An escrow could be set up as you suggest to handle receiving payments and then distribute payments to the underlying mortgage and seller. In fact, this is one of the safety features that the buyer should have in place on a “wrap”.
As far as the due on sale clause…in most modern loans the due on sale clause will be triggered by a “wrap”. For this reason, sometimes the wraps go unrecorded. Once you allow the transaction to go unrecorded…a new level of risk enters for the buyer. For example, what assures the buyer that the seller won’t record additional liens.
Years ago I used to do unrecorded AITD’s…a form of wrap. Because of the due on sale clause the documents were not recorded…they were held in escrow, who also collected and distributed the monies. To protect the buyer would be record a second mortgage which contained clauses which entitled the holder of the second (the buyer) to future appreciation…a type of insurance for the buyer that he had a recorded interest in the property, and in the event he needed to foreclose to clear title, he would also be entitled to appreciation. Today an alternative to this technique would be the performance mortgage, giving the buyer a recorded interest securing his agreement.
If you were interested in better and safer ways to get around due on sale clauses, then you’d need to do some study on land trusts.
Posted by Natalie on January 17, 2001 at 23:10:53:
This is my FIRST WRAP lunchpale box home (3/2) buying for $48k and I convinced the sellers to allow me to put 10% down and owner finance the rest at 9% ($345 a month). I want to resell it on a wrap and rent it out for $675. The original seller has a conventional loan on the home (owes 41k), he’s owner financing to me and in turn I want to owner finance the property again.
Can you wrap a wrap? Should I word it this way in our contract “wrap.” How do I explain this to my insurance company? The title company can create an escrow account for me and the seller and create another one for me and my new buyer. Is this right? Thanks for your help. I can’t wait to do more!
Posted by ed Garcia on January 18, 2001 at 10:32:14:
Natalie,
I imagine you could, but why would you want to. A wrap can be assumed. My suggestion would be for you to lease/option the property for the same payment that you say you want to get. Give the new buyer the difference between that payment and the market rents in the area, credit towards the down payment of the home. In 2 years, you can execute the lease/option receiving your profit in full.
Posted by Natalie on January 18, 2001 at 13:28:52:
Thanks for your insight. I don’t want to be “property mgr” anymore, and pay the taxes, so having the new buyer assume my wrap with a few extra hundred dollars above my cost will be a great answer. This is a conventional loan in Florida. Is there any particular terminology I should make sure I include in our contract?
Be careful there Natalie. I don’t believe that you can necessarily assume a wrap depending on how it reads. If it were my “wrap” no one would be assuming it unless I gave my express written permission, something I would not give in the scenario you just cited.
If you want to include something in your contract with the buyer, you may want to include a clause which permits the assumption of the proposed wrap.
Further, I’m wondering how you propose to have someone assume your wrap, and then manage to get a couple of hundred more dollars per month. When they assume they will take over what was in place. So what instrument are you going to use to get this couple of hundred more???
How do you wrap a non-assumable, original mortgage? Is this done by setting up an escrow so that the buyer pays wrap payments to the escrow agent who then pays the original mortgage, with the difference (if any)going to the seller? What about the due on sale clause? I have read about wraps and understand the financial aspects of it, but not the legal arrangements.
I know you already know the answer to this one…but just in case someone else doesn’t…I’d say the answer is no (depending on what type of “wrap” we’re talking about).
As you know, in a “subject to” transaction the buyer is not “assuming the mortgage subject to”. Rather he is “taking title subject to” the mortgage. A deed transfers ownership. The mortgage comes with it…whether assumed or not.
If the “wrap” were a contract for deed, the seller is holding the deed. Therefore, if you just started paying the contract, at completion of the contract what would guarantee the deed would transfer to you? What it would take is another contract for deed with the prior buyer…in other words, you would be “wrapping a wrap”.
A less common scenario might be a “wrap” known as an AITD. In this scenario I would say that the wrap could be taken over informally through a “subject to” transaction. The problem here is that some of today’s AITD’s go unrecorded…and therefore he would be extremely risky to do this. You’d want to have a “contract”…another “wrap around a wrap”.
