Wrap Around Mortgage (simply explained)
simple put, a wrap around mortgage, more frequently referred to as a wrap, is a type of secondary financing you can use to purchase real estate. The seller, they’ll extend to the buyer an installment note which wraps around any existing notes that have already been secured by the seller. For example, if we have this house right here valued at $110,000, the balance on the seller’s mortgage, let’s say it’s $50,000 at an interest rate of 5%, when the seller wants to sell, they could do so by offering seller financing and carrying back a new mortgage of $100,000 for a buyer at 6%, and they could wrap it around the existing mortgage.
So, from there, the buyer will then make their payments to the seller and the seller will make their payments to the pre-existing mortgage, and the seller gets to keep the difference. So the $100,000 mortgage is a wrap around mortgage, as it’s wrapped around the pre-existing mortgage of $50,000, and this is how it’s most commonly used as well. So, if you’re a little bit more clear now about what a wrap around mortgage is. But if you have a question about it, put it in the comments below and I’ll be happy to answer it.
I read them all and I love to give you the answers. So, now you know what it is, but do you know why it’s important, knowing how to use a wrap around mortgage can be really important to your business? Well, I’ll give you a couple of reasons. One, it’s going to give you a leg up on the competition, specifically when you’re seeing a lot more newbie investors working the market. They don’t know how to do this. All they know to do is write low ball, all cash offers, and if the seller doesn’t agree, then they’re off to the next deal. But in the event that your low ball, all cash offer doesn’t get accepted, you’ve got options. You can offer alternative solutions with something like a wrap around mortgage. From my experience, the more competition, when you know how to do this, the more competition the better.
Because with so many newbie, one trick pony investors offering the same thing, when you show up, the seller sees you as a breath of fresh air. Number two, the second reason, when the market shifts and there are going to be more properties than there are buyers, you’re going to be able to create some really great opportunities for yourself with really deep equity positions using really little to no cash of your own. So it’s going to work really good in a buyer’s market and a seller’s market, so you want to have this in your toolbox.
That’s why it’s important. All righty? So, the likely scenario as to when you can take advantage of a wrap around mortgage, enabling you to close more deals, three come to mind. One, when a seller wants more money than anyone is willing to pay all cash for. What you can do is you can create terms using a wrap around mortgage. Two, when a seller’s house won’t qualify for conventional financing due to it condition or maybe there’s something about it that’s obsolete. Or three, as a seller, you can use a wrap around mortgage to generate bigger spreads for yourself by reaching out to a bigger buyer pool. Here, I’ll show you a couple of these scenarios.
So the seller now is left with the only option to sell to an all cash investor buyer, but none of your investor competition is willing to pay more than $60,000 for it. Meaning, the seller would have to bring in $10,000 anyway just to close in order to clear the entire mortgage. So, when you walk in to meet with the seller, and because you now have the wrap around mortgage in your toolbox, you can offer the seller, say, $75,000, so they pay off the underlying mortgage by wrapping a $75,000 mortgage around the existing one, leaving the seller with an extra five grand just to help them get to their next destination. And then what you can do is you can make the repairs and still have $15,000 of equity, and the house could be a really great addition to your portfolio. And it cost you nothing to get into it except the repairs.
Typically, you can charge a premium when seller financing is involved, as the buyer pool get a lot bigger really quickly when no bank qualifying is involved. So you ask for 20% down, you carry back a wrap around mortgage of $88,000 at 7%, which would give you $22,000 in your pocket, and a monthly payment from the buyer of $585, of which you would then make your $479 monthly payment to your pre-existing mortgage, and that would leave you with a monthly cash flow of $106 or so.
And once the underlying mortgage was paid off, that $585 a month would be yours to keep until the buyer paid it off, sold it, or re-financed it. And this last example I just showed you, this is exactly how I sold this house right here in Memphis, Tennessee. And Tony, an REI Ace client of mine, is doing these same types of deals regularly in Dallas, Texas. So, if you’d like to know how to find these types of deals, in the video that I released last week, and I’ll put it up here in just a second, I’m going to show you how we’re finding deals like this for less than a dollar a day. Or, if you already know that you just want to go deeper with your real estate investing and you’d like some extra help with wrap around mortgages and other creative real estate investing strategies.