Thanks so much for your reply. I plan to do just what you mentioned in terms of having the payments made to a third party (escrow, title co., lawyer - someone)and then having them distribute the funds. Do you have any idea how much it costs to have a third party do that? (PLEASE LET ME KNOW).
However, I don’t really see this as a contract for deed deal where I don’t get the deed until I have paid everything off or a certain amount off. We are planning to have the property deeded over to me at the time of closing (actually over to a land trust, where the seller is the beneficiary, and I am the trustee. In a seperate document the seller will assign her beneficial interest over to me as well. We will contact the bank and let them know that I am the trustee of the land trust and all further communication should be done through me. We will be recording the fact that the property is in a land trust and that I am the trustee and she is the beneficiary. However, we will not record the fact that she has assigned her beneficial interest in the land trust over to me. We are going through this short process so that the bank doesn’t become aware that the property is sold and “possibly” trigger the due on sales clause. Strong advice I received from very seasoned real estate investors on how to handle that possibility). Is your thought that the deed is usually not transferred at the time of closing in wrap around mortgage or “subject to” situations, and even if not, I was informed that I could in fact do it if we choose.
I’d love any feedback you have to offer as you certainly seem to be knowledgeable.
Thanks again!
p.s. - Have you done a wrap around or “subject to 1st mortgage” deal before?
I am fairly new at this and may have just landed my first deal wHich frankly is a tad bit scary, but on with it I’m going. I am working out a deal to do a wrap around mortgage on a very nice townhouse property.
When you do a wrap around mortgage are you technically an owner of the property as for instance you would be on your own home where there is only 1 mortgage (gaining equity, etc.) - yours? Also will I be recorded as an owner in county records?
Last, if the current owner - 1st mortgage - defaults on her loan payments for any reason how would that affect me?
Re: Wrap Around Mortgage - Am I an Owner? - Posted by KC Questions
Posted by KC Questions on February 24, 2003 at 15:27:03:
If you buy a house with a wraparound mortgage, you ARE the owner, because you BOUGHT the house.
A wraparound mortgage is just a 2nd mortgage (or 3rd, 4th, or 5th depending on how many other mortgages are first in line).
Example:
If a seller owes $70k on a first mortgage, and you agree to give the seller $100k for the house, there are different ways to do it. These are two that I normally use.
You can assume (take over) the $70k that the seller owes and give the seller a $30k mortgage. In the end there will be two mortgages, a $70k first, and a $30k second mortgage. In this situation you would pay the first mortgage directly, and write a check to the seller each month, which is where they get their profit.
You can let the seller keep their own $70k first. You would then give them a $100k 2nd mortgage for the total price of the property, and the mortgage would state that $70k of it would go to the seller’s old mortgage. Normally in this situation you would pay the seller for the $100k loan, and the seller would then pay the mortgage on their $70k loan, and keep the difference, which is their profit. When I do this, I like to get a “Power of Attorney” and a “Consent to Disclose Loan Information” forms from the seller so that I can check up on the loan and make sure the seller isn’t just pocketing the money and jeapordizing my property.
In both situations, the seller would deed you the property, which makes you the owner of it, regardless of how you arrange the financing to buy it.
It might makes things easier on you if you remember these few things:
Deed- changes ownership
Promissory Note- states the term and structure of a loan
Mortgage- pledges the house as collateral for a loan
So, regardless of who is responsible for a loan, or who pledged the house as collateral, the deed is what changes ownership.
I have only done one of these type mortages and mine was on a 5 acre lot. The borrower paid all the money to me and I paid the bank. I worked these details out with the bank so that if the payment was not made I would be the first to know and could start the foreclosure process. These is exactly what happened and I got the land back.
It had also been setup that if I did not make the payments to the bank the purchaser would also be notified and at his option make that portion of the payment directly to the bank.
