Help on a wrap transaction - Posted by Michael

Posted by Ron Ohara on November 15, 2000 at 02:59:11:

Since I do not have all of the particulars, I will have to be very general in responding to a “wrap” transaction. In several states, they have what is known as an All-Inclusive Deed of Trust which “wrap” the original first mortgage with another mortgage.

This is another form of creative finance.

An example: The sales price of the property is $66,500.00 with a $6,500.00 down payment. The All-Inclusive Deed of Trust will then be set for $60,000.00 with “x” interest rate and monthly payments in the amount of “x” for a period of “x” months. Within the All-Inclusive Deed of Trust, there is an underlying loan in the amount of $43,000.00 at 6.25%; payable in monthly installments of $597.50 to include PITI. Regarding the “x’s”, you will need to know what the buyers can pay on a monthly basis. Iwould suggest the interest rate on your All-Inclusive is higher than what you have on the First Mortgage (possibly between 9 and 10%) for a period of 15 to 20 years; amortized over a period of 15 to 20 years.

You would actually Deed the property to the Buyers and record the All-Inclusive Deed of Trust which would “wrap” the existing First Mortgage with the new Mortgage to record. You as Seller would be responsible for the payment on the existing First Lender (PITI). The Buyer should be responsible for the quarterly maintenance fee in which he/she would pay directly to the Association, since they own the property. In the case in which the buyer stops making payments, you will be responsible to make sure the underlying lender (First Mortgage) receives their payment and thusly, you would Foreclose on your buyer.

I have seen where the sellers use a third party collect the monthly payments from the buyer and thus making the payment on the first mortgage on your behalf. If there is any overage, that agent would forward the overage to you. Normally there is a fee for this service, but you should negotiate the fee with your buyer.

Upon the First Mortgage being paid off in full through the months, then all remaining payments would go directly to you. Upon the first Mortgage being paid off, you would also be receiving the Taxes and Insurance (Impounds) monthly payment from the buyer, which YOU would be responsible for the payment of the annual taxes and hazard insurance premiums.

If you need more definites, please write to me and I will respond after requesting some particulars (information) regarding your transaction.

Hope this helps and I hope I answered your question.

Ron Ohara
Capital 500 Funding

Help on a wrap transaction - Posted by Michael

Posted by Michael on November 14, 2000 at 23:30:54:

I’ve never sold on a wrap before so I don’t know how the entire process works yet. Here are some specifics about the deal:

My PITI is $597.50 + $275/qtr maint fees. I have a 15yr, 6 1/4% loan. The balance on the loan is approx. $43,000.

I have a buyer for it @: $66,500 but they may not be able to qualify conventionally.

Any suggestions on how I should structure this?

By the way, who would be responsible for paying the taxes & insurance? In the event of foreclosure, is the traditional process followed or is it different? Is the closing process any smoother or easier?

Thanks in advance for your help,


Circle within a Circle… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on November 15, 2000 at 23:18:31:

I have always used the analogy that a Wrap Around type mortgage (or AITD) is really like a circle within another circle.

You have your exiting loan which you are paying on (the inner circle), and if you sell to this buyer and agree to finance that sale by taking back a wrap around type mortgage then this would be the outter circle. This buyer will pay YOU each month and then you will deduct what has to be paid to your lender. The Difference or “spread” you retain. If there are escrows for taxes and insurance in the loan that YOU have, then it makes sense to charge the SAME pro rata amount to your borrower paying you on the wrap around loan.

Wraps are fun and can be VERY profitable and they leave you in the drivers seat. I know I once had 15 loans that I was collecting on a wrap around mortgages. Gradually the administrative duties got to me, some buyers refinanced and paid me off, and on I had to take back.

If you want to move on with your life and not get involved in a long term commitment with this buyer, that other possibility is for you to SELL your wrap around mortgage and convert it into a LUMP SUM cash payout. Through doing this, you can then retire the existing debt you owe and have worry free cash in hand to do with as you please.

If you need assistance in setting this up or wish to explore the latter option please feel free to contact me.

To your success,

Michael Morrongiello