Wraparound Lease - Posted by John

Posted by ray@lcorn on August 09, 2003 at 11:22:33:


I’m still not clear on what is happening, but let me take a shot at understanding and you can correct as needed.

What it sounds like is happening is you’ve borrowed the full amount of the sales price, and the buyer is paying you $30,000 down, and a monthly amount that covers the underlying payment, plus a $600 spread to you?

If so, then the end result is that you owe the bank more than the buyer owes you. That’s opposite the usual “wrap” scenario. Usually the buyer’s note is larger than the underlying mortgage, and the rate and amortization are structured to provide the spread to the seller. That way if the buyer then later wants to pay off the wrap mortgage, the balance on the underlying mortgage is less than the wrap, and the seller walks away with a check for the balance.

But perhaps I misunderstood and you’re only financing the balance of the sales price after the $30T down payment, and structured the buyer’s note at a higher rate than your underlying mortgage. If that’s the case, then the $600 spread is your profit, and if the buyer pays you off early everything should work out.

If the buyer stops paying, your recourse is foreclosure, just as any other lender. So yes, you can foreclose. You remain liable for the underlying mortgage until it is satisfied. As far as that lender is concerned, their contract is with you, not your buyer.

So you are not “in the clear” until your mortgage is paid off. Further, depending on the terms of the underlying mortgage, you could have additional liability. Without getting into a discussion of due on sale clauses and straw man loans, suffice it to say that if there is a due on sale clause or any hint of fraudulent representations, then the original lender has the right to call the note due and payable in full.


Wraparound Lease - Posted by John

Posted by John on August 05, 2003 at 10:16:04:

Recently my partner purchased a multiplex for 350000 and he found a buyer for 432000 and the buyer has a mortgage but since i have a good credit my partner wants me to do a wraparound lease on it for the full value of 432000.

My exit strategy built in the agreement is that the buyer should necessarily refinance within 2 years If he misses even one payment then we have the right to exercise the foreclosure options and he walks away with just the rental income he made those two years.

I am thinking of what my rights would be on a wraparound lease…

Would I have the same rights as a lender?That is if the buyer skips a payment would I be able to foreclose on him?

Would my credit get affected if the buyer skips any payments?

Do I have the recourse to the property if I need to have the house foreclosed and I take up the payments to keep the house current?

Please advice me on the potential risks I might have in this deal and the exit strategy and the possible recourses I might have in this.

Thanks again

Re: Wraparound Lease - Posted by ray@lcorn

Posted by ray@lcorn on August 06, 2003 at 08:02:18:


I am totally confused by your post.

I’ve never heard of a “wraparound lease”… are you referring to a wrap mortgage? A sandwich lease/option?

And why would you take on either from your partner? What’s in it for you? And if the buyer has a mortgage, and your partner is the seller, what difference does your credit make?

Then there’s the question of what type of property we’re talking about… house or multiplex? You mentioned both…

Maybe you should just start over…


Re: Wraparound Lease - Posted by John

Posted by John on August 06, 2003 at 18:24:08:

Hi Ray,
Sorry for the unclear post.

I was meaning the Wraparound mortgage.
Let me try to express myself clearly this time.
My partner is selling to a buyer who has average credit for the purchase of a multiplex.He has average credit so his mortgage is falling short by 80k(80% of the appraiased value is what he able to get).Rather than let the deal go,I decided to get a wraparound mortgage for the entire amount(My credit very good and so I am getting the full mortgage with no money down) .My take will be an initial 30K in payments and every month he has to give $600 to me.
I was wondering in this case what my rights and responsibilities were…

1.If the buyer stops paying what my recourse were
2.Can I foreclose on the property?
3.In this kind of deal Am I in the clear unless the buyer stops making the payments?
Thanks for your response