"Subject to" Wrap Loan using owner financing and a RMLO

[Shanna Beverly]

Hello all,

I am trying to analyze a deal for a potential "subject to" and wrap mortgage using owner financing and wanted to see if anyone could provide some assistance or recommendations based on the numbers.

The owner is not looking for profits, is ready to retire, and simply wants to relinquish responsibility of the home as he has had two prior rental tenants that he had to evict and the home has been vacant since last September.

• Market value of the home is 63k
• Owner Owes 70k to wells Fargo on a 40yr fixed at 5%, refi originated 2 months ago.
• Monthly mortgage to wells fargo is $336.
• Last rent amount was $950/month
• Estimated 4k in repairs.
• Property is not being marketed

I was hoping for some specific advice on doing an owner finance wrap such as those performed by @grant kemp (of whom I would love to receive feedback from).

I have also been looking for some RMLO's in Atlanta but have not been able to find any. If anyone could point me in the right direction that would be awesome.

Thanks in advance for your time and consideration.

[Bill Gulley]

A few issues Shanna,

Doing a sub-2 means taking title, your sale price being lower than the payoff of the existing lien means the seller must cough up the difference to pass title at that price, you have tax issues having the HUD-1 balance if the seller remains obligated to pay on the mortgage which he would be.

In reality however, the seller isn't paying that note, the overage of funds are coming from you on your purchase. The seller is then misrepresenting the value of the sale, much like the forgiveness of debt created having another pay his obligation without it being accounted for. You can't really say it's a seller's expense either as funds are not coming from the seller but being paid out side of settlement by another, namely you the buyer. So, you're misrepresenting the true cost of acquisition of the property too. If you held the property you'd be understating depreciation as well.

You would also be overstating your income on your next sale as you are actually paying more by the agreement. In short, you have tax issues which could well lead to tax fraud.

Next, generally, you can't have a prepayment penalty as an individual, if this financing to your buyer is subject to Dodd-Frank, no, a prepayment is not allowed. There have been prepayment penalties done to reflect the tax liability arising from an early payoff which have held up in the past, prior to Dodd-Frank, but with this new base line for consumer financing I'd say not.

Since 8% in this example is not close to the maximum or any usury matter and is reasonable I'll skip the application of interest to the risk assumed as a basis in setting rates.

Adding interest to an underlying note in a wrap is not as simple as it sounded in that podcast. The amortizations will not be the same. The principal reduction is different at the lower rate with its remaining term. The reduction of the equity loan on top of the underlying mortgage will have a slower principal reduction at its note rate. You can not match the reduction or payment allocations simply my matching the term, as if the underlying mortgage had 212 months remaining and making your equity amount amortized at 212 months, they are two different principal applications and adding additional interest complicates the issue, interest on one note that subsidizes principal reduction on another then affect the actual interest paid, on the underlying mortgage, so who is claiming this interest amount for tax purposes, interest earned and interest paid?

If you are to use one note, a Partitioned Principal Note can be used stating the principal part of the first part and a principal part of the second part, each described with the term and interest bearing which together constitute the Total Principal Part secured under the same deed of trust. Writing these notes or devising them is not for amateurs or the novice.

Another way is to use a second mortgage representing the equity financed. But again, in this property, there is no equity.

In this deal, as I mentioned, you will be paying above market value. If you sell above your price you will be engaging in predatory dealing and lending, the way around that, only in part, is by disclosing to your buyer that they are paying an above market value price and to avoid financing above 100% of market value that premium needs to be paid in cash. Now, in reality, do you think you can disclose that to a buyer and obtain the cash down? Probably not, it's not impossible, but that's a pretty hard sell for an individual owner-seller and we all know a seller most likely won't go there. If there were something unique about the home, like a view of the lake or water access or access to some other amenity that can not be readily shown in the market to establish a comparable sale value, a buyer may pay a premium above a valid market value.

I suggest, since you can't just force a property into a particular strategy because you like the strategy, putting a square peg in a round hole, that you look to the type of transaction or strategy that fits the circumstances, That is buying Sub-2 and being a landlord!

Another point too, exaggerations and misconceptions have been voiced on both sides of the due on sale clause contained in mortgages. The real fact of the matter is, these acceleration options are there for the lender, they do have the right to accelerate a mortgage to maturity and it has been done and will be done again in the future, period. Going into a Sub-2 you need an exit in the event that loan is called on your seller. You can ruin his credit and he absolutely can sue you for damages, no attorney in the country can guarantee you otherwise, much less some investor or guru. So, you have three exists, sell for cash or to a financing buyer who can close before the hammer drops or refinance that underlying loan or use your cash and pay it off. Can you do any of those three things? If you can't, not only cam your seller hammer you but your buyer can clean your clock too.

These are not risk free transactions, your buyer or tenant can fail to pay too, if you operate on a shoestring, you're really at risk. What if your buyer decided to rent the place after 5 years, you can't stop them, can they be a landlord?

I suggest, if you must do something with this property from some emotional attachment that you buy it and hold it, allow equity, real equity to accumulate, enjoy the cash flow, turn it over to a PM if you don't want to LL and sell it years down the road. Otherwise, I see problems and risks here and no, they can not be mitigated they are fully assumed. :)