Posted by Michael Morrongiello on March 31, 2006 at 18:47:47:
They are two different techniques or animals…
A Wrap around instrument is a financing device… One debt ENCIRCLES or “wraps” around the underlying debt. Payments come on the “wrap Around Note” and then payments are paid OUT on the underlying debt. The Holder of the Wrap Around Note administers this.
Taking title “subject to” existing debt is the purchase of a property with debt on it. A DEED is transfer to you (as the buyer) “subject to” the existing liens, encumbrances, etc. that may exist on that property. You agree to accept title to the property that way and to make the payments on that debt but do not formally ASSUME the liability of that debt.
EG. Seller sells a $1M property that still has $400K worth of existing debt against in the form of a bank loan.
Buyer puts down $100,000.00 cash and the property seller finances the $900K balance by agreeing to take back a $900K Wrap Around Mortgage & Note. This $900K wrap around instrument “wraps” around the existing $400K debt still owed to the bank.
Now the buyer would make the payments to the property seller / wrap Note holder on the $900K Note. From these payments collected the Note holder would continue to make the their payments to the bank on the $400K debt still outstanding.
At some point in the future the property seller / wrap around Note holder could elect to SELL their $900K Note and from the Cash proceeds paid to them for the purchase of this wrap around Note, they would PAY OFF the $400K bank loan. This $900K wrap around Note now becomes in essence a 1st lien against the property as the other debt is paid off. This is called “unwrapping the wrap”…
The 1st lien is simply satisfied or released as a lien against the property.
Hope this helps…
Author of the Unity of Real Estate and “paper” study course