Buying houses subject to the existing financing is one of the most lucrative business models for real estate investors. It is the best way to get into a house with little or nothing down and make money up front, make monthly cash flow, and get a nice big check at the end too. The down side is that sometimes it can be pretty hard to convince a nervous homeowner, even one who is highly motivated, that they should trust some investor they just met with their credit and financial security by letting them take over their mortgage payments. I’m an investor and even I would be skeptical about ever doing that, even if they promised me a good amount more than the house was worth.
So, what can you do to convince the skeptics? How can you assure them that their credit is safe, but still make sure YOU are safe as well?
It’s simple. A wraparound mortgage – also known simply as a wrap.
A wrap is a promissory note that you and the seller signs that encompasses, wraps around their existing mortgage.
Let me explain…
Say you have a house where the seller and you have come to an agreement on both price and terms. The house has a FMV of $280,000 and they have agreed to sell it to you at the discounted price of $250,000. There is an existing mortgage balance of $230,000 and you are going to pay them $10,000 up front for their equity and $10,000 when you sell the house.
So far, so good. The sellers agree to the terms, but are afraid to leave their credit and financial security in your hands. They just don’t like the idea of someone else being responsible for their mortgage payment that is still in their name.
What to do, what to do?
What they can do is sell the house to you on a wraparound mortgage. With the new structure:
Your purchase price: $250,000
Cash down payment of $10,000
The homeowner holds a wraparound mortgage for $240,000
You will then make monthly payments on your promissory note to the seller which encompasses their original $230,000 mortgage. The seller then takes that payment and uses it to pay down their original note. That way they are in direct control of the payment. This will allow them to know immediately if you have not made your payment and give them a chance to make it on their own.
Can you see how powerful this is? It completely eliminates the homeowners’ fear that they’re going to find out four months into the deal that you never made a single payment on their mortgage and their credit is trashed and their house is being foreclosed. Not that YOU would ever do that of course. But we all know that it has happened.
***VERY IMPORTANT TIP*** When you are buying a home on a wraparound mortgage and your payment is the same as the homeowner’s loan payment, you should write the check DIRECTLY to the mortgage company. That way you are making sure that the homeowner isn’t just taking your money and not making their loan payments. Otherwise there’s a risk the house you just bought could be foreclosed on. If your payment is larger than their loan payment, break it down into two checks – one for their loan amount, and one for any extra – and write the one for the loan amount directly to the bank.
Put simply, wraps are a hugely powerful tool for your arsenal. They can help make deals happen and help sweeten some that you already are working on.
Now, go buy a house!
As always, thanks for reading. And feel free to contact me with your questions. Let me know what you think in the comments area below, and hey – tell your friends about us!