraps as @Account Closed Noted if you default they have a clear path to get the property back.. the risk in these deals is all Sellers.. Buyers have no risk.. if buyers default its their own problem and deserve to lose their down-payment.

@Jay Hinrichs thanks for this… I kind of figured the same thing. I already qualify under a conventional loan so I could purchase it if need be, but the closing costs and leveraging that for a lower purchase price is really appealing to me! This house is 100sqf bigger than mine so I could see it being closer to 360-370k ballpark but trying to be conservative.

as a broker/pro opinion… are wraps frowned upon by lenders? I’m starting to build a relationship with a really good lender, but don’t want to change his perception of me as an investor. This may be a very naive question, buuuut I’m Ned to this seller finance/creative finance thing. Thanks!

I dont think take out lenders care particularly how you came into title ..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

0 Reply

Justin Sutton

Investor · Rock Hill, SC · Member since 2023 · 24 posts · 19 votes

3y

Quote from @Wes Martinez:

Hello fellow BPs,

I'm currently in the process of doing an off-market deal with someone who prefers a type of seller financing in order to save money on closing costs, but they currently have a mortgage on the property.

Here's the deal:

- Asking: 240k

- Current mortgage balance: ~100k

- Rehab needs: 40k

- Value after reno: ~350k (I own the house next door and it was appraised at that after renos)

The plan is to back into an easy refinance in 12 months, all while doing our best to avoid "Due On Sale" clause. I think I've read just about every post on here on DOS, so I'm very well aware that it is a real risk and basically impossible to fully eliminate, but not likely to be called on if payments are made on time and hazard insurance is changed carefully.

I also realize there are more risks than DOS... I.E. seller declares bankruptcy, etc.

I guess my question is... what is the difference between sub2 and wrap-around and which would back me into a refinance the easiest? I've also researched land contracts/contract for deed, but that seems way more riskier for me (the buyer) right? And also haven't found information on these threads on whether a traditional lender would recognize a contract for deed as true ownership and allow me to refinance.

This investor has 8 other properties and I get the feeling their spouse passed or something unfortunate happened (the investor is in their 60s and all their properties have what I assume is their spouse's name on them too) and now they're just slowly off-loading them instead of dumping rehab money into them. I'd love to nail this deal to gain their trust and hopefully have me be their first choice before putting their other properties on the market!! Thank you so much in advance for your advice!

Hi @Wes Martinez

First off, congrats on finding what sounds like a great deal.

Here is what I would do:
- Take the 100k loan sub2

- Offer the seller half of their cash to close now and the other half in 12 months/sale of property
- Raise the money to cover the all cash to close, holding costs and repairs.
- Close, renovate, list and sell. Disburse remaining 50% to seller, payoff loan take sub2, etc fees etc.

Split profits or payback lender an agreed upon return on whatever money they lent to you.

Ideally you are using the underlying debt as a HML and bringing your own cash (using other peoples money) to take it to the finish line.

0 Reply

Wes Martinez

OP

Member since 2021 · 8 posts · 0 votes

3y

Quote from @Justin Sutton:

Quote from @Wes Martinez:

Hello fellow BPs,

I'm currently in the process of doing an off-market deal with someone who prefers a type of seller financing in order to save money on closing costs, but they currently have a mortgage on the property.

Here's the deal:

- Asking: 240k

- Current mortgage balance: ~100k

- Rehab needs: 40k

- Value after reno: ~350k (I own the house next door and it was appraised at that after renos)

The plan is to back into an easy refinance in 12 months, all while doing our best to avoid "Due On Sale" clause. I think I've read just about every post on here on DOS, so I'm very well aware that it is a real risk and basically impossible to fully eliminate, but not likely to be called on if payments are made on time and hazard insurance is changed carefully.

I also realize there are more risks than DOS... I.E. seller declares bankruptcy, etc.

I guess my question is... what is the difference between sub2 and wrap-around and which would back me into a refinance the easiest? I've also researched land contracts/contract for deed, but that seems way more riskier for me (the buyer) right? And also haven't found information on these threads on whether a traditional lender would recognize a contract for deed as true ownership and allow me to refinance.

This investor has 8 other properties and I get the feeling their spouse passed or something unfortunate happened (the investor is in their 60s and all their properties have what I assume is their spouse's name on them too) and now they're just slowly off-loading them instead of dumping rehab money into them. I'd love to nail this deal to gain their trust and hopefully have me be their first choice before putting their other properties on the market!! Thank you so much in advance for your advice!

Hi @Wes Martinez

First off, congrats on finding what sounds like a great deal.

Here is what I would do:
- Take the 100k loan sub2

- Offer the seller half of their cash to close now and the other half in 12 months/sale of property
- Raise the money to cover the all cash to close, holding costs and repairs.
- Close, renovate, list and sell. Disburse remaining 50% to seller, payoff loan take sub2, etc fees etc.

Split profits or payback lender an agreed upon return on whatever money they lent to you.

Ideally you are using the underlying debt as a HML and bringing your own cash (using other peoples money) to take it to the finish line.

Hey Justin, thanks so much for this input… it’s an amazing option! Ideally though I’d like to keep the property to turn into a medium to short term rental. The house is 3 minutes away from downtown Phoenix and within 10 minutes to 6 hospitals. My current investment property next to this one does really well on Airbnb. But I do like the option of flipping it for f need be! Thanks again!

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Wrap-Around Mortgage vs Subject 2 - I need advice please!!!!

Wrap-Around Mortgage vs Subject 2 - I need advice please!!!!

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