Seller-finance (are they wraparound mortgages?)

4 Replies

Hey there! I see a lot of seller-financed properties as I'm practicing running numbers on properties listed on craigslist & other similar sites. I suspect that many of these homes are not owned outright.

Is it common for people to do seller-financing on their homes as a wraparound mortgage? It's been my understanding from the research/coursework I've done that this is almost certainly against their primary mortgage's terms.

How common is it for banks to call loans in these situations & how safe is it for people to offer seller-financing in these situations? What kind of precautions do people take in offering a wraparound mortgage?

There are lots of different opinions about wrap mortgages.   Many real estate investors swear by them, other people say they should never be used.

The reality is that wraps are a little complicated if you have never done one and hold some small risk of a bank calling the note but CAN be a useful tool when used correctly with two (or three) willing parties

Regarding the terms of most residential mortgage terms, specifically the "due-on-sales clause", they generally say that the lender "has the right to call the note" but not the obligation.   Another way to say it is they CAN call the note but they don't have to...

We have done a lot of seller financing deals, a large number of which were wraps and we have never seen a bank call a performing note due.  We also work with many other investors who would say the same.   It is expensive for banks to foreclose and potentially have to sell the house - they would almost certainly lose money.   Banks like performing notes. So, as long as you keep paying the loan on time, you are fairly safe.   

Some precautions to consider:

- Make sure the person who is the borrower of the underlying bank mortgage fully understands the implications  of a wrap, as well as the buyer

- Consider a 5 or 10yr balloon note (vs. 30yr fixed) if you are worried that the seller may have 2nd thoughts down the road

- Buyers should need to bring a significant down payment to the deal so that they have skin in the game

- If your state allows a Deed of Trust for the wrap note, I suggest using that document (vs. a Mortgage) as it will put a lien on the house allow the Seller to pursue a non-judicial foreclosure if the buyer does not perform.

- The home insurance after the sale (the new owner is the "insured") should retain the name of the previous owner(payor of the bank note) on the insurance as "additional insured" so as to not set off any alarms with the bank.

- Use a 3rd party loan servicing company to collect all mortgage and escrow payments and make all appropriate payments to the bank lender as well as seller finance lender.   The bank lender will generally make the property tax and insurance payments directly.

I will say, there will likely be other, perhaps contrary, opinions on wraps on this forum.   Your risk tolerance plays a role in whether you get involved with wraps or not....

Good luck!

@Jeff Groudan I took over a mortgage sub 2 and deeded in trust. I am now selling it seller finance(wrap). Being that I am now deeding my trust to the new owner should I create another trust and name them the beneficiary or just use their name. Also are you using your personal name, entity, or a trust for the note you are creating and what type of deed are you using for the new buyer ( quit claim, special, or warranty deed). Thanks for your help.

Hi Shawn,  just to be sure I understand, when you say "deeded in trust", do you mean:

- You used a deed of trust OR

- The deed calls out a Trust instead of a company or person?

To answer your questions:

- We usually don't have the new buyer take title in a trust.   So the new deed, after they buy is Just in their name.

- We do sometimes take initial ownership of Sub-To's as a Trust. The Trust then usually has an LLC as the beneficiary. The seller finance note then is between the Trust and the Buyer

- We always use a warranty deed and we always get the title insurance for both sides of the sale (when we acquire and when we sell)

I hope that helps.  Good luck!

Originally posted by @Jeff Groudan :

There are lots of different opinions about wrap mortgages.   Many real estate investors swear by them, other people say they should never be used.

The reality is that wraps are a little complicated if you have never done one and hold some small risk of a bank calling the note but CAN be a useful tool when used correctly with two (or three) willing parties

Regarding the terms of most residential mortgage terms, specifically the "due-on-sales clause", they generally say that the lender "has the right to call the note" but not the obligation.   Another way to say it is they CAN call the note but they don't have to...

We have done a lot of seller financing deals, a large number of which were wraps and we have never seen a bank call a performing note due.  We also work with many other investors who would say the same.   It is expensive for banks to foreclose and potentially have to sell the house - they would almost certainly lose money.   Banks like performing notes. So, as long as you keep paying the loan on time, you are fairly safe.   

Some precautions to consider:

- Make sure the person who is the borrower of the underlying bank mortgage fully understands the implications  of a wrap, as well as the buyer

- Consider a 5 or 10yr balloon note (vs. 30yr fixed) if you are worried that the seller may have 2nd thoughts down the road

- Buyers should need to bring a significant down payment to the deal so that they have skin in the game

- If your state allows a Deed of Trust for the wrap note, I suggest using that document (vs. a Mortgage) as it will put a lien on the house allow the Seller to pursue a non-judicial foreclosure if the buyer does not perform.

- The home insurance after the sale (the new owner is the "insured") should retain the name of the previous owner(payor of the bank note) on the insurance as "additional insured" so as to not set off any alarms with the bank.

- Use a 3rd party loan servicing company to collect all mortgage and escrow payments and make all appropriate payments to the bank lender as well as seller finance lender.   The bank lender will generally make the property tax and insurance payments directly.

I will say, there will likely be other, perhaps contrary, opinions on wraps on this forum.   Your risk tolerance plays a role in whether you get involved with wraps or not....

Good luck!

 Brilliant! Thank you so much for the info. This helps put things in perspective. I have wondered how common wraparounds are & if it's a major concern for buyers. This helps frame it as a matter of "risk tolerance". That makes perfect sense.

Based on this info, I think that I would feel much more comfortable selling as a wrap-around than buying.