Mortgage wrap deal

[Daniel Bernstein]

A real estate agent pitched a mirror wrap deal deal to me. How it would work is that I would buy a new construction home from Lennar, and I would seller finance the property with Lennar currently they are offering around 5% interest rate 30 year fixed. Then after I buy the home I would sell the property to somebody else through seller financing. The real estate agent then said he could likely sell ~250k property for ~50k markup, and I would seller finance the property to somebody else at 7-8% interest rate. This would theoretically give me like $500-$600 of cash flow but I would lose out on any appreciation.

Concerns I have about this strategy is 
1. Lennar homes has really bad reviews: bbb, trustpilot, consumeraffairs. It has a 44.15B market cap so it is one of the biggest home builders in the US. I don't get how it can be so big but get such bad reviews.

2. If the buyer forecloses
a. if the house is bad quality and dealing with Lennar warranties is now my problem
b. now I have to be the one to make the mortgage payments to Lennar

3. Due on sale clause

I would like to hear people's opinions on this strategy if the risk/reward is worth it or to steer away

[Don Konipol]

Quote from @Daniel Bernstein:

A real estate agent pitched a mirror wrap deal deal to me. How it would work is that I would buy a new construction home from Lennar, and I would seller finance the property with Lennar currently they are offering around 5% interest rate 30 year fixed. Then after I buy the home I would sell the property to somebody else through seller financing. The real estate agent then said he could likely sell ~250k property for ~50k markup, and I would seller finance the property to somebody else at 7-8% interest rate. This would theoretically give me like $500-$600 of cash flow but I would lose out on any appreciation.

Concerns I have about this strategy is 
1. Lennar homes has really bad reviews: bbb, trustpilot, consumeraffairs. It has a 44.15B market cap so it is one of the biggest home builders in the US. I don't get how it can be so big but get such bad reviews.

2. If the buyer forecloses
a. if the house is bad quality and dealing with Lennar warranties is now my problem
b. now I have to be the one to make the mortgage payments to Lennar

3. Due on sale clause

I would like to hear people's opinions on this strategy if the risk/reward is worth it or to steer away

In many, or perhaps most, economies, houses can be sold for 20% more than a sale where the buyer pays cash or qualifies for conventional financing by seller financing a buyer who does not otherwise qualify for a mortgage.  Essentially, from the buyers prospective, this is a “penalty” paid for either having poor credit (bankruptcy, 90 day lates, overburdened with debt) or lacking income.  With so many “alternative” qualifying programs out there, there really has to be something other than “under 2 years employed” or “doesn’t show all his income” for the buyer not to be able to obtain institutional financing, and hence be willing to spend $250k for a $200k house. 

This does not mean the buyer/borrower will default on an owner financed carry back mortgage. BUT, it does mean that sophisticated lenders believe that THE CHANCE of default in said situation puts the loan beyond the “risk/reward” parameters that they’re comfortable with.  

Of course, these lenders have a different risk/reward structure than the owner financing seller who has a “built in” $50k gain.

The part I don’t like about doing a wrap is the personal liability the seller maintains for the underlying loan while not having control of the assets securing the loan.  Through “creative” “lawyering” a borrower can utilize TRO orders, pauper affidavits, state foreclosure laws, and bankruptcy filings to tie up any foreclosure 3 years or more. Spending $40k on legal fees to obtain possession of a home from a “aggressive” debtor is not uncommon.  And$40k in damage by debtors being foreclosed on is also not uncommon.  Also, during those 2-3 years you may have to bear to obtain possession, the borrower will probably ignore court orders to pay insurance and property taxes, leaving you out of pocket for those costs.