The Wrap on Seller Financing

In this time of difficult mortgage financing sellers may need to adopt creative finance options to gain the maximum return on their real estate investment. Lenders, once eager to provide mortgages to nearly anyone, are now wary of any borrower who cannot demonstrate that they do not actually need the money. And while it is the business of lenders to loan money, restricting mortgage loans to only the most credit worthy has the added advantage of allowing them to consider funds allocated for reserves as profit. Beyond that the huge backlog of foreclosures continues to clog the system.

Today, more than any time in U.S. real estate history, sellers must become highly pro-active, first presenting the property in its best light repairing and renovating anything that detracts from its salability, and then adopting competitive pricing no matter how painful.

Buyers balk at any property not well priced. This is understandable since no one wants to get stuck with a property not worth what is owed-and most anticipate further erosion of the market. The seller-if they really wish to sell-must often accept an asking price considerably less than could have been expected at the height of the market. Just as investors have lost billions of dollars in the financial markets, unfortunately, property owners have also lost billions. This value is not likely to come back any time soon. And even though a property is basically the same as it was a few short years ago, or even improve, its value has often decreased-in some markets, significantly.

Unfortunately, in many situations, aggressive pricing forces the seller’s bottom line below that which would allow them to proceed with his or her plans to purchase a new home or even pay off the existing mortgage. Seller financing is often a solution.

In general, seller financing means a seller grants a private mortgage to the buyer for either the entire amount or a portion thereof.

If the seller does not have a mortgage or are able to satisfy their existing mortgage they can simply grant a mortgage for the entire amount of the sale. This mortgage is usually drawn up by an attorney and provides the same protection against default as a lender mortgage including but not limited to the right of foreclosure. A thorough credit check is required. A down payment is highly advisable sufficient to cover the legal and logistical costs of such a foreclosure. The interest rate is typically higher than that generally obtainable at a lender.

A slightly more complicated system exists for sellers that have mortgages or that they cannot immediately satisfy known as a wraparound or wrap. Essentially, this involves a secondary mortgage granted to the buyers for the amount of the sale which includes the seller’s existing mortgage plus the amount over their mortgage amount and the sale price.

The seller collects mortgage payments from the buyer to cover his or her existing mortgage plus profit. Typically, an interest spread is adopted so the rate given to the buyer is higher than the interest rate on the existing mortgage.

When the buyer sells the property all mortgages are paid off.

However, since title is actually transferred to the buyer, wraparound mortgages may violate the due-on-sale clause of many existing mortgages and must first be approved by the lender if such a clause exists.

Wraparound mortgages aid the sale by providing financing to a far larger percentage of the home buying public. This is because lenders generally sell their mortgages on the secondary market. For them to do so-especially now-loans must conform to strict guidelines in every respect. A buyer with sound financials may miss the mark on a single point and be denied. A seller need not be as inflexible, although they must be as vigilant.

Besides making the sale, wraps also offer an excellent opportunity to maximize the seller’s investment by capturing the interest usually paid to lenders. This amount over the course of the loan can easily make up and surpass the return on a straight sale-especially in these hard times for sellers. It is typical for a mortgagor to pay back three

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