Should I do a wrap? Advice needed.

Question

I've done some research on wraps and I've got a couple of questions. I'll try to keep this concise, so here are the facts:

I purchased a 4-plex a year and a half ago. I got the owner to carry at 7% for 25 years. Obviously, I am going to attempt to renegotiate the loan amount in the future and get him to settle. I am now considering selling with a wrap mortgage.

My question is if I do a wrap, can I still negotiate down the original loan in the future and keep the savings?

What is a reasonable percentage rate to ask for with a wrap?

Any advice or pitfalls I'm not seeing?

Thanks!

Bill Gulley · Answer

I'd say the terms of your existing loan are pretty good already, I don't see a reasonable person addressing such a matter, especially at your LTV which you didn't mention, but generally, SF is not at 70/75% LTV, just guessing you got a good deal.

Sub-2? Look to the due on sale, a private lender may be more apt to going there than any bank. Insurance, taxes need to be addressed. How are you going to  ensure maintenance is taken care of? You're responsible for the underlying loan. What happens in your buyer becomes incapacitated, dies, takes bankruptcy, get sued, doesn't pay liens? I suggest you find a loan servicer too. :)

Dion DePaoli · Answer

"Obviously, I am going to attempt to renegotiate the loan amount in the future and get him to settle."
	
	That is a troubling statement.  There is no "obvious" reason why you are trying to pay back less than you have borrowed.  Any reduction of principal by the Mortgagee will create an income event in your taxes.  You received capital and you didn't pay it back, that is not a loan, it is income.  
	
	In the post it is not clear why you simply do not sell out right and not mess with any of the creative stuff.  Perhaps that is where the 'obvious' lies, you have negative equity.  In that case, first line of attack can simply be a short payoff with the Mortgagee, if they agree, which they do not have to.  If they agree to short any of the principal, you will have tax impacts as stated above.  That would be the cleanest way to handle this and not mess with any of the wrap idea.
	
	Terms of the debt are only found in the Note, there are no debt terms in the Mortgage, Deed of Trust or Security Deed ("security instrument").  The security instrument is evidence of indebtedness not terms of indebtedness.  The security instrument is the pledge of the property which secures the Promissory Note.  The Promissory Note, like an IOU, holds all the terms of repayment.  Selling the property "Subject To", by conveying title to a new person without satisfying the loan, does not remove you as a borrower or remove the obligation established through the security instrument and note.  So while you are the borrower, which you will always be the borrower until you either satisfy the loan or the Mortgagee allows you to bring in someone to assume the loan (formally), you can negotiate a modification.  A modification is a formal amendment to the terms of the note and does not necessarily change the security instrument per se.

Wayne Brooks · Answer

Why do you think the seller would renegotiate the loan amount?  Assuming someone will agree to change a deal later after you have entered into a contract, is not sound.

Dale Overbay · Answer

Great!  Thank you for the information @Monique B. Just what I was looking for.

Monique M. · Answer

Ahhh!

Thanks for the tip, @Matt Devincenzo.  Much appreciated!

Monique

Matt Devincenzo · Answer

@Monique B. if you need to edit something in a post you can within (I believe) 15 min. Just look under your name on the right and you'll see in greyed out words "edit", click that and you can modify your actual post. After the time limit you'll see it says "update" you can put info there and it will show up in a separate sentance under your original post so other people will know what you added.

Monique M. · Answer

Rats ... Found two typos in my response to the first question.

Corrected sentence:

You could CHOOSE to mimic the principal paydown of a wraparound mortgage BY giving your Buyer rent credits toward the purchase.

Monique M. · Answer

Hi Dale,

Some quick thoughts  ...

If I do a wrap, can I still negotiate down the original loan in the future and keep the savings?

>> If you plan to negotiate an early payoff (sooner than the 25 years) at a discount, you can certainly and easily do that even if you have sold the property with a wrap. If you sell with a 10-year balloon to your buyer, for example, you will have an opportunity to negotiate a cash pay off at a discount at that time.

>> If you plan to negotiate a loan modification instead of an early payoff, that may be challenging. You would no longer be the title holder. You could negotiate the terms of the Promissory Note, but you may not be able to negotiate the terms of the recorded debt instrument (Mortgage, Security Deed, or whatever it is called in your state) since you are no longer the title holder.

One way to address this is to consider selling with a Lease and Option to Purchase instead of selling with a wraparound. Your Buyer would have a Master Lease that gives them full authority to lease the units to their tenants. You could use to mimic the principal paydown of a wraparound mortgage buy giving your Buyer rent credits toward the purchase.

Any advice or pitfalls I'm not seeing?

>> Is there a Due on Sale Clause in your Mortgage with the previous owner?

>> If you sell the 4-plex to a Buyer who plans to live in one of the units, the sale may be treated as a principal residence transaction in your state. If it is, you will need to comply with the rules for financing to owner-occupants in your state and the SAFE act.

Just quick thoughts.

Hope it helps!

Monique