Wrap Around Wholesale Deal

8 Replies

Hello All,

I have recently come across a Seller whom is allowing her property to go to Foreclosure, due to the stress. I would love to help this person out; however, I feel this deal is above my knowledge level.  Below are the details of the transaction so far.

Mortgage Balance: $122,000

ARV: $185,000

Interest Rate: 2.5%

Monthly Rent: $800

Comparable Rent: $1200

Estimated Repairs: $50,000

According to an experienced investor...Does this seem to fit the mold of a wraparound transaction? Are Wrap Around Transactions only do-able with little to no repair costs? Can this person be helped through the service of an investor?

Thank you for any input!

@Sean Joseph Bates

Still need a bit more information to completely analyze this deal.

Does she really have an existing 2.5% loan?  

Need to know the amount it will take to reinstate the loan.

For me, I don't care as much about repairs, as I wrap these and owner finance them at 9-9.5%. So if my equity is chewed up in repairs, I will more than make up for it in interest. If she is sitting on 2.5% loan, I couldn't care less if the repairs exceeded the ARV, within reason of course. The monthly cash flow alone, will take care of that.

Well, there’s not really a deal here....if $122k mtg and $50k rehab are correct.  Also, if they have a 2.5% interest rate, that means this was a loan modification....there is likely another +50k or so that was “set to the side” (deferred to the end of the mtg) in the loan mod, which is SOP to get the mo they payment down to something the borrower qualifies for.....this $50k is still due, but not obvious from their monthly statement.

@John K.

I contacted the seller and received the below information from her.

- Interest rate: confirmed for 2%
-Loan Reinstatement: $9,115

- Mortgage Balance: Confirmed for $128k

If the original Mortgage documentation contains designation that the loan is not assumable, does that mean the wrap can not be done? What are your thoughts now with the updated info? And also, thank you very much for your input. This is a huge help.


-Sean

@John K. and @Wayne Brooks

Please see the below. 

My understanding of a wrap is as follows: The Seller has equity in a property, and carries back part of that equity as a mortgage at a higher interest rate than the original mortgage. A third party company needs to be hired to collect the payments. A good candidate for a wrap transaction are properties that have a competitive mortgage in place (ie low rate and low monthly payment) with some equity in the property. 

This is beneficial to an investor because they can acquire a property with a down payment and rent it to a tenant at a higher rent than the mortgage payment. This is beneficial to the seller because they can prevent a foreclosure and save their credit and start anew (as is the case with my seller). 

Some questions that I have:

1. The mortgage contains language that says the loan cannot be 'assumed', does this mean that the wrap transaction cannot be done because the wrap trans is essentially a subject to with an additional mortgage?   

2. I would like to discuss the repair costs associated as well. How do repair costs affect a wrap?

3. What about this deal makes it ideal or not ideal?

4. This forum is very interesting because two pro investors have widely different opinions. John and Wayne, it would be awesome if this forum gets to see you both analyze this deal and compare the differences. It would go a long way for all of the new investors roaming the market who read this. 

Thank you greatly,

Sean

Originally posted by @Sean Joseph Bates :

@John K. and @Wayne Brooks

Please see the below. 

My understanding of a wrap is as follows: The Seller has equity in a property, and carries back part of that equity as a mortgage at a higher interest rate than the original mortgage. A third party company needs to be hired to collect the payments. A good candidate for a wrap transaction are properties that have a competitive mortgage in place (ie low rate and low monthly payment) with some equity in the property. 

This is beneficial to an investor because they can acquire a property with a down payment and rent it to a tenant at a higher rent than the mortgage payment. This is beneficial to the seller because they can prevent a foreclosure and save their credit and start anew (as is the case with my seller). 

Some questions that I have:

1. The mortgage contains language that says the loan cannot be 'assumed', does this mean that the wrap transaction cannot be done because the wrap trans is essentially a subject to with an additional mortgage?   

2. I would like to discuss the repair costs associated as well. How do repair costs affect a wrap?

3. What about this deal makes it ideal or not ideal?

4. This forum is very interesting because two pro investors have widely different opinions. John and Wayne, it would be awesome if this forum gets to see you both analyze this deal and compare the differences. It would go a long way for all of the new investors roaming the market who read this. 

Thank you greatly,

Sean

 The seller is paid a fee to walk, usually a few thousand dollars. They are not going to be carrying any note, we are simply assuming responsibility of their existing note. We pay the amount needed to get the loan back to good, then make the payments going forward.

1. We won't be assuming the note in the traditional means. We will be utilizing a tool known as "subject to", meaning subject to the existing note/mortgage. The risk with these types of deals, is that the lender can exercise the due on sale clause, which would mean the note is due in full. It happens, but it's extremely rare. The lenders are not REI, they are note investors, they have no interest in owning real estate. I will say this though, usually we deal with loans that are in the 5-6% range, so it's not advisable for the bank to call it due, so they can take on all the risks/costs associated with taking a property back, just so they can resell it at 3%. Typically, if the note is performing, there is no reason for them to care. At 2.5%, it would make one think though.

2. There are basically 2 ways you can buy and that is with equity, or without. 

  a. Those that buy for equity gains, won't be attracted to this deal, as it seems there is no equity left. 

  b. Those that buy with no/negative equity, rely mostly on wrapping the note to a buyer, so they can create their own equity, with interest. So in this deal, if the existing loan is at 2.5%, I would wrap it at 9%, and make a killing in interest. In addition to the awesome markup in interest, there will be an extensive amount of cash flow, free and clear at that. When I wrap to a buyer, I have ZERO expenses. This will take care of the no equity, quickly. 

The other strategy with no/negative equity, is to find those properties in what I call the GO ZONE. This is a neighborhood that has documented history of appreciating very well, over a sustained period of time. For me, it's no less than 10 years. This would justify buying at the top, or even over, because in 10 years, you are likely looking at doubling your money. 

I typically don't buy properties that need extensive work, because of the time issue. The 60-90 days it would take me to turn a property around, I could have done a dozen other deals. However, that is just my way of looking at it. 

3. What makes it very attractive to those that use S2 and wrap as a strategy, is the 2.5% interest on the existing note. What @Wayne Brooks pointed out, there has to be confirmation that there is not a hidden sum of money due. This is something you will want to confirm. 


Yes, it is a huge plus to any seller facing foreclosure. You can recover from late payments on your credit much easier than you can, a foreclosure. It is often said that a foreclosure is the atomic bomb of credit disasters. 


 

@Sean Joseph Bates Again, IF the mtg balance is $128k, plus $9k in arrears, plus $50k in rehab, then a buyer would be into it for $187k for a property worth $185....no deal.  
I highly suspect there is a deferred amount above the $128k.

A loan that has gone through a loan will have much higher scrutiny when it comes to the due on sale clause.....which will be an issue with any kind of sub2.

BTW, how much is her monthly payment, just the P & I, not the taxes and insurance, on the 2.0 % rate?  Loan mods are typically done at a 2% rate, 40 years....after they set aside a certain amount.

BTW, loan mods are typically recorded just like the original mtg....reading that may give you some clues.