Re: Wrap around mortgage - Posted by Eduardo (OR)
Posted by Eduardo (OR) on May 10, 2000 at 21:02:28:
No, it’s not a gamble at all. Just as safe as any other arrangment provided you have a collection escrow account set up with a title company or other neutral third party entity. Your payments are mailed to the collection escrow account. They make all the payments to the underlying mortgagees and send the seller the difference. All documents for reconveyance or satisfaction are signed by the seller and held in the escrow account until you finish paying what you owe. Make sure the payments to the underlying cease before yours do to the seller. Then they record the documents giving you clear title. The seller can be long dead or missing. You’re completely protected. The initial cost and monthly fee charged by the collection escrow is small. You can have the other party pay for it or agree to split it. But, you’re right, NEVER make payments directly to the seller in any circumstances where you trust him to turn around and pay someone else. The prudent investor just doesn’t do a risky thing like this when there is such a safe, simple, cheap alternative as a neutral third party collection escrow account available.
But, why do you want to buy on a wrap? Most investors simply buy by assuming the underlying and paying the seller on a second. The terms of the second are negotiated separately. The purpose of wrapping a loan is usually to benefit the seller by establishing a higher interest rate so they can make money on the spread between the rate on the underlying loan and the rate on the wrap (unless someone is trying to get around a due-on-sale clause which I don’t recommend for novice buyers). --Eduardo