Questions about using wraps and land contracts...what's true and can I use one?

General Real Estate Investing
1

I have some questions:

  • Is the wraparound mortgage, something I can refinance to gain title to the property?
    Or will I still need to get a purchase loan to complete the transaction?

  • If I used a Land Contract to purchase, does the property being purchased have to be owned free and clear of any mortgages by the seller?

  • Notwithstanding a “Due on Sale” clause, is it possible for the seller to extend seller financing in the form of a Land Contract?

  • Is the broker correct when he said it could not be done that way?

I opted to purchase 2 seperate parcels, a 23 unit and a 34 unit building(s) using a land contract, when the new broker learned of my method of purchase,(LC) he stated I couldn’t because the seller needs to own the property free and clear; he then suggested a wraparound mortgage.

  • Would I still need a down payment(20%) to obtain this loan if I purchase with a wrap?

As I understand it, a down payment is not required when refinancing a mortgage(in this case a land contract), but it is required on a purchase loan…for the most part.

Can anyone help with these questions?

  • Is it easier to refinance a commercial loan, or obtain a purchase loan with a lower credit score?

Mid-score of 597
Thank You
CNYInvestor

2

Is the wraparound mortgage, something I can refinance to gain title to the property?

If you purchased the property with a wrap-around mortgage, then you got the deed at settlement. No need to refinance to get title because you already have it.

If I used a Land Contract to purchase, does the property being purchased have to be owned free and clear of any mortgages by the seller? Notwithstanding a “Due on Sale” clause, is it possible for the seller to extend seller financing in the form of a Land Contract? Is the broker correct when he said it could not be done that way?

Depends upon your state law and who is liable for the underlying mortgage. Some states have enacted legislation in recent years which limits a seller’s ability to sell a leveraged property on a contract for deed, especially of that property was acquired Subject To an existing mortgage in the first place…

Would I still need a down payment(20%) to obtain this loan if I purchase with a wrap?

Depends upon the deal you negotiate with the seller. The downpayment amount is negotiable.

3

Dave T,

I just learned that the seller owns the property on a lease option.

I’m certain all of the details could have been hammered out, directing all the income genarated by the property in question to pay the bills first and the seller second.

He has opted not to sell to me because of his lack of information regarding his ability to do so in the first place.

Is it possible to sell to someone on a land contract if the seller has a lease option to purchase it himself?

I could always write in the contract, “If I am unsuccessful in refinancing the property in the time allotted, I will walk away without dispute.”
His risk therefore would be he would not be able to sell during this time unless he did some work on his own to line up prospective buyers just in case I was unsuccessful in refinancing.

The Wrap around mortgage as I explained in a different post, would be a vehicle for me to tie the property up in contract and eventually, (6-12 months) purchase when I found suitable financing.

This method sounds more like an upsell on the part of the mortgage broker, who will earn a higher commission this way. In this particular case (23 unit) the seller wants out as soon as possible, no prolonged period of seller financing; he is moving out of state.

The down payment issue would not be resolved, and I could not complete the purchase.

The Land Contract is less expensive and due to my financial situation, (debt to income ratio) it is the only answer I have to purchase these larger and more attractive properties at this point. Barring any partnership opportunities of course, which I have had plenty of opportunities to make offers on.

If given a choice and set out in a direction, I do not like houses as much as I do buildings. I grew up in a “self employed” commercial atmosphere, (I’m a natural) backed by real estate, and I have leaned towards this type of “commercial” property since day 1 of this course; which also includes apt. buildings.

cnyinvestor
Marc

4

Either the seller owns the property or he does not. If the person offering to sell you the property only has an option to purchase then he is not the owner yet. This person will have to exercise his option to purchase before he can sell to you. Once he owns the property, he is free to sell to you with any creative financing technique that works for both of you.

If the person offering to sell you the property is the true owner who has lease optioned the property to another tenant/buyer, then you can still purchase the property from this seller subject to the lease option agreement already in place with his tenant/buyer. If you do this, then you will have to honor the lease/option agreement that you will inherit from the seller.

From your comments, I believe you don’t understand a wrap-aroung mortgage, a land contract, and the difference between the two.

