Buying a house without using your own money or credit.
You know wraps are all the craze right now?! Cutting carbs? Eat a lettuce wrap. Feeling flabby? Wear a belly wrap. Want to wear babies? Baby wrap. Want to spice up your dreads? Hair wrap. Want to avoid an STD? Wrap it up. You get the point. What do you know about a mortgage wrap? Well actually a wrap mortgage. I hope the answer is nothing because if not you really don’t need me much. #Ineedtobeneeded
But first…. Allow me to go into an unrelated story that I will wrap into this theme. See what I did there? Yea…
In the early 2000’s I was working on new construction as well as the REI we talk about here. My sister was 21 and worked for my framing crew as a helper (aka laborer, grunt….so on). She was young, strong, sexy, and full of energy. At 24 I was too (young and energetic anyway), but I was also too busy putting together deals to carry wood around a job site.
During this time, much in the way I had woken with an epiphany that I was going to be a real estate investor; she came to my house and said “Sissy, I know what I want to do with my life.” The answer was be a private investigator. Seriously? Oh ok. Well, we had big dream and small budgets. It was good.
Back to working on the job site…. It was a Friday and I stood over my sister. “April, get up!! You are late already.” She growled and rolled over on the couch which she had claimed as her personal bed. “April!!! The guys started at 6 this morning. It’s 7:15.”
She had only been there for a few hours (like one) when I had two important things happening. One, an offer had been accepted on a house that was involved in a bidding war and I needed to get my ass to the realtor’s office to ratify a contract (scanners weren’t a thing back then, no e-signing folks). Two, a duplex I was selling in Jackson Ward (I still remember, 505 West Clay St), had an inspection so it could close. This closing, my friends would buy the other house almost outright. This was going to happen simultaneously and I had no lock box on Clay St. #sigh
I run to my closet and grab a dress out, snatch a hairbrush, and my makeup bag. I drive to the jobsite nestled in the thick of Walton Park off Lucks Ln. #SouthsideRichmondersRep
I pull up to find my sister dragging a few 2X4’s and the guys rolling their eyes and getting their own lumber for the cut man. This was not because she was a girl but because she was hungover AF!!!
“April!!!” I yell from the car window.
“Thank God” she silently mouths.
I jump from my 2000 Ford Explorer LXT and run down the gravel drive in my stilettos. “Yo, I need you to meet an inspector. Go under the house and put this on. For goodness sakes, brush your hair and chew some gum.”
She responded with the expected smile/expletive combo. Whatever.
“It’s the house on Clay. Key are in the makeup bag. Page me after. Take my cell. I’ll be at my agent’s office.”
Meanwhile….. A charming man named Charles, that I swear is the genetic result of cloning Don King and Morgan Freeman together into one dude, had kindly (I say that because he was the nicest non-payer ever) skipped out on three months’ rent at $1800 and a bounced deposit for $8,000. I heard from a girl at the realtor’s office that he was living in her apartment complex. #GOTCHAmofo
Remember, my sis ultimately wanted to be a PI.
She paged me from my cell and I called her to hear the inspection went well. Guess what??? “I need you to go to Genito Apartments. I think Charles lives there. I need an address to serve him.”
So, her day that started as a framer ended as a PI. I paid her only one pay check for all the hats she wore. Her job was layered.
I am going to say that although this had more real estate relevance than the usual, unnecessary, intro story, yes, we are left to wonder wtf this has to do with anything……… AND…. Here goes folks. Her job was layered. She may have technically been a laborer for a framing crew, there was a ton going on that nobody knew. When she was framing, a guy driving by whistling at her didn’t know that she would be acting as an assistant to an REI, meeting an inspector in an hour. When the inspector was debating if she had a liquid breakfast or was just still drunk from last night; he had no idea that she would be stalking Don Freemen or Morgan King. Morgan King. I like that one. Any hoo… her position was layered. Like my ridiculous haircut in 1986 that turned into a frizzy mullet as soon as the sun came out.
Our financing for creative deals can be layered too…. Let’s do this!!!!
In the past two weeks, I told you about Sub to and Owner Financed purchases. If you have not read these and have no idea what the functional space I am talking about you should glance through them. Of course, I have the links attached. I will proceed as if you know these terms.
Here goes for real this time….
