Subject-to to wrap mortgage

[Chris DeSisto]

When you buy a property sub2 for say 70k then wrap it for say 100k to an end buyer, the actual wrap, is it a contract for deed or is the wrap a note and deed of trust to the end buyer?

I assume you don't want to give up the deed, so do most or do you always do a wrap with a contract for deed?

[Jerel Ehlert]

While still permitted, CFD is dangerous in the extreme for sellers. Texas Property Code sec. 5.061 et al. describe executory contracts, which include CFD and LO.  Just don't.  Compliance is nearly impossible and the day after signing, the buyer can record in the real property records as a deed w/ vendor's lien.

When the property has an underlying lien, the better route is to sell by conveying title in a deed w/ vendor's lien, promissory note, and "wrap" deed of trust.  My package includes about 40-60 pages of notices and disclosures.  Under Dodd-Frank and CFPB, and Texas SAFE Act, you are better off using an RMLO to take a credit app and give regulatory disclosures.  Close at a title company and pay for title policy.  There is a de minimis exception, but no point risking the chance that the exception doesn't apply to you.  

Under CFPB guidelines, if you charge more than 1.5% over the Average Prime Offer Rate (currently, APOR is 4.24% on 30yr fixed), appraisal and inspection are no longer optional.  

Speaking of appraisal, if you sell it for $100K, it needs to be worth $100K (not just "wrap" it for $100K, pocketing the down payment).  There are some "gurus" teaching that if you sell on owner financing, you get to jump up the sales price.  This is wrong. The interest rate the lender charges is a reflection of risk. The asset's value does not change with relation to the financing.  I have decades of US Supreme Court cases discussing this ad nauseum. 

No balloon earlier than 5-years from the effective date on the note.

Use a loan servicing company.  They should be able to address your ongoing (annual) regulatory compliance, but your job is still to make sure your agent complies.

Your biggest issue is insurance.  Buyer/borrower is free to choose any carrier that meets your minimum requirements (which should not be much different than the underlying mortgagee's).  You either end up with 1 policy with the original owner, the underlying mortgagee, you (as new mortgagee), and the new owner on it.  OR you end up with 2 policies - one with the original owner and the underlying mortgagee, and one with the new owner and you (as new mortgagee).  You can only charge escrows to the new owner for taxes (passed through to underlying) and new owner's insurance premium.  If there are 2 policies, you eat the cost of the original owner's.  Good news, that can be a stripped down version w/o contents, to the mortgagee's minimum.

Also, you should immediately change the policy from the original owner's agent/carrier to your agent (even if it is the same carrier).  The first thing a disgruntled original owner will do is cancel the insurance to mess with the investor to get the property back or loan out of their name.  Usually happens around year 5.