Need some advise on a wrap

7 Replies

I'm looking at an investment property in NC. I know the seller. It's a 3/3 house with a 2/1.5 garage apartment. The seller would like to move into the garage apartment and rent it from me and my brother would like to move into the house and also rent from me. So far sounds good right? The house will sell for approx. $300K. The owner has a note left for $220K. I can afford to put down $80K but not in a position at this time to get financing on the $220K. I will be in a year and a half. I was thinking about a wrap note from the seller with a 3 year balloon just to give me a little extra time if needed to refinance. I have not examined the sellers mortgage yet but I'm sure there will be a due on sale clause. Any thoughts on how to do this??

Originally posted by @Ron Jones :

I'm looking at an investment property in NC. I know the seller. It's a 3/3 house with a 2/1.5 garage apartment. The seller would like to move into the garage apartment and rent it from me and my brother would like to move into the house and also rent from me. So far sounds good right? The house will sell for approx. $300K. The owner has a note left for $220K. I can afford to put down $80K but not in a position at this time to get financing on the $220K. I will be in a year and a half. I was thinking about a wrap note from the seller with a 3 year balloon just to give me a little extra time if needed to refinance. I have not examined the sellers mortgage yet but I'm sure there will be a due on sale clause. Any thoughts on how to do this??

You can do a Lease Option with a 10 year Option if you want. Or, you can do a Wrap by taking Title in an LLC. Find a real estate attorney in NC who understand creative financing.

Thanks for the reply Mike. Could you explain a little about the lease option you suggested?

Thanks

Originally posted by @Ron Jones :

Thanks for the reply Mike. Could you explain a little about the lease option you suggested?

Thanks

 You would basically have two agreements. One for the Lease and one for the Option. You would specify in the Option how the selling price is determined at the time you set for the Option to be exercised. For instance, a set dollar amount or perhaps a calculated amount or perhaps an appraisal done at the time of exercising the option. In most of my options I give the buyer 3 years or 5 years with a set price. They can exercise the option at anytime before the option date. The option can be extended if need be. Any underlying financing gets paid off when the option is exercised, by the new financing. We get to keep the difference. As an example, When I partner, the partner brings in $50k, I buy the property using the $50k with Subject To or a Lease Option. I then bump up the property price by $25k to $50k & "flip" the property to a tenant buyer who gives us $25k down, which is split between my partner and myself. The tenant buyer has 3 years or 5 years or whatever, to exercise the option. We make about $500 a month on the cash flow. When he exercises the option, he gets financing & pays off the option which we use to pay off the underlying note. We get to keep the difference. The time the tenant buyer is in the option period, he has responsibility for all repairs, he is paying down our mortgage for us (like a tenant would be) and the property is going up in value (sometimes) and we get the tax write offs (always). I frequently take on partners using this model and we do very, very well. It is based on off-market purchases and Lease Options. 

Mike you might be confused on my deal. I'm the buyer. The seller would like to stay in the house and become my tenant. Most likely the seller needs their equity now. I would provide that in the form of cash $80K.  I'm just looking for a way to put off the financing of the balance by getting the seller to do a wrap and keep their loan in place. I would be able to finance the loan balance in 18 months. 

Originally posted by @Ron Jones :

Mike you might be confused on my deal. I'm the buyer. The seller would like to stay in the house and become my tenant. Most likely the seller needs their equity now. I would provide that in the form of cash $80K.  I'm just looking for a way to put off the financing of the balance by getting the seller to do a wrap and keep their loan in place. I would be able to finance the loan balance in 18 months. 

 A lot of lawsuits have been fought in court over buyers who used creative financing and let the sellers stay in the property as renters. I'd suggest you talk to a real estate attorney in the area and see if the local courts have had anything to say about the concept. It is never a problem until "it's a problem". Then, it's $50,000 in legal fees and two years of legal problems. Like I say "it's never a problem" except for all of those who have gone through it and it happens far more frequently than you think. The former owner sees the value of the property go up and thinks they sold too cheaply. Sometimes the court agrees. But, it is always costly if that happens.

You are going to have to talk with the seller more to find out exactly what they need. Maybe they can get by with only getting 30k now and 1k per month. Maybe they need40k now and the rest in 3 years. I would ask the seller directly, "How much of the cash do you need right now?"

My question is why are you buying at 300k if it will sell for 300k???? This is not really a deal. I guess you have your reasons for buying at market price.

To your question, I would get the property deeded to me. Keep making their mortgage payment. After a year and a half you could refinance the property. I would also not pay the 80k all at once. Do some research of "sub-to" or buying a property subject to the mortgage. 

I have done this a number of times to rehab a property and sell within about 3 to 9 months. I also have a rental property that was purchased sub-to. I would not recommend it as a long term strategy, but it can help you get into a property that you would not otherwise be able to get into.

Hi Rick. The property is a riverfront log cabin style property with water on 3 sides and wrap around porches on all sides. Sits on 1.5 acres. I was being conservative with resale value. Possibly worth 400K with the right buyer. I love the place and would consider it a 2nd home myself. My plan is if my brother moves into the main house and rents from me it will be a second home. Great tips on sub-to and I'll read up on that. Thanks!

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