One of our Synrgy Home Selling Programs is a Wrap Around Mortgage. A Wrap Around Mortgage, also known as wraps, are a creative financing strategy where you can sell your property by leaving your current mortgage in place and helping the buyer come up with part or all of the down payment by allowing them to use some of your current equity in the property in the form of a seller carry back.
How It Works
Let’s say 19 years ago, you wanted to buy a house for $140,000. So, you went to a bank and after putting 20% down, you got a loan for $112,000 at 4.5% interest rate and moved into the property. Now, 19 years later, you only owe $75,000 and you decide to sell for around $165,000.
But there is a challenge. Either you haven’t had any offers yet because there are limited buyers in the area, or all the offers you are receiving are way too low because the house is older and needs some work. So, you are starting to get frustrated. That’s when clever investor Sarah comes into the picture. She loves the house, and even though the property needs some repairs, she thinks it would make a great rental property. After building a relationship with each other, you let Sarah know that the lowest you would be willing to accept for the property is $150,000, giving her a small discount because of the repairs. Sarah wants to do the deal, but there’s a small challenge. Sarah only has $10,000 available right now. So, she asks you if you’d be willing to get a little creative in order to get the deal done.
You ask her what she has in mind, and Sarah makes you this creative offer. She says, “Listen. I’ll pay you the $150,000 you’re asking for the property with $10,000 as the down payment and you doing two creative things. Number one, you leave your $75,000 current mortgage in place, and number two, you carry back the remaining $65,000 balance in the form of a second position lien on the property. We can wrap the two loans together in a new financing instrument called a Wrap Around Mortgage and I will pay you 6% interest rate on the new loan.” So, after thinking about it, you realize this type of creative deal is actually brilliant because:
- One, you get the purchase price that you want for the property.
- Two, you also get $10,000 down, which shows Sarah is committed.
- And three, you get monthly mailbox money without the headache of turning the property into a rental because you created a spread between the 4.5% interest rate on your original loan and the 6% interest rate you are charging Sarah on the total amount you lent to her.
Essentially, you’re the bank, and we all know why bankers are so filthy rich. It’s because they let money make more money for them. It’s a huge win-win for everyone. So, you say okay to the deal and Sarah creates all the paperwork to make it happen. Wraps have been around for a long time, and in recent years, they are making a huge comeback.
Wrap Around Mortgage Benefits
Here are four awesome reasons why you may want to use a Wrap Around Mortgage when selling your property:
- You can sell quickly. Since no banks are involved, qualifying for the buyer can happen within a few conversations versus months of appraisals, repairs, and a mountain of paperwork.
- You get mailbox money without having to be a landlord or deal with tenants and toilets. When you allow a buyer to wrap your existing mortgage, you are no longer the titleholder of the property. Your buyer is. So, the buyers are responsible for any and all repairs, dealing with tenants, collecting rents, and making monthly payments directly to the bank.
- You get the price you want. Typically, the reason you would allow someone to wrap your existing mortgage is that you are getting the price you want for the property instead of selling it at a big discount. Plus, you are getting a spread in the interest rate, which is profits in your pocket each month. In exchange for these benefits, you work with your buyer on giving them good terms, and everyone comes out a winner.
- It’s a simple, fast way to sell a property. Real estate investors are easy to deal with as opposed to owner-occupants. No repairs are needed. All the paperwork will be handled by the investor or the closing agent. No commissions or closing costs are typically associated with this type of sale, and since there are no banks involved, the approval process is as easy as a few conversations between you and the buyer.
Now, there is one major downside to allowing a buyer to place a wrap mortgage around your existing mortgage. If the buyer stops making their mortgage payments to you, you’re still responsible to make the payments on your underlying loan. Since the loan is still in your name, you are responsible for ensuring the payments are made. The good news is, since you are collecting payments each month, you can quickly catch any issues and address them as needed. As a worst-case scenario, you may have to foreclose on the buyer in order to take the property back, which can be costly and time-consuming.
As professional investors, we have put certain processes in place to ensure you never have to worry about any of these issues. First, we always pay on time and in full and have never had any issues with missed payments, so our track record speaks for itself. But just to ensure your confidence, we can set up online banking for direct monthly withdrawals, and we would be willing to sign something called a performance deed, which is essentially a deed in lieu of foreclosure, which will be held in escrow and executed in the event we default. This bypasses the foreclosure process and allows you to quickly take back the property if we miss more than a few payments.
At the end of the day, our goal is to create a win-win scenario where everyone walks away getting what they needed out of the transaction. If you would like to explore this option or any other selling options with us here at Synrgy Home Offer, whether that be a straight cash offer or even listing your home the traditional way, feel free to give us a call or text. We’re happy to answer any questions!