Wrap Financing and the Due on Sale

[HuskyInvestor06]

Hey Guys,

Ok, so I understand that "wrap" financing as any financing which entails collecting payments from a new buyer without paying off the underlying financing.

I've read some sources, primarily those of Bill Bronchick, hearalding the extreme profitability of selling using wrap financing, when employed correctly and under the ideal circumstances.

I understand the concept and how it works, and I will not argue that making a monthly spread sounds very appealing. However, when considering the fundamentals of the transaction itself, wouldn't it follow that as soon as the property was sold to the second party with the wrap agreement, the due on sale would be triggered, thus bringing about the POSSIBILITY that the loan balance could be called due (afterall, the bank might opt not to call it due)? And wouldnt this negate the purpose of the wrap in the first place?

Thanks for your help guys!

[steve55121]

Hey Guys,

Ok, so I understand that "wrap" financing as any financing which entails collecting payments from a new buyer without paying off the underlying financing.

I've read some sources, primarily those of Bill Bronchick, hearalding the extreme profitability of selling using wrap financing, when employed correctly and under the ideal circumstances.

I understand the concept and how it works, and I will not argue that making a monthly spread sounds very appealing. However, when considering the fundamentals of the transaction itself, wouldn't it follow that as soon as the property was sold to the second party with the wrap agreement, the due on sale would be triggered, thus bringing about the POSSIBILITY that the loan balance could be called due (afterall, the bank might opt not to call it due)? And wouldnt this negate the purpose of the wrap in the first place?

Thanks for your help guys!

I believe you will want to sell the house contract for deed with a wrap mortgage. The property stays in your name but it is actually sold.

-Steve

[sdr2887]

I think an important distinction here is legal title vs. equitable title. You want to give the "buyer" equitable title to protect their interests but not legal title. This is basically what Steve is saying too I guess.

[Pasquini]

Flip side of this...give a buyer an equitable interest in the property and you are heading down foreclosure alley instead of eviction road in the event of non-performance.

Creating a wrap mortgage will violate the lender's due on sale provisions, but may not trigger it. That is up to the lender. They may, or may not bring a foreclosure action. Don't let anyone tell you they don't do it, however. Doesn't matter if the payments and insurance are current, either. That is no guarantee.

It's all about managing risk, ladies and gentlemen.

[Tony Putman]

My attorney and a few others don't advise using Contract For Deed in Texas. It is an executory contract that has a lot of disclosures and annual reporting requirements. It is very complex. :SM129:

Blessed Investing!

[Terry (Houston)]

Too true Tony, James Smith who is a lawyer here and was the President of the local investment club wrote a great article on the Contract For Deed issue here in Texas. As did Bill Bronchick.

Another scary issue is that they are trying to add the same stipulations to selling on a L/O. You can see the post about it here: http://cpanel.richclub.org/invision//index.php?act=ST&f=3&t=1311&

As to the Due on Sale Clause.

Again here in Texas a foreclosure does not take long, it could be as short as 45 days. That does not take into consideration the possibility of them filing a BK of course.

But with that said, I only put someone into a owner financed transaction if they put 10% down. With that amount down my loss will not be significant to foreclose on them.

In the 5 years I have been buying properties Sub To I have not ever dealt with a lender calling a loan due, but I teach my students to be sure and buy right going in. If they have to foreclose or a lender calls the loan due then they need to be prepared to save the owners credit first and foremost.

That means plenty of equity going into the deal so if you have to obtain financing to keep the DOS being called then you can refinance out.

Have not had to do it, but I don’t buy houses Sub To with small equity like some teach you to do out there.

[Dan Auito]

Terry you should let people have a little bit of that knowledge you have stored up in that real estate mind of yours. As a teacher you could really help people understand your subject here! Granted your probably busy as a one armed paper hanger but I always will make the request in hopes of getting the best that is in one OUT! Thanks for being here Terry! Dan and the Crew! :thumbup:

[loans2investors]

Well if you are worried about the due on sale clause you could sell the note to a note buyer at a discount

I go into a home knowing that this is my exit strategy and I create a note depending on the size of the home value I get 80-90% of the note.

The note buyers pay for the under lining mortgage right away thus putting them in first position and thus the due on sale is satified