Advice about creating and selling 2nd mortgages - Posted by Trai Davenport

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…


Michael Morrongiello
Author of the Unity of Real Estate and “paper” study course

Advice about creating and selling 2nd mortgages - Posted by Trai Davenport

Posted by Trai Davenport on February 08, 2006 at 23:38:56:

I am in the garage building business and alot of my customers have to get financing to pay for them. Most of the time I send them to 2 or three companies to do a home equity loan/line.

I would like to get some thoughts on the difficulty, advantages, or disadvantages of creating the note myself and selling it/funding it on the closing table.


Re: DON"T take back 2nds if you can avoid it - Posted by Michael Morrongiello

Posted by Michael Morrongiello on February 11, 2006 at 19:00:13:

The market for HIGH RISK smaller juinor position 2nd lien Mortgages (or Trust Deeds)is very fragmented and unstable at best. There simply is not a strong desire or investor appeal for these loans unless the discounts are LARGE to offset the RISK.

It would be far better for you to work with some of your customers and structuring a 1st lien as opposed to the 2nd lien. Even if there is existing debt against their property you can take back a “wrap around” type lien, or a lien that when it is sold and converte into a cash sum their existing debt will be be retired, thus the wrap around lien now becomes a bonafide 1st lien.

As an alternative you might also find out what OTHER Real Estate they might own that could be use to better secure the money owed to you…

Best to your success,
Michael Morrongiello

Re: DON"T take back 2nds if you can avoid it - Posted by Nota Bene

Posted by Nota Bene on March 31, 2006 at 15:58:01:

Trying to understand the difference between a wrap and a “subject to”.

From your description, it sounds like a wrap creates a new note that includes the previous lien amounts.

Example: 1M property. First note for 500K, second note for 500K (yes, 100% financing) created when seller sold property. Seller still owes 400K to the bank.

I want to buy that first position note. Property has not closed escrow, because seller needs the money from the sale of the note in order to pay off the bank.

If this were solved with a “subject to”, I think (and correct me if I’m wrong) that the seller and buyer could create a short contract between them, whereby the buyer agrees to close on the property, with the existing liens in place, to be paid off at closing when the note in first position sells. In other words, buyer is buying the property “subject to” the existing liens on the property. Does that make sense?

How would this be solved with a wrap? Would a third note be created for 900K, which includes the bank lien (400K), plus the first owner financed note for 500K?

And then I’d be buying a first position note with a balance of 900K? If so, what physically happens to the 500K note? Does it simply get torn up and destroyed?

If my description of the wrap is correct, why would the property buyer agree to sign the new 900K note, when in fact he still has a 500K second position note? In other words, what would one say to him to convince him to do it?

Thank you in advance