As far as financing is concerned, there is no difference between a wrap-around mortage and a land contract – they are both financing vehicles that behave exactly the same way as far as financing is concerned. You don’t “use” a wrap-around mortgage to “tie up” a property. The seller may agree to hold a wrap-around mortgage to finance the property you have under contract.

Both financing vehicles finance the sale of a property. A sale with a wrap-around mortgage and a sale with a land contract are both installment sales. The difference is that a land contract does not transfer title until the contract is satisfied whereas a sale financed with a wrap tranfers title at settlement.

A wrap-around mortgage is seller financing so I don’t understand why a mortgage broker would be involved. The seller’s first mortgage is already in place and it is being wrapped by the seller held second mortgage, so why is a mortgage broker in the picture?

You say a land contract would be less expensive. You express some concern about your debt to income ratio. Once again the wrap and the land contract behave exactly the same way as far as financing is concerned – both are offered by the seller with no banks or lenders involved. Most of the time, the seller is not too concerned with your debt to income ratio, just your ability to make the monthly payments. You will have to explain why you feel one is more expensive than the other assuming that the rate and terms for the wrap are the same as the land contract.

5

Dave,
Thank you for your “frank” and direct reply concerning my question. You state i do not understand the difference between a wrap and a land contract. While that may be true in some ways, becuase I wouldn’t have asked the question had I needed some advice; I believe you may have jumped the gun and didn’t actually understand my question, explanation, or need at this point.

  1. a wrap around mortgage…I can read and I have read the definition!
    For this particular sale, It would have been used as a “vehicle” to purchase the property. Essentially, I would have been “tying” the property up temporarily while “the broker”, (there is one involved, so I mentioned it) and I searched for suitable financing, along with raising my credit score.
    However, by doing this, when the conventional financing was found, it would still be in the form of a “purchase loan”, hence my question: Can you “refinance” a “wrap-around mortgage” or will It need to be a “purchase loan”?
    Each of the two different type’s of loans have their own expenses. A “refinance loan” is usually cheaper than a “purchase loan” simply because of the down payment factor. Around here, it’s 80% financing, which leaves a 20% deficit. I stated the seller want’s out ASAP, he will not carry a small second.
  2. You answered my question about the Land Contract. You must have been warmed up by then…
    Depending on the length of the lease option, he may or may not be able to sell to me was what I was looking for;
    you stated, " If the person offering to sell you the property only has an option to purchase then he is not the owner yet. This person will have to exercise his option to purchase before he can sell to you. Once he owns the property, he is free to sell to you with any creative financing technique that works for both of you."
6

Dave,
Thank you for your “frank” and direct reply concerning my questions. You state I do not understand the difference between a wrap and a land contract. While that may be true in some ways, because I wouldn’t have asked the question had I needed some advice on the matter, I believe you may have jumped the gun and didn’t actually understand my question, explanation, or need at this point, or

I may have even mis-placed terms when I experienced a loss of words, like “to gain title to the property” for example. I merely wanted the property out of the sellers hands and into my possesion after they received there asking price, thereby gaining title to the property…“out of his hands and into mine”.

  1. a wrap around mortgage…I can read and I have read the definition!
    For this particular sale, It would have been used as a “vehicle” to purchase the property. Essentially, I would have been “tying” the property up temporarily while “the broker”, (there is one involved, so I mentioned it) and I searched for suitable financing, along with raising my credit score. [The broker is also the property manager the sale simply went that direction…aka use my team so I can make them some money. I have my own set of brokers that I use.]
    However, by doing this, (wrap-around) when the conventional financing was found it would still be in the form of a “purchase loan”,
    hence my question:
    Can you “refinance” a “wrap-around mortgage” or will It need to be a “purchase loan”?
    Each of the two different type’s of loans have their own expenses. A “refinance loan” is usually “less expensive” than a “purchase loan” simply because of the down payment factor. Around here, it’s 80% financing, which leaves a 20% deficit for me. I stated the seller want’s out ASAP, he will not carry a small second.
  2. You answered my question about the Land Contract. You must have been warmed up by then… :smile
    Depending on the length of the lease option, he may or may not be able to sell to me was what I was looking for.
    You stated, " If the person offering to sell you the property only has an option to purchase then he is not the owner yet. This person will have to exercise his option to purchase before he can sell to you. Once he owns the property, he is free to sell to you with any creative financing technique that works for both of you."

