Posted by John Behle on November 17, 1998 at 12:50:35:
Yes, a wrap CAN trigger a due on sale clause, but there are many ways to avoid it that have been discussed frequently. With a wrap, just an escrow with a check sent in the original Trustor or Mortgagor’s name and care as to the hazard insurance will usually do. As has been discussed, there aren’t a whole lot of “due on sale” Gestapo out there to get us.
As a junior lienholder, the triggering of a DOS would just mean an early payoff and usually windfall profit anyway. On wraps with high yields, I usually like to keep them in place and receive my yield.
There are a lot more DOS clauses out there then when many of my articles were written about wraps. There are no laws that “prohibit” wraps and they are not illegal, there just is the potential risk of the lender following his contractual right to call the loan. There are a few laws in states like California that relate to agents and the DOS clause, but it doesn’t affect an investor (unless you are licensed).
Refinancing underlying liens can be complicated. You do need the co-operation of the current owner. He would have to sign a subordination agreement or even deed the property to you with a later re-sale, but it is possible. On an AITD, the buyer is in title. On a contract for deed, you would be in title and it can be easier to get the financing.
You can also borrow outside the transaction if needed. That would look like borrowing against the note to pay off the high rate underlying second. Some paper buyers just make paying off underlying loans a policy. In some cases, they will even pay off low rate first or second loans and blow their yield to pieces. Being big isn’t always an advantage. Elephants aren’t necessarily graceful and don’t dance well.