Thank you so much for your reply to my question about Wrap Around Mortgages. It was very insightful. I am in the process of working on one, and have one more big question that is somewhat lingering in my mind. If a seller still has to make approximately 348 more payments on their loan balance of 155,000 at $1200 each (they don’t have much equity in the property as they just bought it about a year ago for example sake), will it work if I provide them a note and a mortgage that is paid for less months than the months their first mortgage is committed to (given that this is a wrap around mortgage deal) or do my payments and mortgage have to be for at least as long as the sellers to be a true wrap around. i.e. my payments are for 332 months in the amount of $1200 at whatever interest rate it takes to equal a total of $155,000 that the seller owes(in this deal you can see the seller is not really making a profit, just getting out from under payments they dont want anymore - as they’ve moved to a new home and the house will be vacant, and they would be paying 2 mortgages).
Last question - Do I provide an Installment Note or just a regular promissary note?
THANK YOU FOR THE FEEDBACK!! It’s greatly appreciated.
Thank you so much for your feedback. The thing I find to be very interesting is that you and the buyer went directly to the bank and told them what was happening. In many cases that I’ve heard of people don’t want to do that (seller’s at least, but buyer’s too, because if the bank finds out that the property has in essence been sold, they may have a clause in their sales contract that calls for the loan to become due in full. I do however, fully understand that there are a few ways around that. One other thing, I have been advised of to prevent non-payment (in my case I’m the buyer) is to send my payments directly to the bank or through an escrow company (or something of the sort) that can make sure that my payments are being sent to the bank as opposed to giving them to the seller and asking her to make sure they get to the bank. I have not done this before and I’m wondering if you went to an official closing, and recorded everything when you did your purchase and also if you deeded the property over to the buyer at the time that you did the deal (PLEASE LET ME KNOW). I am planning to have the property deeded over to me at the time of closing (actually deeded into a land trust, with her as beneficiary and me as trustee. She will then in a seperate document assign her beneficial interest over to me. We will let the bank know that I am the trustee and all communication from here forward should be through me. This is a prime way of getting around the “due on sales clause”. We will record that she has made me trustee of her property’s land trust, but we will not record her assigning me as beneficiary of the trust - though it will be notorized-strong advice I got from some very top notch real estate investors).
If you have a moment and can discuss this with me via phone, I would greatly, greatly appreciate your insight. Feel free to e-mail me at parislsmith@hotmail.com with your number and/or I will provide you with my phone no. Otherwise feel free to communicate via e-mail or the discussion board.
There’s got to be a way around that and/or a way to protect yourself when doing a wrap around mortgage. Otherwise why would people ever do a wrap around mortgage or any type of mortgage where an owner is financing (by the way I’m doing this with purely no money down - I’m strictly wrapping around her present mortgage)if they are always running the risk of being totally out if the seller should default on their own loan.
Some things I’ve seen here tonight seem to suggest that you can send payment direct to the first lender if you write your agreement up that way. I don’t know, but one last thought comes to mind - my renter. If she didn’t pay her mortgage, what would happen to my renter and the subsequent rental agreement I have with that person?
Re: Wrap Around Mortgage - Am I an Owner? - Posted by KC Questions
Posted by KC Questions on February 24, 2003 at 23:04:38:
If there is no equity, you don’t need to do a wraparound mortgage, because the seller isn’t getting any profit out of the deal, they are just getting debt relief. If the seller was to deed you the house, you could start paying the seller’s mortgage each month.
This is what a lot of investors do that is called “buying subject to the existing mortgage” but you will probably want to buy a course covering that topic to make sure you are properly protected.
If you want to pay the mortgage off sooner, you can always pay extra each month, but you would probably be better off putting that money away for a rainy day fund.
Re: Wrap Around Mortgage - Am I an Owner? - Posted by Don Dion
Posted by Don Dion on February 23, 2003 at 10:33:44:
There is a way to protect yourself. Include in your contract for deed ie: wrap around mortgage, a clause that says the payments will be made to a third party and paid out to the seller and the mortgage company. An attorney or title company may offer this service.
With out this in your contract what you will find is the mortgage holder will tell you that your not their client and therefore can not discuss the sellers account. Once the forecloser goes thru then you can contact the attorney for the lender and begin the process of offering to purchase the REO