What is a Wrap Mortgage?
Basically, a wrap mortgage, aka wraparound mortgage, is any time more than one method of financing is used at once. “What the ham biscuits are you talking about Charity?” Allow me to elaborate….
Although it is called a wrap mortgage it is really layered financing. For example; if Sally sells you a house for a little over what she owes and sell it to me via owner financing for a little more. I then fix it up a little and sell it to John for above what I; owe there are several layers of financing in place. There is Sally’s Mortgage to her lender. Your mortgage to Sally. My mortgage to you. John’s mortgage to me.
Side note: I have used wrap mortgages since the beginning of my REI career and just didn’t know they were called anything. I think I was in this for like six years before I learned wrap mortgages were a thing.
Back to the point. #ADDblogger
When would I use a wrap mortgage?
A wrap mortgage will be used when the sales price is more than the amount due with the in place financing.
Let’s say you are buying a house from Mr. Jones for $100,000. He owes $75,000 to ABC mortgage company. You purchase the house and agree to make a payment to his mortgage company. You also agree to pay Mr. Jones a payment each month until the $25,000 is paid off. This is a wrap mortgage.
Now, same house. You owe $100,000 but you are going to sell it for $150,000 to Ms. Smith. She has given you 20% ($30,000) in a non-refundable down payment. She will still owe $120,000. Since you only owe $100,000 you will want her to make payments to you directly. You will in turn pay the other two payments. Guess what? Wrap mortgage as well.
What do I need to consider for a wrap versus a sub to or owner fi?
When we are looking at the numbers for a sub to or an owner fi we are looking at two things; the purchase price and the single monthly payment. With a wrap, you will need to consider the second payment if you are adding to an existing form of financing. You need to fully understand the amount you can get monthly versus the amount you are proposing to pay. Let’s look at the above scenario. If the original mortgage is based on an original purchase price of $150,000 and the interest rate is 4.75%, add in tax and insurance and you are looking at a payment of roughly $990.00. The max monthly on a property valued at $150,000 is generally no more than $1200 (and that is generous). You only have a difference of $210 per month to pay the seller and still make money.
“But the loan is only $75,000?” you say. Yes. But remember, the payment is based on the original loan amount, not the amount due.
Does it cost more to close a wrap mortgage?
Simply, maybe. You may have to have loan docs drawn for the second as well as the original closing. The difference shouldn’t be much though.
Can this work with lease purchases and rentals?
If you are purchasing with a wrap you can choose the exit strategy that works best for you.
What are the benefits of a wrap?
When you are purchasing above the payoff you do not need cash to close the deal. When you are selling a property that you have financing on already, you can collect more than just the cash they have on hand.
What are the drawbacks of a wrap?
If you are the buyer, you need to be sure the underlying mortgage is being paid. The best way to do that is to pay it directly.
Can I layer for a flip?
You can. In fact, this is done a lot. If you have a hard lender paying 90% of 70% of the ARV; you may need to have a private lender provide the other 10% required for acquisition. *Remember, you should not flip at higher than 70% of ARV. This figure should include purchase and rehab cost.
So now you know three ways to structure a deal using creative financing. In the next few weeks we will discuss lease purchase and non-recorded deeds.
This gives you to power to be that investor that can buy beyond her cash or credit.
Remember gals and guys; I love to chat. I talk WAY too much. So if you have a question, please, ask. If you are looking for a ton of time with me (Hey! I get it!) I do offer mentorships and coaching.
Also, there is a survey at the bottom. I just want to know what YOU want to know. So it is one question. What would you like to learn about once this series is done?
Happy investing my real estate junkies!!!!!
I was born an entrepreneur. I am pretty certain that I was peddling passies in the hospital when the nurses left the room.All of the other kids in the neighborhood were riding bikes and playing with dolls I was selling jewelry out of a catalogue and creating a back yard consignment shop. At 21 I became a real estate investor and fell in love. This was/is/ and always will be my passion. I have been madly in love with flipping, holding, and writing offers on real estate that seem crazy for 18 years. Ladies and gents I am willing to share the love of my life with you. Maybe its polyamory maybe its jut because I can’t shut up about it. Either way I will be sharing every mistake I ever made and the lesson that came from it. I love questions. Please ask away!!!