Isn’t Wraparound Mortgage financing the same as Lease Option?

Question

I live in Texas and i’ve recently learned that Lease Options here are just more of a head ache and not ideal as a strategy for someone who’s just getting started in real estate. In doing my research i ran across what’s called a Wraparound Mortgage, which IS allowed in Texas and apparently the laws are more leniently towards. However, it seems to be very similar, if not, the same a Lease Option. Can someone help with differentiate the two?

Eduardo Beltran · Answer

@Christopher Phillips

Thank you for clarifying. I was a little confused with a wraparound mortgage worked, but your explanation definitely helped understand it.

Can I just ask, what happens when let’s say... Seller has $40k left on the house, But decided to create a wraparound loan of $200k for a Buyer. Eventually, the Buyer pays the $40k to the Seller that was owed to the bank. What happens to the deed? Does the Seller keep it under his name until the rest gets paid in full ($160k)? Also, what if the Buyer stops paying? Does the Seller have to give any money back? I wouldn’t think so since the Seller is acting as “the bank”, but just wondering. Sorry for all the questions. Just wanting to understand it. Thanks

Don Konipol · Answer

@Eduardo Beltran

In a wrap mortgage the deed is transferred to the buyer at the time the wrap is created.  The wrap actually wraps around an existing superior lien.  I think you may be confusing a wrap with a contract for deed.  A contract for deed is a type of property transfer in which equitable title is passed but legal title remains with the seller, or whomever owns the contract for deed.  The contract itself will specify when legal title is transferred.

If legal title is transferred, than a lien holder has the right to initiate and foreclose if the mortgage provisions or deed of trust covenants are violated.  In most circumstances, the borrower is granted a period of time to correct the violation.

With a wrap mortgage legal title was already transferred to the borrower at the time of the creation of the wrap...usually.   In a wrap when the underlying mortgage is paid off the wrap part ends and the remaining loan is now in first position.  Almost the same effect can be achieved with the assumption of the first and a seller financed second.  The wrap however gives the seller more control and if the seller wrap is at a higher interest rate than the loan being wrapped, the seller will earn the differential on the wrapped portion.

40 years ago we did subject tos, assumptions, wraps, contract for deed, all the time.  Now, with low low interest rates on new loans, they’ve become somewhat obsolete, except in very specific situations

Christopher Phillips · Answer

They have nothing to do with each other.

A lease option is what it says. A lease with an option to buy a property at a later date. The person leasing the property doesn't own anything until they exercise the option to buy. The monthly payments are just rent payments and are nothing going towards the purchase of the home.

A wraparound mortgage means that the seller acts as a 2nd mortgage on the property. The 2nd loan will be junior to the original loan. The person still owes the first mortgage. The difference between the original loan balance and the sales price will be held by the seller as a promissory note to be paid by the buyer based on the agreed upon terms. This isn't as clean as doing regular seller financing and the property is free and clear of loans. How the title is handled depends on the deal.

Joe Villeneuve · Answer

Don't know about Wraps.  I don't do them.  SLO's should be no problem.

Julian Sanchez · Answer

@Don Konipol

Now It's time to bring them back, sending a wrap LOI for a 68 unit in Ohio

Julian Sanchez · Answer

They are still interested but looking closely at the numbers they are not what the broker had originally stated in his OM (as always never go by Anything a broker puts in an OM).

Thus current revenue would not cover the monthly debt at the terms we had originally agreed upon; so we're back and forth on the negotiations

Kerry Baird · Answer

@Julian Sanchez  How did that work out for you?

Gene Boykin · Answer

@Joe Villeneuve do you know if it’s true that it’s difficult to find title companies and attorneys to close these deals?

Joe Villeneuve · Answer

As was stated above, the main difference is the timing of the transfer of title.  Keep in mind, the wrap around is a purchase using a new mortgage that blankets the existing one.  The LO has no mortgage until the Option is executed, and thus you are NOT buying the property...yet.  The LO just gives you control over the property...which is usually far less costly (depending on the terms).

Gene Boykin · Answer

@Christopher Phillips it sounds like you’ve completed some of these deals. I’m going on this venture soon. From what I hear, the most difficult part is finding title companies and attorneys to close wraps and sub 2’s.

Isn’t Wraparound Mortgage financing the same as Lease Option?

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