Help On Wrap Around Mortgage
I have a friend of mine call me and offered this to me. He is also an investor and said he cannot qualify for any more loans. The comps are coming at about 125k and the seller is ready to sell it for 96k. So this guy said if I could buy the house from the seller at 96k+closing costs, he would inturn buy from me if I could wraparound the mortgate. He would pay about 5-10k to me for helping him acquire the property. He would get a property that is worth 125k for say 110-115k.
My question is when I do that will I need to transfer the title to him? And also are there any risks involved in doing a deal like this?
Thanks in advance
Yes, there are risks.
Generally with a wrap-around mortgage (in the conventional usage of the term), you transfer title but carry back the financing. Your lien on the property secures your loan to the investor.
If the investor defaults, you will have to foreclose. I don't know know costly this could be in your state.
Since you are apparently giving the investor 100% financing, you should be compensated with a good interest rate spread. If you acquire the property with financing at 6%, then turn around and wrap your loan to give the investor 100% financing, you might want at least a 2% spread, or an 8% interest rate.
Another risk is that wrap-around mortgages worked very well when the underlying mortgage loan was a non-qualifying assumable. Now that all institutional loans are qualifying assumable, you run the risk that the lender for the underlying loan will call your note due in full, followed closely by a foreclosure notice. You could be in quite a bind if your investor is not prepared to cash you out in full.
I tend to watch my friends more closely than strangers I've had more friends mistake my kindness for weakenss than have strangers I've done biz with. Just make sure everything is on the up and up - and that if your friend backs out in a few years that you can handle having the property back.
I'd probably suggest some kind of lease option to your friend - you get the benefits of the tax breaks and he gets the ability to rent to whomever he chooses and fixes his cost. Plus you should boost your credit score after a holding period by the extra on-time payments.
If your friend is steering your right, and you recognize that if there are problems you will get the property back in less than ideal conditions (and have a strained friendship) then i think it is a good way to make a little $$ and help out a friend.