"Subject to" Wrap Loan using owner financing and a RMLO

17 Replies

Hello all,

I am trying to analyze a deal for a potential "subject to" and wrap mortgage using owner financing and wanted to see if anyone could provide some assistance or recommendations based on the numbers.

The owner is not looking for profits, is ready to retire, and simply wants to relinquish responsibility of the home as he has had two prior rental tenants that he had to evict and the home has been vacant since last September.

  • Market value of the home is 63k
  • Owner Owes 70k to wells Fargo on a 40yr fixed at 5%, refi originated 2 months ago.
  • Monthly mortgage to wells fargo is $336.
  • Last rent amount was $950/month
  • Estimated 4k in repairs.
  • Property is not being marketed

I was hoping for some specific advice on doing an owner finance wrap such as those performed by @grant kemp (of whom I would love to receive feedback from).

I have also been looking for some RMLO's in Atlanta but have not been able to find any. If anyone could point me in the right direction that would be awesome.

Thanks in advance for your time and consideration.

This thread showed Brian Gibbons as the original poster on the forum page, very strange.

Shanna, welcome to BP.

First, this isn't a deal for a Sub-to, it's underwater, it's a liability giving you a negative net worth as soon as you close.

Search for a recent thread, about the podcast you mentioned.

What do you want to do with this property? About all you can do is lease it.

You would be paying 10% over market value, if you attempted to sell above your price you'll be in a predatory transaction.

GA has some strict financing laws as I recall, I'm not sure what exemptions are available to you being in the business. Your purchase can avoid recent laws as a commercial deal, your sale to an owner occupant may not be. I doubt you'd get a responsible RLMO to originate an underwater deal again over your purchase price. :)

Originally posted by @Brian Gibbons :
Hi @Shanna Beverly

1. RMLOs in Atlanta, I would talk to Mindy Henderson TX, She is an RMLO in 37 states

http://www.realtor.com/realestateagents/Mindy-Henderson_Plano_TX_1131328_532684802

2. re: Wraps in GA, talk to your REIA president and talk to your president about a Wrap Cantract attorney and a Title Co.

Are the 37 states those that simply require the National Exam with the 23 hour course? Have you used her? All I found on her site was that she said "home mortgage professional" on her real estate agent's site, no mention of the RMLO or number. 17 years as an agent she ought to know what's going on in that world.

I thought GA had tough mortgage licensing requirements, do you know, my impression from J. Scott's comments I believe it was.

I bet we cover wraps soon here, on BP, it's not as easy as some think. :)

About Mindy Henderson

Mindy is the owner of North Texas Homes, LC—a real estate company specializing in servicing the administrative needs of the real estate investor community. North Texas Homes, LC handles the details and paperwork involved in the real estate business. Mindy is a licensed real estate broker and Residential Mortgage Loan Originator (RMLO). These credentials allow her to perform services like representing clients purchasing and selling homes, providing full-spectrum property management, finding and screening tenants for rent homes, and preparing loan disclosures for investors offering owner financing. North Texas Homes offers services that can be utilized throughout all phases of the real estate investment cycle.

Mindy has BA degrees in both Business and in Economics. She started her real estate career as a note broker buying and selling individual owner-finance notes. During the Savings and Loan crisis, she led a team of processors and underwriters in the acquisition, re-documentation and resale of entire portfolios of distressed loans. She became a residential loan officer in 1994 specializing in providing funding to sub-prime borrowers, first-time home buyers and real estate investors. She purchased her first investment property in 1990. Since then she has purchased and renovated over 35 properties. Although she has successfully flipped several homes, she primarily pursues a buy and hold strategy. She currently owns and manages 27 of her own properties as well as manages 45 other single family homes on behalf of her real estate investor clients.

Mindy Henderson
RMLO #209494
North Texas Homes, LLC

Thanks @Brian Gibbons and @Bill Gulley

My idea was to purchase "subject to" at market rate of around 63k with the understanding that the loan was underwater and at the sellers current 5% (or if possible 6% to provide the seller some cash flow).

Then do a sandwhich deal and resale the home through another wrap around mortgage to the end-buyer for about 8% on a 15 year loan.

This would bring the end buyers payments to about $600/month, almost $300 more than the sellers amount due monthly on the loan.

If $200 of the $300 monthly from the end-buyer were applied on top of the original sellers loan (70k, 5%, 40 yrs), it would pay off the loan in 15 years while leaving $100 cash flow for the length of the loan or 18k to the investor over 15 years.

I left out the down payment because I figure since the loan is upside down it would need to go to the sellers loan amount and would only shorten the loan term for all parties but would also create obligation for the end-buyer.

This essentially allows the original home owner to obtain his full loan amount through the interest earnings over the life of the wrapped loan.

I see a risk at play if the end-buyer refinances or pays the loan in full prior to end of the loan which would leave the investor (me) responsible for the difference of the sale price and the original sellers loan balance. I am curious to know if this risk can be mitigated through a prepayment penalty of any amount to the end-buyer towards this difference if it applies.

Just trying to think creatively here without floating off too far. Thanks for the input guys and please share any thoughts.

A few issues Shanna,

Doing a sub-2 means taking title, your sale price being lower than the payoff of the existing lien means the seller must cough up the difference to pass title at that price, you have tax issues having the HUD-1 balance if the seller remains obligated to pay on the mortgage which he would be.

