Seller Financing, Subject To, and Wraps

14 Replies

We just presented an off-market seller several options to purchase their home, and they seem to be leaning more towards the seller financing route (for the highest purchase price). However, we've never done this before, so we're reaching out to the BP masterminds for help :-)

The situation:
Mortgage of $200k
Seller wants $50k (to be paid when we sell the house)
Total purchase price will be $250k
Planning to flip and sell for $400k

I've been reading through the forums, but I'm still confused on the difference between subject to and wrap-around mortgages. And then someone threw in the term "land contracts", which confused us even more. Which route works best for our situation? Do we keep the mortgage as a 1st lienholder, and then a note to the seller for the 2nd position, or is there a way to tie all of this in one (is that what the wrap-around mortgage does)?

Also, is it better to close this purchase transaction through Escrow or through a real estate attorney? This is in Seattle, Washington.

Since it's a short term flip, do a subject to for the 200k and a seller financed note of 50k in second position. Take over their payments on the current mortgage and pay them interest only payments on their note for the length of the project until it sells. Then when you're done with the project and sell it, you pay off both loans in full and the sellers receive their 50k. You'll get the house with nothing down and the only expenses coming out your pocket are rehab costs (which you can borrow) and mortgage payments.

@Troy Gravett

Yeah, that's what I had in mind too, except for the part about making payments to the seller (less of a headache if we can just have it all paid out at the end).  Still curious though as to what a wraparound note does and how it's structured.

Also, I contacted my main escrow/title company and they said:
"Unfortunately we wouldn’t be able to close this unless the original underwriting lender were aware. It’s just not something that our underwriters are willing to let us take a risk insuring."

Looks like we'll be closing with an attorney.

@Nghi Le

Yea, you don't have to make interest payments to them each month, you can accrue the interest and then pay in full after the sale.

A wrap (aka All Inclusive Trust Deed) is a bit different. Without getting too logistical, you basically wrap the current mortgage with a larger mortgage between you and the seller. So Seller -> Bank = 200k; You -> Seller 250k. Each month, you pay an escrow company the payment on the 250k note, and the escrow company pays the mortgage on the smaller note and then pays the seller the difference, or what's left over. This prevents a default on the loans to make sure you maintain possession. Better for long term holds

Hey @Nghi Le !  Keep us posted.  I'd like to hear how this turns out.  I understand your experienced in flips and would like to know the other numbers taken into consideration.

How much rehab is needed $$$ wise?

The house is in the Seattle city limits?


@Troy Gravett You clarified things for me very well, especially the "better for long-term holds" part.  Thank you!

@Aaron Ramm Sorry for the late response!  I'm not as active on BP as I used to be :-(

The house is in central Seattle.  The seller saw one of our flips in progress and reached out to us.  The rehab should be around $50k - $60k.

We're still waiting to hear from the seller on whether they'll accept our offer or not.  In the meantime, we also made another seller an owner-financing offer, but this one has no mortgage, so it'll be much simpler to structure it.

Will keep you updated!

Ahh, the seller found an end buyer that was willing to buy the property as-is for much higher than we could offer.  Darn Zillow's "Make Me Move" and Seattle's hot market, lol.

@ Nghi Le, I hear  people say they make multiple offers to a seller, what does that mean? Could you give me a example?

@Carl Washington

You can do something like the following 3 options:

  • All cash
  • Lease-Option
  • Owner Financing

Here's a sample offer I made 6 months ago on an off-market property:

Offer #1: All Cash

$120,000 Purchase Price

Offer #2: Owner Financing with Down Payment and Monthly Interest

$130,000 Purchase Price

Down payment of $10,000 now, and then $1,000 a month for up to 7 months, at which point you will be cashed out

Offer #3: Owner Financing with a Single Balloon Payment At End

$140,000 Purchase Price + seller closing costs (title/escrow/insurance fees and excise taxes)

We pay all of your closing costs (so you won't have to bring any money to the closing table), and then cash you out within 7 months at the highest purchase price

@Nghi Le

Some great info in this thread here... 

Do you buy, or do you know people that buy, a-lot of properties off market? What's your suggestion for doing so? It would make sense that you need to do that in a market like Seattle, I'm sure the MLS is bone dry up there... Also do you always build a 7 month cash out window into your owner financing deals? What if the house doesn't sell, do you have some contingency set up?


@Ben Biggs

We primarily buy our properties from wholesalers and MLS, so we don't typically deal with off-market sellers directly. The offer I mentioned earlier was to neighbor who had interest in the work that we did from one of our flips in the area. I ultimately didn't get the deal, as a couple of other investors had already reached out to the owner and offered higher than I did. The market is extremely competitive here in Seattle, and I tend to be more conservative than most of the flippers out there.

Due to the hot Seattle market, we don't really have an issue of houses not selling.  We typically buy in areas where the average DOM is less than a week.

I'm definitely not an expert on marketing and wholesaling (tried my hand at direct mail for a week and decided it wasn't right for me), but I'd reach out to the multitude of wholesalers on BP for some more advice :-)

How did you decide after only 1 wk that direct mail is not for you?

@Kelly B.

There were multiple reasons, many at play before we even started the campaign.  But we were all working full-time then, and we decided that rehabbing and doing the mailing (and responding to calls) just wasn't feasible.  We also had 0 responses out of 300 mailers  that week (and over the next 3 months we only had 1 call back), so we did a bit more research and saw how competitive the wholesaling landscape was in Seattle, and we just didn't have the time and energy to do trial-and-error to find the sweet spot.  Even now, in Seattle, it's easier to be a rehabber (and buy from wholesalers) than to be a wholesaler.

True, wholesaling is a lot of work especially if you don't have systems in place.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here