Posted by John Behle on January 26, 1999 at 17:19:02:
The type of “Wrap” examples I detail in the book “Mortgage Magic” are the type that you would not want to sell - because of the high yields.
The examples in the book reflect the type of deals that got me into the paper business - through the back door. I started by creating paper. I hoped to sell some of my wraps to get cash to do more deals. I remember one wrap I shopped around to sell that had an interenal rate of return of 21%. The current market was 18% yield for note buyers. I didn’t expect a premium over the face value, but I was stunned that the buyer still wanted a 20% discount from face!
That’s when I started financing paper through borrowing from private investors and structuring “Nothing down” wrap deals through what I term “Split Wraps” and “Split Cranks”. Then I ended up with nothing into the deal and $100+ per month positive cash flow.
As far as the underlying loans being paid, that is simple. They pay you the full payment and you pay the underlying loan. You know it is being paid, because you or the escrow company doing collections is paying it.
The yield on your deal you described either breaks down into several cash flows which can be discounted in the simple three step process detailed in “Discounting as Easy as 1,2,3” or through the “Uneven cash flow” functions of some calculators. I’ll choose the later method to save some time now.
Your internal rate of return (IRR) would be 2.06 per month or 24.68% annual.
Now the problem, is that you can’t really structure a deal where the wrap is shorter than the underlying loan, so what you do is run an amortization schedule to find the point where the mortgage balances are nearly equal (i.e. wrap is just a little larger than the first). At that point, you need to either lower the payment to extend the wrap to equal the length of the first or increase the amount being paid on the first to amortize quicker to meet the time of the wrap.
I received your Mortgage Magic revision today and I had a question with the wrap around.
I have a single family home which I bought from the bank and refinanced with a first mortgage of $47,700(390.76/Month/20 years)The property is valued at $58,000. If I understand your concept about creating the paper for the equity, I would be able to sell the house on a wrap for $58,000 @ 9.5%/15 years($600.89/Month/15 years). This would create a positive cash flow on the property of about $200/Month. Someone would then be interested in buying the wrap mortgage Equity of $10,300?
First: if this is true I want to meet those people. I have a number of properties I would like to do this with.
Second: My concern is if I lose control of the wrap mortgage and the buyer starts not paying, how is this handled since I am still responsible for the first position mortgage. I usually write a quit claim clause in any mortgage I carry but, what does that do for the person who buys the wrap mortgage.
Third: What would the equity be worth with these types of numbers. I don’t follow the determination of the equity value you show in the book?
Help me out to understand this a little better, please
Posted by Mark Vidales on January 28, 1999 at 14:17:17:
Rich,
I think you are killing the goose. Man! $200.00 a month positive cash flow? I’d keep that kind of note all day long. $10,000.00 isn’t that much and what do you plan on doing with the money anyway? I plan on doing the same thing with a property I own as well.
It’s eating me at about $250.00/mo. renting it. I can sell on a wrap of $100K with the underlying at @79K and my cash flow is roughly $200 or so per mo. on the positive side. No way I would sell that note. The only down side to my first is that it is adjustable with a cap of 14% YIKES!! but the loan is almost 9 years old and adjustables are on the low end right now. So like John says or at least I think he means keep that goose!