financing secrets of a millionaire real estate investor.pdf

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9 / Owner Financing 129 This is a basic example of a wraparound deal. As you can see, the profitability with wraps is based on two simple financial principles: “borrow low, lend high” and “buy low, sell high.” Susie bought the property a little below market price and sold it a little above market price. A new owner-carry loan at a higher interest rate was created that wrapped around the existing loan. In a wrap transaction, the buyer gives the seller a promissory note for substantially all of the purchase price that is secured by a mortgage or deed of trust. Because the first mortgage is not satisfied at closing, the seller’s mortgage is a junior lien. At closing of the transaction, the buyer has title and the seller has a second wraparound mortgage that is junior in position to the existing first mortgage. The wraparound mortgage is essentially the same as a regular mortgage, but it incorporates the terms of the underlying senior mortgage. The buyer typically makes payments of principal, interest, taxes, and insurance to the seller, who then satisfies his or her monthly obligations on the underlying mortgage for the same items. See Figure 9.3. In states that use deeds of trust rather than mortgages, the term “all-inclusive trust deed” (AITD) is used. The document is slightly different, but the concept is the same. Wraparound Land Contract A wrap can also be done with an installment land contract. You can buy on land contract, then sell on land contract. Or, you can buy with conventional financing, then sell on land contract. Either way, the wrap concept means you are collecting one payment and paying an underlying loan.
130 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR FIGURE 9.3 A Second Mortgage Transaction $72,000 1st Mortgage $20,000 2nd Mortgage Lender Sandy Seller $72,000 @ 7% = $479.02/month $20,000 @ 8% = $146.75/month Bunny Buyer Wraparound versus Second Mortgage By definition, a wraparound is subordinate, or second, to the existing financing. Technically, it is a second mortgage or lien. However, let’s contrast the wrap with the traditional method of owner financing, in which the seller accepts a note and second mortgage. Consider Sandy Seller who has a house worth $100,000. He has a mortgage loan balance of $72,000. He has $28,000 in equity. The interest rate on the $72,000 mortgage note is 7 percent. Bunny Buyer offers $8,000 cash to Sandy Seller subject to the existing first mortgage of $72,000. At closing, Bunny also gives Sandy a $20,000 note at 8 percent interest, secured by a second mortgage lien on the property. See Figure 9.3. Now consider the transaction if Sandy Seller counteroffers with a wraparound scenario, in which he takes $8,000 down and a wraparound note and mortgage for $92,000 at 8 percent interest. Notice
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vi CONTENTS Government Loan Program
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viii CONTENTS 8. The Lease Option 9
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CHAPTER1 Introduction to Real Estat
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1 / Introduction to Real Estate Fin
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CHAPTER2 A Legal Primer on Real Est
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GL OSSARY abstract of title A compi
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GLOSSARY 181 improvements. Also use
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GLOSSARY 185 security instrument A
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RE SOURCES Suggested Reading Altern
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IN DEX A Acceleration clause, 118 A
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INDEX 191 blended, 73 Federal Reser
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INDEX 193 W Washington Mutual, 22 W
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