Wrap around mortgage / Seller Financing

[Kim Rock]

Well, I was all proud of myself that I had gotten a seller to accept seller financing on a property I felt would be a good long term investment..... now I come to find out he has a mortgage on the property, and wants to just accept my payments to him and use them to pay the mortgage. Doesn't his mortgage have a due on sale clause? What happens if we transfer title to me, I own the property, he still has his old mortgage, and the bank finds out? What are my risks here? I am not sure this is turning out the way I wanted.

[Joel Owens]

Kim WRAPS in most markets are very common right now. It's one of the few ways deals are getting done.

A regular seller that has held onto the property for awhile might have some equity built up but not totally paid off.

In this case the seller wants and needs to sell.All cash buyers because of leverage want a VERY low price.This makes the deal unworkable for the seller.They will have to bring money to closing and pay closing costs and if listed real estate commissions.

This is the same reason buyers wanting the seller to hold a 15 to 20 percent second doesn't work many times. In this case the seller after holding a second will eat up most of their equity and and still have to bring money to closing.With the buyer getting 80 to 85 percent financing they will have no skin int he deal if it goes south.

So the WRAP with enough down allows the seller to cash out some equity with 15 to 20% down and pay closing costs and commissions and still come out ahead.Later if the buyer defaults the seller will most likely be in a better sales market than they are today.

You definitely do not want to pay the seller directly on these deals.You pay a third party note servicer.The note servicer makes sure payments are made on time which protects you the buyer and also protects the seller doing the wraps credit.Generally you set reserves with the note company of a few months.This way if the buyer pays late the servicer has a cushion to pay the lender on time.

You want to know what type of underlying mortgage there is.Is it fixed or adjustable and what is the interest rate?? As long as the senior mortgage doesn't adjust before your balloon is do you should be okay.

People with properties totally paid off will many times just reduce to land an all cash buyer unless they are trying to avoid taxes,etc.