Wrap Question

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  • Hey CFD community,

    I have a property under contract that I’ve been trying to get to the closing table. Just got the payoff amount and now am re-thinking my all cash offer. I realize I could probably get some financing from a portfolio lender but the interest rate on the original loan is pretty good. I know more experienced people than myself have done wraps and wanted to see if you could double check my thinking.

    Property: SFR 3/2, 1500 ft.² rents in the area from $1650 to $2000. ARV: $200-225K Goal: Buy and hold

    Purchase price: $70 K. Purchasing as is, no inspection as the property is in pre-foreclosure and abandoned.

    Problem: I just received the payoff about from the mortgage company and it is $75K along with 3 additional liens which bump up the cash required for this to be free and clear at the closing table to $87.5K.

    Mortgage: 40 year, 4.5% interest rate and only requires $10.5 K to reinstate it at $300 a month payment.

    From discussions with the seller, I already know there’s going to be $10K in various other immediate cash expenditures (water bill, dead trees, mold) plus another $15-25K in repairs and renovations and so my all in number is becoming considerably less attractive in an all cash deal.

    What I’m considering right now is a seller-financed wrap. Basically, my down payment would reinstate the loan, pay off the liens and then follow the mortgage out. Seller just wants to get out of the loan so I don’t need to be too worried about her making a profit.

    my strategy:

    1) POA signed by seller for myself and my trustee to talk with loan servicer. Letter to LS telling them the new address for invoices and that my company will be paying on behalf of the seller.
    2) my down payment goes to pay off liens and reinstate the loan.
    3) warranty deed is conveyed to trust.
    A) I’m confused as to who is the beneficiary? My LLC is what I want to be but don’t see how to protect the seller unless that is through my promissory note (I just want to be able to explain to a judge in a worse case scenario)
    4) my wrap mortgage basically blankets the sellers original mortgage (same amount, same interest rate)
    5) promissory note from me to seller
    6) deed to secure debt (Again, a little confused on from who to who with regards to doing this in a land trust)
    7) affidavit of due on sale
    8) close on the property and do the repairs/renovation
    9) install tenant
    10) payoff loan in 2057 and gain the release of lien.

    My attorney says he knows how to do this but is discouraging the strategy because of DOS.

    Do you see anything I’m missing? Are there relevant docs here on CFD?

    As always, the insights of any and all is greatly appreciated.

    Looks like you have it covered. You have the seller deed into trust then sells the beneficial interest to your LLC correct. I would try and get into the house to inspect however.

    Thanks, Don. I agree about the inspection but the issue is that it was abandoned by a family member who has an expired lien against the property in some sort of family squabble. I have go file for a writ of possession and get his stuff out first. Good news is I’ve got a ten-page appraisal report from an insurance company on the property from five years ago that gives me the details on what to expect.

    The RISK FREE way to do this deal is to get an OPTION for the mortgage balances, then offer it for sale with seller financing with a minimum $10k down (to cover back payments), You get all proceeds over the down payment as immediate cash to you. Wrap the underlying loan with a much higher interest rate so you can a really good cash flow every month too. If structured correctly, you’ll have a back end payment as well. You could put a 1 year balloon on the note so you get cashed out soon.

    IF you sold this with a highest bidder sale for the highest down payment, you would literally have investors fighting over who will give you the most down payment.

    Let someone else deal with the hassles of rehabbing the house.

    Thanks, Jackie. I’ve had similar thoughts. You’re definitely correct about that being risk-free. I’m fairly comfortable with the risk level despite no inspection since I think I can sell this no matter what with an HBS.

    I guess my thoughts are that holding onto this for a few years and getting cash flows from rents and then selling to a retail or investor buyer would be preferable to getting cash right now.

    Would you or anyone else be willing to share their philosophy on when you flip one versus keeping it in the portfolio? Granted, I haven’t seen the inside yet but I still think the worst case is $25-30 K on the rehab but the location of the property can’t be beat (good schools, great highway access, jobs, etc.) along with good potential appreciation. As a younger investor getting started, TTT doesn’t scare me that much but the seasoned investors here and elsewhere all seem to transition to owner financing sales and all the other tactics of avoiding being a landlord.

    Thanks for the help,

    My philosophy for keeping in my portfolio has always been only if I have very little cash ( like < $5k) invested in buying the property and fix up costs.

    If it takes more than that, I’ll either wholesale or sell with a wrap so I can still get the cash flow. If you want the cash flow to continue for longer, you could even put language in the note of a penalty if the note is paid off early.

    I hate having lot of cash tied up in a house for a long term basis. If the market crashes (like 2008) all that cash and equity could get wiped out really fast.

    Thanks, Jackie. Solid points. I’m re-thinking this as we speak. JB

    Check you state law. In Illinois we can not have prepayment penalty.

    Don, thanks for the heads up. I think you can charge prepayment penalty in my state bill check.


    I’m not sure how far along the foreclosure process these people are. So I might have to make a payment in order to get them current: $10K. Call that option price. Hopefully, I have more time.

    As I said before, 3/2 SFR: Under contract for $70K. ARV $225K-$250K; Switch option price to remaining balance: $65K.

    We sign option agreement, notarized and recorded between seller and my LLC.

    WD conveyed to land trust. Beneficiary: my LLC and seller? I’m not making a purchase yet.

    Conduct HBS for down payment. Selling price $175K +/- Down payment takes care of remaining liens. Any extra I keep.

    Here’s what I don’t understand. All I have is the option. What happens to the deed at that point? regardless of the investor, they’re still going to need at least 90 and probably 180-200 days to get house renovated. The down payment won’t cover the remaining balance on the original mortgage. Are we signing a contract for deed at the HBS? Would a flipper/renovator have trouble getting financing with only a CFD?

    Any insights appreciated.



    You buy Subject-to the mortgage, then wrap it when you sell to your HBS buyer. There is no need to pay off the underlying loan once it is brought current.


    Sorry, I wasn’t being clear with my question yesterday and had a hard time wrapping (HA!) my mind around what you were saying. I looked at Jack shea’s book on trusts today and now understand what you’re saying. Thanks, JB

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