Using Wrap to buy - What if seller defaults?

8 Replies

Hey All! 

New member here! I searched the forums and couldn't find an answer to this question. I appreciate any advice in advance. 

I'm closing on a purchase this week with the goal of flipping the property in the next 4 months. The seller agreed to owner finance by wrapping the current loan. I have had my attorney review the contracts and besides triggering the "due on sale" clause my only other exposure is the seller not paying the current mortgage that we are wrapping around. I'm concerned that the seller could wake up one day and decide to stop paying their mortgage. The promissory note does state that the seller is obligated to pay the existing mortgage according the it's terms but what happens to my position and what is my recourse if they decide to pocket my payments, not pay on their note, and the bank forecloses or calls the note due?

Thanks!  

Hey Ben - welcome to BP!  Is there any way you can structure the deal where your monthly payments are paying down the mortgage directly then the remainder is being paid to the seller?  You're right to question your exposure here along with the "due on sale" clause.  Do you happen to know how much equity the current owner has in the property?  This may also be an indicator to the likelihood of default though past is not always indicative of the future.

Best of luck in the deal and looking forward to hearing how this pans out for you.

@Manuel Olguin Thanks for the response! The seller is selling me the property for the balance of the loan. The property needs repairs and my numbers only work if I can acquire the property for the current loan amount and if I don't have to pay for hard money or a private investor. My Deed of Trust states that if the seller does not make payments on the first note that I can make those payments and apply them to my note. I'm also going to request that I get access to their online login so I can verify that payments are being made. I think that is the best I can do to learn if the house is slipping into foreclosure and stop it from happening. At the end of the day, I only plan on being in this investment for 4-6 months but you never know. The exit strategy could change down the road. Thanks! 

I have never heard of an investor buying on a wrap around mortgage where they did not pay the mortgage directly and have all the information from the seller about the mortgage. I would never do it. The way to do the transaction is to purchase the property subject to the mortgage or another way to say it is that you get the deed and YOU keep paying his mortgage. YOU get power of attorney from the seller. It is also called "sub-to".

When you go to sell the property, the title company is going to want the information about the original mortgage. Do you know the account #, the bank, etc.? If the seller does not want to give the information, died in a car crash, moved away or does not want to mess with the property anymore you are in a tough spot. I like to be the seller of the wrap around, I would never be the buyer.

@Rick Pozos Thanks for the insight. It struck me as an odd way to structure it as well. I'm not that experienced with creative financing but I have been reading a lot and haven't heard of it done this way. I initially structured the contract as a simple sub-to where I would make their payments but when I sent it to title, their attorney came back with it structured as a Wrap without my input. I do have a current mortgage statement and their payoff info so I'm not in the dark where their loan is concerned. Since I'm buying through a wholesaler, I haven't had a chance to just talk to the seller and see if we can structure it in a more simple way. This has been dragging out for a few weeks now with the title company and I'm leery of asking them to redo the legal docs. The Deed of Trust the attorney wrote does give me the freedom to make payments on their behalf and credit it toward what I owe, so I may just talk to the seller and ask if they would be ok with that. The thing is, this is a flip and I hope to be out of it in 4-6 months anyway. 

@Ben Rodrigue many mortgages are assumable - but you have to qualify. That way you legally take over their payments. Is that the case here? Could you qualify? If not, and if you are comfortable with the wrap situation then the others are correct - you need to make your payments directly to the mortgage company and provide proof to the seller - not the other way around... 

if there is no equity for the seller. then sub too is the route.. you only wrap when there is significant equity.

and how is the wholeslaer getting paid .. you paying them a fee ?

@Teri S. I wanted to avoid assuming it since that would clue the bank in on the fact that we are trigging the due on sale clause. I agree, I think that is the way to go. I'm going to insert language that I'm paying the bank directly and, in doing so, my obligations to the wrapped note will be met. Thanks! 

@Jay Hinrichs Loved your podcast! Thanks for commenting. Yes, I'm paying the wholesaler at closing. They are on the HUD. I'm confused why the attorney structured it this way and I have a call into them. I may just go with the flow to prevent further delays but I'm going to add language where I pay the bank directly. In theory, doing the wrap this way does give the seller some protection since they can foreclose if I don't fulfill my obligation but it also takes away some of my control should the seller flake out. Thanks!

if the seller is very concerned about his or her FICO  etc then i can see the wrap..  sub too and wrap are highly risky for sellers.. not so much buyer... buyer just has to perform.. the carnage that happens in these is 99% of the time created by the buyer not the seller.

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