In reality however, the seller isn't paying that note, the overage of funds are coming from you on your purchase. The seller is then misrepresenting the value of the sale, much like the forgiveness of debt created having another pay his obligation without it being accounted for. You can't really say it's a seller's expense either as funds are not coming from the seller but being paid out side of settlement by another, namely you the buyer. So, you're misrepresenting the true cost of acquisition of the property too. If you held the property you'd be understating depreciation as well.

You would also be overstating your income on your next sale as you are actually paying more by the agreement. In short, you have tax issues which could well lead to tax fraud.

Next, generally, you can't have a prepayment penalty as an individual, if this financing to your buyer is subject to Dodd-Frank, no, a prepayment is not allowed. There have been prepayment penalties done to reflect the tax liability arising from an early payoff which have held up in the past, prior to Dodd-Frank, but with this new base line for consumer financing I'd say not.

Since 8% in this example is not close to the maximum or any usury matter and is reasonable I'll skip the application of interest to the risk assumed as a basis in setting rates.

Adding interest to an underlying note in a wrap is not as simple as it sounded in that podcast. The amortizations will not be the same. The principal reduction is different at the lower rate with its remaining term. The reduction of the equity loan on top of the underlying mortgage will have a slower principal reduction at its note rate. You can not match the reduction or payment allocations simply my matching the term, as if the underlying mortgage had 212 months remaining and making your equity amount amortized at 212 months, they are two different principal applications and adding additional interest complicates the issue, interest on one note that subsidizes principal reduction on another then affect the actual interest paid, on the underlying mortgage, so who is claiming this interest amount for tax purposes, interest earned and interest paid?

If you are to use one note, a Partitioned Principal Note can be used stating the principal part of the first part and a principal part of the second part, each described with the term and interest bearing which together constitute the Total Principal Part secured under the same deed of trust. Writing these notes or devising them is not for amateurs or the novice.

Another way is to use a second mortgage representing the equity financed. But again, in this property, there is no equity.

In this deal, as I mentioned, you will be paying above market value. If you sell above your price you will be engaging in predatory dealing and lending, the way around that, only in part, is by disclosing to your buyer that they are paying an above market value price and to avoid financing above 100% of market value that premium needs to be paid in cash. Now, in reality, do you think you can disclose that to a buyer and obtain the cash down? Probably not, it's not impossible, but that's a pretty hard sell for an individual owner-seller and we all know a seller most likely won't go there. If there were something unique about the home, like a view of the lake or water access or access to some other amenity that can not be readily shown in the market to establish a comparable sale value, a buyer may pay a premium above a valid market value.

I suggest, since you can't just force a property into a particular strategy because you like the strategy, putting a square peg in a round hole, that you look to the type of transaction or strategy that fits the circumstances, That is buying Sub-2 and being a landlord!

Another point too, exaggerations and misconceptions have been voiced on both sides of the due on sale clause contained in mortgages. The real fact of the matter is, these acceleration options are there for the lender, they do have the right to accelerate a mortgage to maturity and it has been done and will be done again in the future, period. Going into a Sub-2 you need an exit in the event that loan is called on your seller. You can ruin his credit and he absolutely can sue you for damages, no attorney in the country can guarantee you otherwise, much less some investor or guru. So, you have three exists, sell for cash or to a financing buyer who can close before the hammer drops or refinance that underlying loan or use your cash and pay it off. Can you do any of those three things? If you can't, not only cam your seller hammer you but your buyer can clean your clock too.

These are not risk free transactions, your buyer or tenant can fail to pay too, if you operate on a shoestring, you're really at risk. What if your buyer decided to rent the place after 5 years, you can't stop them, can they be a landlord?

I suggest, if you must do something with this property from some emotional attachment that you buy it and hold it, allow equity, real equity to accumulate, enjoy the cash flow, turn it over to a PM if you don't want to LL and sell it years down the road. Otherwise, I see problems and risks here and no, they can not be mitigated they are fully assumed. :)

Thanks @Bill Gulley. I am very grateful for your response and appreciate the fact that you guys with so much knowledge and experience will take the time to lend us your advise.

Thanks again.

Thanks, I meant to say too, you sure didn't sound like a wholesaler! You were thinking out of the box!!! That's a good thing and you're wise to check the depth before you jump in! :)

Because they aren't used in all states, you're in the Republic of Cali, it's different than most states. LOL

You can mention another lien besides the one secured. To secure an interest in a note the note must be described and it needs to set out the obligations to pay. The security agreement you mentioned does that. :)

Buy it sub2 and just rent it if you are concerned about predatory lending. If it was in my market I would take it. You can sell it later with terms when values increase. We don't need equity unless your exit is to turn soon.
Recently, we bought one sub2 and asked the seller to bring cash to close. We left with almost enough money to make repairs.

And that does happen Jason, good for you, I've bailed out many when it cost them.

Well, I'm out of here, going to a BBQ, have a cold one with the president of the fastest growing bank in Mo. We love talking loans. (Mostly, it's about making fun of those who made bad ones, LOL)

@Shaun Reilly, the ARV was based on an average cma between gamls and fmls. The bank may still see the owner as primary occupant because thier current residence is not in his name.

@derrick Jordan, I do not believe this property has sold however is been a few weeks since my last update. 

Did you sell the property Shanna?