19 Replies

After leaving a real estate workshop "No Money, No Bank, No Credit" They mentioned this idea called Wrap around.

If people do not know , this is basically you as the seller, giving the buyer the ownership of the house an option to purchase an asset , if they cannot qualify for a conventional loan. (Due to low credit, high interest rates or down payments) This is similar to "sub to" contracts where buyer has ownership and seller has promissory note.

Now in this situation, you are acting similar to a bank. So I've thought of a scenario and When I had asked this question, They said it was possible. Can you apply for an FHA loan, and then use creative financing for Wrap around mortgage? I asked if the "owner occupancy" applies and it was stated otherwise. So this bottled my mind, and why not consider this technique? You can use this to get extra cash, and also maybe a little extra cash flow.

Example: Me: Apply for an FHA Loan and get approved at 3.5% down and 3.5% interest.

Property: 200,000
Down Payment: 7,500
Interest: 7,500
30 Year Mortgage.
Mortgage: 575/Monthly
(Not including insurance or HOA)

Lets just say you want to use this "Wrap Mortgage" technique

You find a buyer that is willing to purchase this property for 230,000 and you require a downpayment at 10% and interest at 7%. Good deal right since the buyer would be motivated for this deal because most conventional lenders require 20% and higher interest rates. Win Win situation?

Property: 230,000
Down Payment: 23,000
Interest: 17,250
30 Year Mortgage
Mortgage: 686
(Not including insurance or HOA)

Income from sale: 23,000-7,500= 12,500
Interest: 17,250-7500=9750
Mortgage: 111 Cash Flow

The only reason why I don't this working is if the bank submits note due, which then you can convince buyer to refinance.

Have I wasted thought on this or can this actually work, am I getting way ahead of myself?? Considering FHA loans are for owner occupancy.

Hey @Ryan Nguyen - the reason I wouldn't do it like this, ever, is because the bank can very easily demand that you pay back the entire $200,000 mortgage immediately. So unless you had $200,000 just lying around - they could start foreclosure on you. You can't simply just "convince the buyer to refinance" because chances are - they cannot (or else they wouldn't be doing a creative strategy like this, they'd just go get a 3.5% down FHA loan of their own.) AND they have no reason to - cause they have a mortgage with you. So then you'd have a foreclosure on your hands and a big mess.

I'm generally 100% opposed to wraps and subject 2s - unless they are for VERY short time frames, like a year or less, like in a flip or something. Hope that makes sense?

@Brandon Turner - I understand where you are coming from, but don't subject 2's and wraps occur often? And the buyer that I choose wouldn't be eligible for an FHA Loan so thats why they would be in for the deal. I can see it being a big risk, but its more of an exit strategy if you were job transferring or some sort? I was just thinking of an innovated strategy.

But to go off of your last statement. Lets just say I found a HUD home ( I know title transfer takes forever) Is that property flippable within a year? Would this strategy be more considerable? At all?

Hey @Ryan Nguyen - yeah, some people do subject 2s and wraps. However, as @Jeff Brown pointed out in an article last week - what happens when the interest rates rise and banks aren't content letting you "wrap" a loan at 3.5% when they could force you to take out another loan at 10% or higher? This is what worries me about wraps and subject 2s.

As for your last question - I'm not sure I understand - about the title transfer. They usually do have a 90-day rule that you can't re-sell them, but after that it's usually cool. Is that what you mean?

I like the way you are thinking. Strategy is what makes this game so fun. Keep it up, keep posting your ideas, and you'll keep growing!

Yes, that answered my question but the way you approached the strategy does make sense. And I did have that thought in mind but I thought it was just a concept that was holding people back. (Banks issuing note due) . I was seeing if anyone had used this strategy and statistically seeing if the note being due occurred to them. What is the link to Jeff Brown Article?

Hey Ryan -- Brandon's correct, it's definitely a subject to situation. Don't be involved with it -- as a buyer or a seller. The last time subject to purchases were in vogue, they were massacred by the banks, when interest rose to the point where enough was enough. It's gonna happen again -- it's a matter of when, not if. Don't get caught in the crosshairs.

The fact the seller/buyer use a wrap is completely irrelevant.

Hope this helps -- Jeff

@Jeff Brown

After the experience with the real estate workshop, the were really pushing that idea... but why? Sub 2 contracts are used in wholesaling, flipping as well right? When you market "buy house for cash" You look for distressed sellers who need to sell. Most investors or wholesalers put these sellers in these types of contracts right?

Gurus/work shops push all kinds of ideas that don't work in the real world, because their "students" don't have enough experience, or the relevant background, to realize why these "creative strategies" won't work. People who advertise "we buy cash", generally "buy cash" and not Sub2. Selling with a wrap around, on a property you bought Sub2, will open you up to a few different potential problems.

Wayne Brooks - Well I would be using an FHA Loan and wrapping that not Sub2.

