Re: Anyone doing Wraps? - Posted by JPiper
Posted by JPiper on April 12, 1999 at 08:50:14:
One thing I learned a long time ago is that if something appears “easy”, you just haven’t looked hard enough.
Here’s the basic scenario. You take over the property that you mentioned at essentially full market value?.let’s say $100K. The property has a 7% loan, payments of $665 PI. Now you resell the property at let’s say $115K. Maybe you get $5K down, and finance $110K at 10 ½%. Payment is $1006 PI. So this puts $5K in your pocket (pretax) and gives you cashflow of $341 per month.
Here’s a few problems. First, you have DOS clause issues. I’m not going to go into those here. We’ve had numerous posts regarding this issue, to include some recent ones below this on the newsgroup. There are a variety of techniques for dealing with the issue, the best of which is probably a land trust. Suffice it to say though, that risk does present itself arising out of this issue.
Next, you have bought a property at market value. Clearly there is a risk to this. Granted, you have a cash flow?.but you have no protection from the standpoint of equity. The problem that this presents arises from a possible decline in real estate values. While I’m not saying this WILL happen, I am saying it’s possible?.I’ve seen it happen. It happened not too long ago in California?.which unraveled a variety of “wrap” type situations.
Depending on what type of transaction you do with your end buyer, there is a risk associated with default. As an example, in some states land contracts require a judicial foreclosure (a time consuming and costly process).
I don’t bring up these particular problems with the idea to discourage you?.but rather with the intent of alerting you to the fact that while the transaction may appear “easy”, it does require knowledge. This knowledge is something you should obtain BEFORE doing a transaction of this type. Bronchick as a course called “Cash Cows?” which I understand goes into this type of transaction. While I haven’t read the course, I have the utmost confidence that Bronchick confronts these issues and others in his course. Bill Gatten has a book concerning his PACTrust, which also deals with methods for handling transactions such as these.
Now to give you my personal preference. In the above type of transaction, my preference is to assign the deal. In other words, I put the deal together and then assign it to an end buyer. This takes me out of the loop (assuming I have a release of liability and other CYA documents). Why? I don’t like holding properties with no equity?.but then again I have a strong conservative streak.