Jefferson Memorial was purchased on a Wrap.....okay okay...that is not true

Greetings from Washington D.C. (actually…not anymore…but when I wrote this…that’s where  I was…as if you cared).  Still my favorite metropolis (other than Cedar Crest, NM…of course).

Anyway….

With all that is happening with our economy, specifically, lenders not lending.  Creative financing (owner financing) is showing up a lot more.  Great for us…the investors.

In most cases, many of the “owner financing” deals have an existing mortgage in place.  So…for a seller to sell his/her asset with seller financing, the seller may choose to sell via a Wrap Mortgage.  What in the world is a Wrap Mortgage, a.k.a, a Wrap-Around Mortgage?

I have seen many definitions for a “Wrap Mortgage.”  But for us, the investors, a “wrap” is basically taking the existing asset’s mortgage and wrapping it (hence the word “wrap”) with a brand new mortgage.  In other words, a new legal document is created that refers to the existing mortgage (first position) but with the wrap mortgage now making the new owner liable.  The beauty here is, the new owner is only liable to the seller.  The “Seller” is still liable to the original lender.

****Note….A “true” Wrap is NOT an assumption….at least what I am defining here as a Wrap.

There is a lot more to this but the above is the general idea.

Many investors and sellers get a little jumpy when they find out there is a “Due on Sale” clause in the original mortgage when selling an asset creatively.  A “Due On Sale Clause” is simply where the lender can call a loan due if certain points of the mortgage are compromised i.e., a “wrap mortgage.”

Have I ever experienced a lender initiate a “Due On Sale” clause? No.  Have I heard of other investors have to deal with a lender exercising the “Due On Sale” clause?  Yes…but only in a residential investment he or she bought on a wrap.  But….that was the only one.  Even in that instance, the lender worked with the investor on refinancing the asset.  Go figure!

I have yet to experience or hear of it on a commercial deal specifically due to a “wrap mortgage” transaction.  That is not to say that it does not happen.  But my question is, will a lender excercise the Due on Sale clause on a performing note?  I doubt it….but none-the-less it is a possible downside.

Just a few more thoughts regarding a Wrap:

1) the terms of first-position mortgage may or may not be reflected in the Wrap.  Usually, the terms are negotiable with the first-position mortgage being the base line.

2) Legal instruments are used to put the Wrap in place, i.e., REC (Real Estate Contract).  Usually, in a commercial transaction, the documents are a little more sophisticated (uhh…hmm…more complicated since attorneys are involved).

3) In some cases, an escrow company or attorney is used for the ongoing management of the transaction.  In other words, a third party is usually used to make sure payments are collected from the new owner and payments are made to the first-position lender.  This protects both parties.

Of course, there is a lot more detail involved but overall….I love buying assets with owner financing and a Wrap is a great tool.

Until next time…..rob