Wrap Around Note
(creative financing)
***An
explanation of a second
position note is needed before
discussing a wrap around.
A second position note is one that is second in line to another
existing note (in 1st lien position) on the same property.
A traditional "second" usually is a very small note in relation
to the value of the property. This second position note is
created when the home buyer does NOT have enough money
for a down payment.
Here
is an example:
A home is sold for $100,000 and the buyer obtains a bank loan
for 80% of the value of this home. The buyer needs to cover
the remaining $20,000 to pay the seller. If the home buyer
only
has $10,000, then the home seller can take back (seller
carry-
back financing) a second
position note for the remaining
$10,000 to complete this transaction.
Bank
loan (1st lien position) = $80,000
Down payment = $10,000
Loan from seller (2nd position) = $10,000
Total sales price = $100,000
back to top
In this scenario, the homeowner is carrying a note for $10,000
but the bank owns the 1st position for $80,000. If time comes
when the owner of this 2nd position note elects
to sell, then it
may not look attractive to an institutional note buyer.
Here is the reason why:
If
the home buyer stops making payments on the
2nd position
note, then nothing can be done to enforce payment. As long
as the 1st position note is paid (to the bank), the property can
not be foreclosed on.
In a default
situation,
such as a foreclosure,
the holder of the
2nd position note is second
in line to claim his / her
funds.
If the bank has to foreclose, then it will incur expenses such as:
maintenance of the
property
repairs
realtor's fees
to resell the property
late fees
penalties
interest, etc.
The bank will want to
collect the balance that the buyer owed
them PLUS all of the other expenses.
back to top
For
illustration purpose, let's assume that the
outstanding
balance and expenses total $90,000 but the bank only sells
the home for $92,000. The 2nd position note holder would
receive
only
$2,000.
Now a "WRAP AROUND" note
can be discussed. A wrap
around note usually is created when the home seller takes
back a note after selling his or her home but also is making
payments on an existing note. It "wraps around" the exist-
ing 1st mortgage usually by way of a land contract along
with a new note stating a new term and interest rate to be
paid.
When a "wrap" is created, the seller
continues to make pay-
ments on the existing mortgage.
A wrap around, or sometimes called a "wrap", does NOT
pay off the 1st mortgage. Rather, it creates a land
contract,
a new financing instrument.
***With a wrap around note, the buyer of your house is NOT
required to qualify with the current lender of your mortgage.
But here is a word of caution to you
the seller:
If the lender discovers that a wrap around note has been cre-
ated, then it has the option to call the loan "due and payable"
immediately. This also is known as the due
on
sale clause
that is usually included with most mortgages. The lender's
rights in the property OVERRIDES any agreement that a buyer
has made with the home seller.
It would be wise to consult with an attorney to determine how
the state laws interact with this type of transaction.
Here is an example:
A home is worth $100,000 and selling for the same price. The
home seller is currently paying the bank for a note owed on
this property. The balance of this note is $20,000.
In this
sce-
nario, the home seller would sell his or her home to the buyer
using a land
contract or contract for deed
and the sale price
would be for $100,000. Also assume that the home buyer pays
the seller $10,000 down.
back to top
In this
scenario, a note for $90,000
has been created by the
new buyer ($100,000 sale
price minus $10,000 down payment).
At the same time, the home seller still is paying on his or her
note to the bank that has a balance of $20,000.
An
institutional
note buyer probably would purchase this type
of note. The $90,000 land contract would be purchased and the
$20,000 existing note would be paid off. The remaining bal-
ance (the difference
between the
$20,000 owed on the existing
mortgage and the pay price for the $90,000 land contract) would
be given to the note seller.
This transaction would place an institutional note buyer in 1st
position because they are the only one that is owed any money.
Here is how the above
transaction is
broken down:
Home sale price = $100,000
Down payment = $10,000
New note (the wrap around note) = $90,000
Balance owed to the bank by the seller = $20,000
Again, the
bottom line is:
An
institutional note buyer purchases the $90,000
note, pays off
the $20,000 note, and then gives the difference to the note holder.
Doug Iles
The Beneficial Broker
c/o Beneficial Brokers, LLC
http://www.creativehomesellerstrategies.com
http://www.creativehomesellerstrategies.com/HomeSellerindex.html
http://www.creativehomesellerstrategies.com/Commercialindex.html
http://www.creativehomesellerstrategies.com/HighestBidderSale.html#T
http://www.creativehomesellerstrategies.com/ResidentialIndex.html
26
Gibson Avenue
Mansfield, OH 44907-1316
Business email: askyourquestion@creativehomesellerstrategies.com
Home email: diles1@neo.rr.com
Other email: douglas.iles@huntington.com
TOLL-FREE business phone: 1-877-972-3847 or
1-877-97ADVISE
Choose Option 1 to leave a message for Doug Iles
Choose Option 2 to request a 24 x 7 fax-on-demand company brochure
Choose Option 3 to request a 24 x 7 fax-on-demand owner financing
brochure
Choose Option 4 to request a 24 x 7 fax-on-demand partial purchase
brochure
Choose Option 5 to request a 24 x 7 fax-on-demand simultaneous close
brochure
Choose Option 100 to listen to a foreclosure hotline recording
Choose Option 200 to learn about the Instant Equity Exchange program
TOLL-FREE business fax: 1-877-972-3847
Home phone @ 419-775-5349
Cell phone @ 419-545-4446
back to top
