Lender · Fremont, CA · Member since 2014 · 292 posts · 102 votes
Anyone done a wrap around mortgage in WI ? I have a property that i hold free and clear, but wanted to cash out. So doing a 30 year fixed now. In the meantime, i am advertising this property for seller financing so i can hold the note and not the property.
Anyone done a wrap around in the state of WI? What are the steps involved and how to go about this ?
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
10y
@Pari Thiagasundaram I can't give you advise with the legal side, but here are some financial considerations. First question, who is going to buy a home and is going to volunteer to pay higher interest rate? As a first time home buyer you can get a FAH loan with 5% down. A person who can't qualify for that has either demonstrated a lot of financially iresponsible behaviour (in that case why would you take the risk) or they had a one time situation. But in my experience these people are usually smart enough to know that they can rent for a year until they haev fixed their score enough to qualify for a low interest bank loan.
The other issue you have is trust: people will be suspicious to a home made mortgage from a private individual compared to a well known bank. Finally look at the numbers: the most you can get IMO is a 3% spread. So in todays world 7-8% tops compared to 4-5% from the bank. On a 100k note that's $200 bucks. Looks alright for passive income at first glance, but keep in mind you loose your tax shelter, so to my best knowledge it is full taxable. On top of that you loose the tax write of from property taxes and mortgae interest rate, because that goes to the new owner now. Bottom line it's not very attractive to do; you hear it in a guru seminar once in a while, but nobody really does it, at least not in todays low interest rate environment.
You want your cake and at it? Here is something to think about: get a cash out refi and market the home as rent to own. On a typical Milaukee property you should cashflow $300-500 before property management expenses. Repairs and maintenance will be the responsibility of your tenant and in the mean time you keep all the tax write offs. Be careful to not include a rent credit (not legal anymore since the Frank Dodd Act). If you are ok with some risk take a 5 year ARM to maximize cash flow (vs a 30 year fixed), but keep in mind that you have a 50% chance that your tenant buyer is not going to execute and you need to go for another round before it may sell (keeping the deposit, so not so bad).
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
10y
@Pari Thiagasundaram I can't give you advise with the legal side, but here are some financial considerations. First question, who is going to buy a home and is going to volunteer to pay higher interest rate? As a first time home buyer you can get a FAH loan with 5% down. A person who can't qualify for that has either demonstrated a lot of financially iresponsible behaviour (in that case why would you take the risk) or they had a one time situation. But in my experience these people are usually smart enough to know that they can rent for a year until they haev fixed their score enough to qualify for a low interest bank loan.
The other issue you have is trust: people will be suspicious to a home made mortgage from a private individual compared to a well known bank. Finally look at the numbers: the most you can get IMO is a 3% spread. So in todays world 7-8% tops compared to 4-5% from the bank. On a 100k note that's $200 bucks. Looks alright for passive income at first glance, but keep in mind you loose your tax shelter, so to my best knowledge it is full taxable. On top of that you loose the tax write of from property taxes and mortgae interest rate, because that goes to the new owner now. Bottom line it's not very attractive to do; you hear it in a guru seminar once in a while, but nobody really does it, at least not in todays low interest rate environment.
You want your cake and at it? Here is something to think about: get a cash out refi and market the home as rent to own. On a typical Milaukee property you should cashflow $300-500 before property management expenses. Repairs and maintenance will be the responsibility of your tenant and in the mean time you keep all the tax write offs. Be careful to not include a rent credit (not legal anymore since the Frank Dodd Act). If you are ok with some risk take a 5 year ARM to maximize cash flow (vs a 30 year fixed), but keep in mind that you have a 50% chance that your tenant buyer is not going to execute and you need to go for another round before it may sell (keeping the deposit, so not so bad).
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
10y
Hi @Pari Thiagasundaram , What is the price of the house and what kind of neighborhood is it in?
For lower priced properties (under 100k) I am finding I can sell with owner financing and get 8-9%. I could probably go higher but am comfortable with this rate. We find that banks are NOT excited to lend in this price range so that leaves room for people like yourself to owner finance.
We are also able to get a premium price in some cases. We back into our price based on local rents and leave enough to cover taxes and insurance and a little extra so there is a savings vs rent to the buyer. You can then work the price, the rate, and duration to back into a payment. We are finding that if we get a good discount on the property when we buy and manage the process closely that our returns are hitting 15-25% annual return (before selling the front end).
Higher rate = lower sale price but easier for the buyer to cash you out and refinance (easier to appraise). With current low rates if their credit problem is temporary they can lock in a price and cash you out latter. Lower rate = higher price.
Don't be fooled by the pricing in these neighborhoods, a lot of these sales are distressed sales or cash sales to investors and the comps often do not reflect the true market value of the property. @ 50k house that needs 20k in rehab may only sell for 10-15k, the comps can be all over the place.
Lastly, if you want to cash out some or all of your investment consider holding the note for a year or two and then selling 5-10 years of front end payments. You keep the back end of the note and go buy another property after selling the front end. Rinse and repeat.
Lender · Fremont, CA · Member since 2014 · 292 posts · 102 votes
10y
Hi @Bob E. The property is in on 53207. Its a 4 bedroom/1.5 bath. And we gave it some finishing touches to the attic to make it an extra room. Asking price is 145K.
It is a great piece of information to know that the banks are not lending much on the under 100K homes.
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
10y
@Pari Thiagasundaram you can use the same ad you normally use, but metion Rent to Own in the headline and explain further in the ad. You advertise the home as a rental in the apropritae section. I am seeing better quality aplicants lately with postlets than craigslist. If you need a template just browese ads until you find one that you like best or combine from different ads. I think people like bullet points - they are scanning lots of homes and you want to make they key facts easy to spot: number of BR, bathrooms, garage space, square footage and location.
We use two seperate contracts: a regular rental agreement and a simple option to purchase agreement. They dont reference each other. Thats the concept, but there is a lot more to it than I can put in a quick post. There are several good books on the subject of lease options, money well spent. Wendy Patton is great, also Peter Conti.
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
10y
With Dodd Frank Rent to own is on thin ice. I would offer a lease option instead.
With higher priced homes like this you might be better off to just sell to outright, if you financed it to create an $1,100 month payment for 360 months at 9% the sale price would be $136,710.05 so seller financing is not helping you a lot on this one. Financing at 8% would get you close to $150k but that is not a big increase over set selling it and taking your profit.