The Bank Allowed What?

Wow…has is been a long time or what?  I have been so busy with a real estate class (six weeks) and purchased an apartment building within the same time frame.  Just plain crazy so a lot of things got neglected…especially this blog.  Looks like we have another apartment building in the works (thanks to KB Realty)….things are looking busy for the next few months…at least I hope!

Anyway….

There is one thing I never heard of when it comes to investing… A Bank Approved Wrap.  BUT this one thing is a HUGE deal.  I have done several wraps before…..but never a bank approved wrap.  Now…remember…a wrap is when you “wrap” an existing mortgage with a brand new mortgage.  Read more about wraps HERE.

So what is the big deal?  Well, usually on wraps, there is always a small risk that the loan can be called due to the fact that the asset has been sold yet the loan is still in place.  This is a small risk because banks usually do not exercise the “due on sale” clause call if the loan is in good standing.  In other words, the payments are still coming in on time.  But…there is always a chance.  In any case, when we first approached the seller, the seller did a “no no” and asked if the lender if it would be okay to wrap the note.  Surprisingly, the lender said “yes”…..at first I thought there was a mistake….and I just felt someone misunderstood something.  But….I was wrong.  So, in the last week of December, we closed on an apartment building with only about 6% into the deal (commissions and closing costs).  No joke!

I even talked to my lender friends….they all NEVER heard of of such a thing….especially in commercial.

The beauty of the deal was that it was 80% occupied and still cash flowing.  The issue with the property was mismanagement.  Bad management with out-of-town owners is a great formula for opportunity.

Now…I have to give credit where credit is due.  Preston from KB Realty found this deal and made it happen.  James, a.k.a. “J” our attorney, worked hard during Christmas to get things right.  Having solid relationships was the only way to get this done….but I digress.

There were problems with the deal….more specifically, timing.  The sellers wanted to close before December 31, 2009….which only gave less than 30 days to close.  Now…. trying to close in 30 days during the holidays is impossible….so I thought.  I told Preston “there was NO WAY we could do it.”  Due diligence, attorneys, inspectors, banks, title companies….are hard to round up to work on a project anytime of the year….especially during the holidays….Forget about it!  Well…Preston pushed and pushed and the rest is history.

My partners and I learned something…..we don’t know everything…but thinking we do can lose us opportunities.

Thanks to Preston…David….J….

On to the next project!

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