The "Wrap" - Posted by Rocky

Posted by Ed Garcia on December 18, 2000 at 22:01:47:


The “Wrap” - Posted by Rocky

Posted by Rocky on December 17, 2000 at 15:07:00:

I am familiar with the concept of wrapping a new loan around an existing loan. Where i am confused is in a situation as follows.

-Buyer gets bank financing for a property

-Buyer then sells property to another on a zero down, seller-financed transaction.

Even though the spread between the 2 should be positive, how does the original buyer keep the bank financing on a house which he has sold to someone else? Doesn’t the bank require the loan due and payable upon the sale of the property?

I hope aomeone can help clear this up in my mind. Thank you in advance.

Re: The “Wrap” - Posted by David Butler

Posted by David Butler on December 17, 2000 at 16:23:13:

Hello Rocky,

You are on the right track… but, before we answer your specific question, I, for one, seriously question the desire to sell anyone a property with zero down seller carryback financing - unless there is some awfully strong compelling attraction otherwise!

Think about it… if you were going to rent the property out - what would you ask for upfront??? Probably, first, last and security deposit, right? In a zero down deal, the fellow won’t even have to come up with the first payment until 30 days after closing. Why would a seller want to strap it to himself with something like that?

For myself, if I’m not seeing at least 10% down, and a 40% back-end DTI, that buyer is looking at a lease option… or possibly, a contract for deed. The exception might be accepting 5% down, where I can get a simultaneous close for an 85% first - if I feel EXTREMELY confident that the buyer is going to make those payments (so I don’t have to take the property back to satisfy my 2nd mortgage - unless of course, I want the property back for other reasons). Alternatively, I might accept additional collateral… otherwise… no pay, NO WAY!

As to your specific question - what you are referring due is a “Due-On-Sale”, or “Alienation” clause… both of which are forms of “Acceleration” clauses (as are various other “default” clauses).

And the anwswer is, it depends. While many lenders (especially in the conventional pipeline) include DOS clauses, not every real estate loan includes such a clause. And, even of those that do, some will waive the DOS provision under the right circumstances. This is more likely during “easy money” cycles, or soft interest rate cycles like we are seeing right now. They will still usually want to qualify the buyer to some standard, and charge a small fee - and of course, keep in mind that they are still holding you fully liable on the loan (i.e. “subject to”) in that instance.

And it is generally easier to do if the loan is held in portfolio and/or by a subprime lender.

By the way, there are some divergent schools of thought on the possibility of completing a transfer (“wrapped” or otherwise), despite the presence of a DOS clause, and without involving the first lender in the process. I am not personally comfortable with the approach, but I am not qualified to assert that it is not valid.

You may want to explore that issue through the various posts in the Archives here on this site, and look at the materials offered in relation to Bill Bronchik’s Land Trust course, and Bill Gatten’s PAC-Trust course to more fully explore that issue.

Hope this helps, and Happy Hunting!

David P. Butler