So I just want to clarify , @Brandon Turner . Lets say I found a good deal and I could flip it, Would it be feasible to wholesale that property but I must put it under a SUB2 contract right? Or would this be something you are against.

PS. I have always had a skeptical feel on these Workshops, I feel like they just want you to birddog for them with minimal referral fees because they want to expand, while you spend money on direct marketing, and knowing you can't handle will run to them for help where they would take over the deal. Its kinda like what you see in those movies, "ill take it from here son"

Coincidently , There was a mentorship program for 97/monthly or 297/monthly but offered full mentorship

Hey @Ryan Nguyen - what do you mean by "using an FHA loan and wrapping it?" Do you mean you would get an FHA loan in your own name, and then sell the property to someone else, and have them pay a higher down payment than you did? If so, I still come back to my original problem of what to do when the bank calls you and says "pay us back the $100,000 right now."

As for the other thing, about flipping/wholesale/sub2 - I'm confused :) Either you are flipping it or wholesaling it - you can't do both. Unless you are talking about "flipping the contract" which is the same thing as wholesaling. When you wholesale something - you never actually own it - so you wouldn't need to do a SUB2 or regular mortgage or anything. Wholesaling just means you are signing a legal paper saying you will buy it, and then giving that piece of paper to another investor to actually follow through and buy it.

However - if your plan was to "fix and flip" it, meaning you buy it for cheap, fix it up, and then re-sell it to a person who can actually come with a bank loan - then yes, that's the only time I'd entertain a SUB2 - IF I had another exit strategy (like I had the cash to pay it off, or I could get a bank loan to pay off the loan.)

@Brandon Turner - the first paragraph answered the main question which I can understand why its risky.

I thought wholesaling also used sub2 contracts but then I remembered you are basically just selling the contract you signed with the seller to purchase the property. I initially thought you had to use a SUB2 contract and then you can find a buyer who will pay more than what you got it for from the seller.

Fix and Flip, uses sub2 which now I understand. THank you for clearing it up BP

Cool. Again, @Ryan Nguyen - I love the questions you are asking. Most people don't even know the questions to ask, so you are doing great thus far! :)

@Brandon Turner I was wondering what your take would be on purchase agreements. I understand yours and @Jeff Brown 's objections to Sub-2's due to the due on sale clause but to my understanding that is often nullified if you use a purchase agreement in which the deed does not technically change hands until the underlying loan is paid off? Does using this strategy help to mitigate this type of risk and therefore allow [url]@Ryan Nguyen to perform a transaction he was previously discussing?

Hey @Jesse V. - I've heard that it doesn't always matter- I think it's kinda up to the judge and the bank if they want to press it. There's probably not a lot of a examples around, cause no bank wants to call these due yet, but if rates go up, I'm not one for risking it. Just my 2 cents - @Jeff Brown probably has a lot more insight!

I agree with most that as rates rise the calling due will happen. I just happened to have closed on one today where most of the purchase was subject 2 the mortgage. I think I am going to hang on to it and rent it. I think my risk is somewhat low because There is a decent amount of equity in the deal and I can sell or refi in the future if necessary...hopefully. I will risk what money I do have in the deal. As long as I dont sell it on seller financing for long term to someone else I am OK with the risk. Wouldnt be fair to long term buyer if the bank called it due and neither one of us could refi especially if they put a lot of money down.

Hey Guys — Lenders love relatively higher interest rates. Whenever they get a chance, they go for the jugular. Those who think all the land contracts, wrap-arounds, and the life will protect them are in for a very rude awakening. It will be like coming to a gun fight with a rubber knife.

Been there, done that, saw the blood in the streets. None of it, by the way, was lender blood. :)

after reading the replies, what if you were locked in at a fixed interest rate?

@Jeff Brown Is there any form of seller financing that you are comfortable with or any way that you feel it is possible to structure a seller financing deal that can help to mitigate the risk of a due on sell clause or is the only form of financing you do through private money or lenders? I would appreciate any input you can give as this is a really interesting topic to me and you seem very knowledgable and experienced in this topic. Please feel free to contact me directly. Thanks.

@Ryan Nguyen I'm not expert but my understanding of seller financing and what I have read is that your loan would be a fixed interest rate at say 3.5%. The problem exists when you engage in seller financing and deed the property over to your buyer. When this occurs your lender can use the due on sell clause to call back the loan leaving you with only a couple of options: pay the house off with cash or refi at a higher interest rate which is inevitably going to happen. What has been discussed that lenders will most likely call back these low interest loans if they can so that they can then get new loans at a higher interest rate.
This is my understanding but @Brandon Turner or @Jeff Brown might be able to explain better.

@Ryan Nguyen You may be able to short circuit the whole due on sale discussion that is taking place - the way I read your initial post, you are planning on taking out an FHA 3.5% loan, then turning around to a renter and never living in the property. If I read that accurately, you can't do that. It's actually mortgage fraud.

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