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9 / Owner Financing 131 FIGURE 9.4 A Wraparound Transaction $72,000 1st Mortgage $92,000 Wrap Mortgage Lender $72,000 @ 7% = $479.02/month Sandy Seller $92,000 @ 8% = $675.06/month Bunny Buyer the difference between the two It is a subtle distinction, but note that in both cases, Sandy Seller makes 8 percent interest on the $20,000 carryback. However, in the wraparound scenario, Sandy also makes a 1 percent point spread on the $72,000 balance because he has financed that portion at 7 percent interest and is charging Bunny Buyer 8 percent interest on the entire owner-carry portion. See Figure 9.4. The payment on $92,000 at 8 percent interest is approximately $675 per month. The payment on the first/second mortgage combo is approximately $625 per month. That’s a $50 per month difference! Thus, the wraparound payment is immensely more profitable in most situations.
132 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR Loan Term Differential Means More Profit! An additional point worth noting here is that the existing $72,000 loan was figured at $479.02 per month based on the assumption that the loan was originated at $70,000. In other words, the original loan balance may have been more, meaning, of course, that the monthly payment may be more. However, if the existing first mortgage loan was paid for 8 years, the remaining balance is just 22 years. If the wraparound loan is amortized over 30 years, the seller has a very bright future at the end! Mirror Wraparound A slight variation to the subject-to purchase is the mirror wraparound. A mirror wrap is commonly done where the seller has little or no equity but is not willing to simply hand over a deed to the buyer. So, for example, if the seller owed $97,000 on a $100,000 house at 7 percent interest amortized over 30 years, the wrap would be for $97,000 at 7 percent interest. At any given time, the buyer’s payoff will be exactly the same as the payoff amount on the underlying loan. In fact, the paperwork on a mirror wrap is often prepared by attaching a copy of the underlying note to the wraparound contract. The wording is usually something like the following: Purchaser agrees to pay Seller as the full purchase price for the Property the sum of $97,000, a sum equal to the balance of a certain promissory note (hereinafter “Note”) executed by the Sellers on September 23, 2002, to ABC Mortgage Company, a copy of which is annexed hereto as exhibit “A,” the terms of which are incorporated herein. Beginning on March 1, 2003, and continuing on the 1st day
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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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2 /A Legal Primer on Real Estate Lo
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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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