Which can be done as a simultaneus closing, If I’m not mistaken.

None the less he has moved on so I must do the same. I would still like some answers to the questions, so the next time this happens, I’ll already have an answer.

7

Dave,
Thank you for your “frank” and direct reply concerning my question. You state I do not understand the difference between a wrap and a land contract. While that may be true in some ways, because I wouldn’t have asked the question had I not needed some advice. I don’t think you hit the nail on its head with that statement either.

  1. A wrap-around mortgage…I can read and I have read the definition!

  2. For this particular sale, this purchase method would have been used as a “vehicle” to purchase the property in question. Essentially, I would have been “tying” the property up temporarily while “the broker”, (there is one involved, so I mentioned it) and I searched for suitable financing, along with raising my credit score.

  3. Purchasing the property this way, (wrap-around) when the conventional financing was ultimately found and approved, it would still be in the form of a “purchase loan”, hence my question:
    Can you “refinance” a “wrap-around mortgage” or will It need to be a “purchase loan”?

  4. Each of the two different type’s of loans have their own expenses. A “refinance loan” is usually cheaper than a “purchase loan” simply because of the “down payment” requirement on the latter. Around here, it’s 80% financing, which leaves a 20% deficit. I stated the seller want’s out ASAP, he will not carry a small second.

  5. You answered my question about the Land Contract:
    you stated, " If the person offering to sell you the property only has an option to purchase then he is not the owner yet. This person will have to exercise his option to purchase before he can sell to you. Once he owns the property, he is free to sell to you with any creative financing technique that works for both of you."

Depending on the length of the lease option, he may or may not be able to sell to me was what I was looking for.

The seller has moved on just the same. I would still like a yes or no answer as far as the possibility of refinancing a wrap around mortgage with “conventional financing” goes.
Must I use a purchase loan?

8
The seller has moved on just the same. I would still like a yes or no answer as far as the possibility of refinancing a wrap around mortgage with "conventional financing" goes. Must I use a purchase loan?

A wrap-around mortgage does not “tie up” a property you want to purchase – a contract to purchase does. Having the seller carry back some of the financing as a wrap-around mortgage is just a contract provision in your purchase agreement.

Please understand that if you finance the purchase of a property with a wrap-around mortgage, then you are the owner of the property. The title is in your name. If you want to pay off the wrap and replace it with a new conventional mortgage, then you would be refinancing – not obtaining a purchase money loan.

If I were the seller in your example, I would also insist on a significant prepayment penalty if the loan is paid off within the first 12 months.

9

Dave,
Thank you for the simple answer. That’s what I was looking for. The broker did not clarify that simple fact, (whether or not it would be a refinance or a purchase loan, so I thought I would ask the forum).
Money money money…it’s a good thing I’m not working with a seller who is going to add a pre-payment penalty. I like where you are going with it though, the “Big” mortgage companies do it, so why shouldn’t you.
I value the people I do business with, and I appreciate their efforts to keep the cost’s low and pass on the benefits of real estate.
I have enough on my plate as it is…
I operate more or less like a non-profit at this point. Ten’s of millions of dollars in real estate already exist within my network of family who currently invest. It’s my turn, but I’m working on building my solid foundation in philanthropy, for me it’s people first and then money.

10

Dave T.

How come a wrap mortgage does not trigger the dosc? Will title companies sell title insurance to property sold on a wrap note? Have you as either buyer/seller required an escrow account be setup with 3-6 month cash reserves?

11

A sale does trigger the DOSC. A sale using a wrap-around mortgage is an installment sale. I don’t generally sell my properties, so a wrap-around mortgage is not in my arsenal.

Wraps were real popular in the 80s (until 1988) when all conforming loans were non-qualifying assumables. I don’t hear them used very much today. Instead, investors seem to prefer the Contract for Deed to achieve the same owner financing outcome as a wrap-around mortgage.

A Contract for Deed also triggers the DOSC. It is the lender’s option to call the loan due when the DOSC is triggered. Many don’t if the underlying loan is current.