I’m a wannabe at this point, buy plan on getting into REI yesterday…
A couple of questions regarding wraps…
First, in looking into creative finance options, the wrap seems appealing to me because of the flexibility. BUT, how can you get around a Due-On-Sale clause (if there is one) in the first mortgage for the property?
Second, I know that 5 or more units usually qualifies as a commercial mortgage. Can you, or has anyone, used a wrap for a property with a commercial mortgage?
Wraps do not get around due on sale clauses. They are still done every day one way or another. Commercial deals use wraps too. I have heard some rumbling that wraps too may be outlawed by states. Texas and Colorado are cracking down on lease purchase deals and perhaps sub2 and wrap deals next.
Commercial loans generally do not have due-on-sale clauses, because the lender doesn’t want the loan paid off; they want the cash flow.
If you have good credit, you can usually buy a residential property on a wrap-around (all-inclusive-trust-deed), which is subject-to the existing financing. You can send a letter to the lender advising them that you’ve acquired title to the property subject-to their superior lien, but you are not requesting assuming liability for the loan. Now the ball is in their court. They’ve been notified. If they call the loan due, then with your good credit you can get a take-out loan to cash them out (stupid lender). Otherwise, they have waived their right to call the loan due.
DO NOT ACQUIRE TITLE SUBJECT-TO FHA OR VA FINANCING; always apply for formal assumption of FHA or VA loans. You don’t want to spend any time in an 8x8 cell. The government has federal laws in place that prohibit acquiring title subject-to FHA or VA financing. The FBI is all over this. Don’t say you weren’t warned.
Lease-option deals in Colorado are very dangerous when the original seller is allowed to stay in the property. The lease-option looks like a mortgage to an under-educated judge who wants very much to help the poor consumer save his home from the evil nasty real estate investor. Bottom line: The judge may interpret the lease-option as a loan (mortgage) and disallow an eviction of the non-paying resident. You have to file for a judicial foreclosure, which will take months to resolve, all the while the resident is not making payments and living there for free. Always require the seller to vacate the property.
When you sell on a lease-option, always get written acknowledgement from the tenant-buyer that they are not getting a loan or mortgage, that they only have a leasehold interest in the property, do not take a huge non-refundable option deposit, do not give “applied rent credits”. These things look like a down payment for a purchase and slowly paying off the loan, even though they’re not. A judge always wants to ignore the letter of the contract and give the deadbeat a free ride on your money. Be careful.