Slow market? Already streamlined business? Sell your investment property with a wrap and make even more money over the long haul. Here’s how.
What is a wrap-around mortgage?
Using a wrap-around mortgage or all-inclusive trust deed means your create a mortgage/trust deed securing a debt that included the balance due on any existing mortgages (not to mention the additional amount you are loaning to the buyer). The new mortgage is written as a single loan amount, with one monthly payment amount and a single interest rate.
The new buyer gets the property title at closing although the underlying mortgage remains your responsibility to pay. You’d typically use an escrow company to handle all the payments, including them forwarding the leftover money to you each month.
Why is a wrap profitable?
The difference in the interest rate charged the new buyer and the one you pay on the underlying mortgage makes a wrap agreement awesome. If you sell the property for $150,000, there was a $15,000 down payment and there is 10% interest charged on the remaining $135,000 wrap, your 7% on a $95,000 underlying mortgage means you’d pay 7% but receive 10% on the same amount. You’d keep the 3% spread and make 10% on the remaining $40,000.
In the first year alone, you’d make $2,850 in interest on the underlying mortgage and $4,000 on the part you loaned. That totals $6,850! Or, an annual yield of 17.1% on $40,000.
Other reasons to use a wrap
To the buyer, you are the bank. Meaning, they don’t need to qualify, get the property appraised, pay points, loan origination fees or closing costs.
You can increase the selling price. Due to the ease of closing for this type of property, you can compensate for your increased risk.
You won’t trigger the due-on-sale clause because the mortgage stays in your name.
Selling on a wrap isn’t in the best interest of everyone, but with a slow market or when thinking of passive income, it’s an excellent avenue to achieve success.