wrap mortgage - how would you structure this?

Question

I'm thinking of selling my personal residence on a wrap, but I wanted to see what you thought about these approximate numbers (rounded for simplicity):

$140k sales price
$30k down payment from buyer

$95k owed on my existing mortgage @ 4.875%
$550 P&I monthly payment ($650 w/ taxes and insurance)

Seller finance the $110k left w/ a wrap w/ a 3 year balloon.

How would you structure the deal in regards to interest rate to the buyer.  I've heard add 1-2% to your current rate, but it seems I could do a little more than that and it still be an attractive deal for the buyer.

Also, I would like to find a loan processing company to deal w/ the payments & record keeping.  What is a fair price to pay for those services?

(And I know a wrap probably isn't the first option many would choose, but I'm in Texas so its really my only option)

Herb V. · Answer

The downpayment is good but the interest is to low. I suggest 8% for a great credit buyer and higher for one with poorer credit. I think 7-10yr balloon would better suit a note buyer if you go that route. IMO, Herbster

Bryan Hancock · Answer

I write wraps in Austin almost on a weekly basis.  Comments:

1.  Your interest rates are low.  8.5% is around the "market rate" for owner finance buyers right now...30-yr, fully-amortizing

2.  A $30k down payment is going to DRASTICALLY limit your pool of buyers.  If you can sit on the sidelines and be choosy this requirement is fine, but you are going to have to kiss a lot of frogs before you find someone with that much cash on a wrap sale transaction...it may take 6+ months unless you advertise like a mad man

3.  You have the DOS clause to worry about.  I am assuming you know about this, but you may want to consider doing something like a Wally Wrap so that you have an asset to show your next lender prior to your note seasoning.  This only really matters if you plan to buy a house again soon...within 9-12 months

4.  Instead of doing a 3-yr bullet you may consider making the note adjustable at 1% escalation annually past year 3.  This will put you more in line with the market.  If you need that equity that soon you may just consider holding out to sell the house outright

5.  If you PM me I can get you in touch with a processing company with fair rates.  I would suggest that you make the payments on your mortgage yourself and just using the processor for the wrap note

Chris Allen · Answer

I know this is a really old thread, but I just messaged you. I am looking to do a Wrap in Temple and would love to talk to you about this.

Account Closed · Answer

i just sold a property on a contract for deed.  started the interest rate at 8.5% and wrote in the contract that their interest rate will change anytime my bank loan's changes (every 5 years) and will always remain 2.5 interest points above...for what it's worth...i have another under contract that hopefully will close soon..i'd be interested in hearing about this wally wrap as well bryan...what was that?

Bryan Hancock · Answer

I advise all of the people that want to buy another property inside of a year to use a Wally Wrap because they write a wrap around the wrap so that the seller has an asset to show their next lender.  This eliminates the seasoning requirement for the seller that will be required when someone else takes over their loan.

Most lenders require proof of someone else paying the note for around 9-12 months so that the debt isn't counted in their DTI calculation.  They generally treat the debt like they would with a rental and count around 75% of the gross mortgage payment as "income" in the DTI calculation.  This process is done immediately if there is an asset they can show....the wrap note that is an asset.

One of my coaching clients is selling his personal residence like this after he gets done with his forensic loan audit so that he can downsize.  Absent the DTI "immediate credit" he may not qualify for a new loan for the size of home he seeks inside of the 9-12 months after he sells.

There really isn't any magic to the Wally Wrap, but it does solve some issues and it has been vetted with thousands of transactions.  I am sure your attorney could draw up something similar if they are familiar with wraps.  It generally isn't worth the brain damage of experimenting though....especially if you want to move to a new home that you will own inside of the typical lender's seasoning period.

Bill Gulley · Answer

Craig, I'd be happy to review your docs and deal for you and get you to a servicer. Sorry, I don't have the servicer handy yet, but they are in WA I believe, not a problem.

As far as rate is concerned, you can usually go about two points over the current rate (less closing costs for a seller financed deal so there is no real expense there) You need to make sure the borrower can cover that. If you are going to use a mortgage originator, make sure they kiss the deal with their license number. But right now, it's my understanding that Texas has given a little more time on the requirements.

Be happy to assist you...and the price is right...LOL, I don't charge any fee! PM me later, Good luck, Bill

Craig M · Answer

We are trying to sell because the place is too small for us, and we need every dime of equity we can get out of it to get into a new home. (hence the large down payment wrap buyer wanted).  It seems a traditional sale gobbles up half of it in closing costs.

We refinanced early last year, and another refi would cost ~$5k, plus w/ the LTV, I don't think the numbers work out just right.

Too bad we were too naive to even consider those offers when they were handed to us.  They are long gone now.

This "wally wrap" seems just like a regular wrap, what am I missing?

Bryan Hancock · Answer

@Craig

If you have two offers with that high of down payment already you must be living right!

I responded to your PM and would be happy to help you out with this.

Craig M · Answer

1.  I thought the 'add 1-2%' interest rate sounded low.  Thanks

2.  We've actually previously had two potential buyers come forth, one w/ $20k & one w/ $30k - unsolicited offers that we let get away before we even considered owner financing (or knew what it entailed).  What is the going down payment % for wraps? I figured it had to be a bit higher (~20%) to leverage some risk.  We would like to get a fair bit of equity out of the deal.

3. I am fully aware of the DOSC, but not Wally Wraps.  I'll have to look that up.  I have checked with our lender and keeping this home's mortgage will not effect qualifying for our next house.

4. That's good advice - the escalation clause to adjust for the market.

5. PM sent

So... with 20k down, a 120k note @ 8.5% would put the buyers payment right ~$1000/month.  I like the cash flow, but I don't want to price anyone out of the market for a cheap house.

Rich Weese · Answer

Craig- you've received good suggestions here, imo. I wouldn't worry about the $1000 payment. I have 16 homes in Rio Grande Valley that are RENTED for $1000 plus per month. Our median price home is much lower than Austin. I'd be confident you'll have many takers. Good luck.

2nd comment- Why are you selling? If you like the home, area etc, you could refi and pull out the same amount of money. Unless you are unknowledgable, my bet is you could make more from rent than sale, and still have the benefits of owning the original home while you go do something else.
The 25K you have left in property will be netting you(gross) of $350 mo or 4200 per year. About the same as if you rent it, less costs. But, you still own house and benefits are as follows.
1. tax benefits
2. principal payoff on your note.
3. Possible inflation on home value
4. The cash flow either way.
       Two different ways to go and both work well.

wrap mortgage - how would you structure this?

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