Alternative to Wrap - Posted by JPP

Posted by JPP on August 30, 2003 at 12:59:53:

Thanks for your quick response. My sense is that there IS a due on sale clause, but we’ll certainly check. If not, we’ll see if your first option will pass muster.
Again, thanks for your usual nuggets of valuable information, and for taking time from the holiday weekend to answer RE questions.
Kind regards,

Alternative to Wrap - Posted by JPP

Posted by JPP on August 30, 2003 at 12:05:29:

I’m on a committee that is considering purchasing a 4500 sq ft SFH on a college campus. The home is large enough to create up to 12 single bedrooms (it has 5 now) for fraternity extension housing. The owner is asking 350K and does not need a down payment, although we could break our bank and give him 50K. The listing agent has suggested a 20 year wrap, with the first mortgage (200K remaining on balance) paid out in about 10 years.
We’d like to keep our 50K in the bank, for repairs, emergencies, etc., so … any other options ?
Thanks in advance for all responses.

Re: Alternative to Wrap - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 30, 2003 at 12:33:37:


It seems to me that the issue is the existing financing. If there is no due on sale clause, there is no need to do a wrap because of a due on sale clause. So you simply do a deed from the current owner to your ownership entity, with a junior loan carried back by the seller, secured by a security instrument, such as a deed of trust or mortgage.

The only other reason to do a wrap, it seems to me, is if the interest rate on the first loan were less than the interest rate which your organizaton would be willing to pay on the total purchase price. Then, the seller wraps the old loan so that he gets the spread between your payment on the old loan and his payment to the lender. But this only helps him, not you. It would be better for you to simply take over the property “subject to” the first loan and take over payments on the lower-interest-rate first loan, it such it be. If the first loan is not at an interest rate which is less than what you are willing to pay, there is no advantage to wrapping the loan. Oh, well there is another advantage to the seller. As the first loan gets paid down, it is being paid down much faster than the amount you are paying down on the loan. So, again, that does not benefit you guys.

If the existing first loan is a high interest rate, you likely would be better off getting a new loan at today’s lower interest rates, then get the seller to carry the remainder of the purchase price on a junior loan. If necessary, you could pay him so cash. Or you could secure the loan with both the house being bought and the existing frataernity house, if you own it and have equity in is. Or on some other poroperty of somebody on the committe who would be willing to put up the property for the added security.

I suggest you question the listing agent carefully about why the “wrap” suggestion.

I suggest that you consult a local attorney who does nothing but real estate work for advice. I am not an attorney. I do not know your local laws, since I don’t even know where you are.

Good InvestngRon Starr**