{"id":25108,"date":"2021-07-22T01:31:13","date_gmt":"2021-07-22T01:31:13","guid":{"rendered":"https:\/\/hpnotes.com\/newweb\/?p=25108"},"modified":"2021-08-12T18:42:01","modified_gmt":"2021-08-12T18:42:01","slug":"gift-wraped-real-estate-owner-financed-notes","status":"publish","type":"post","link":"https:\/\/hpnotes.com\/newweb\/2021\/07\/22\/gift-wraped-real-estate-owner-financed-notes\/","title":{"rendered":"Gift WRAPed"},"content":{"rendered":"\n
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Click to order the Note Professor Notebood –hard copy $99.95 or CD $39.95<\/a><\/div>\n<\/div>\n\n\n\n

by Tom Henderson<\/h2>\n\n\n\n

From Page 91 of THE NOTE PROFESSOR NOTEBOOK<\/h4>\n\n\n\n

There are financial advantages to selling properties using a Wrap Note rather than taking back a second lien.  There is the safety issue, but here I will discuss only the number crunching. There are \u201cgifts\u201d you can receive when you sell your property utilizing a wrap.  Why?scuss only the number crunching. There are \u201cgifts\u201d you can receive when you sell your property utilizing a wrap<\/strong><\/p>\n\n\n\n

A wrap around mortgage, or wrap, <\/strong>for short, is a gift because you will be earning interest on money you do not lend. Great gift, don’t you think? A wrap around mortgage is also called an All Inclusive Trust Deed, and a “Tootsie Pop” mortgage.<\/p>\n\n\n\n

A wrap is nothing more than a junior lien that “wraps” around senior liens. In essence, a wrap works like this. The buyers would make you a monthly payment <\/strong>for the wrap note<\/strong>. You <\/strong>then would make the underlying payments<\/strong>, and have a cash flow of what is left. <\/strong>Because your wrap lien includes the underlying senior liens<\/strong>, you will be collecting interest on the spread <\/strong>between your junior lien and the senior liens<\/strong>. Hence, the “all inclusive<\/strong>” term. By collecting interest on money you do not lend<\/strong>, you will greatly increase your yield<\/strong>, as we will later plainly see.<\/p>\n\n\n\n

For example, if you had a property worth $100,000 <\/strong>with a mortgage of $70,000 <\/strong>you would have equity of $30,000<\/strong>. Not taking the due on sale clause into consideration, the terms are at 7% <\/strong>with payments of $629.18 <\/strong>for 15 years. Bob and Betty Buyer <\/strong>have offered you $100,000 <\/strong>with 10% down<\/strong>, and want you to finance the rest. You have two options <\/strong>to make this deal work. One is for you to take back a straight second<\/strong>with the Buyers assuming the 1st<\/strong>. The other is to take back a wrap around mortgage<\/strong>, where the Buyers would be paying you monthly payments<\/strong>, and you would be paying the underlying lien. <\/strong>Which would offer you the better yield<\/strong>? Lets’ look.<\/p>\n\n\n\n

If you structure the deal where the Buyers put their 10% down and assume the 1stlien of $70,000, <\/strong>you would then carry a 2nd of $20,000 dollars @10% <\/strong>interest with payments of $214.92 for 15 years<\/strong>. With this method, you would be receiving a 10% yield. <\/strong>Here is what the note would look like:<\/p>\n\n\n\n

N = 180
I\/YR= 10
PV = -$20,000 <\/p>\n\n\n\n

FV = 0<\/p>\n\n\n\n

PMT = $214.92<\/p>\n\n\n\n

Let’s see what happens if you were to structure this deal using a wrap aroundmortgage. <\/strong>You would be carrying a $90,000 note <\/strong>that would include the senior lien of $70,000, plus the $20,000 you are financing<\/strong>. Your wrap note would look like this:<\/p>\n\n\n\n

N = 180
I\/YR= 10
PV = -$90,000 <\/p>\n\n\n\n

PMT = -$967.14 <\/p>\n\n\n\n

FV = 0<\/p>\n\n\n\n

With the $967.14 payment<\/strong>, you would make the underlying payment of $629.18<\/strong>. Subtracting the $629.18 <\/strong>from the $967.14<\/strong>, you will enjoy cash flow of $337.96<\/strong>. By structuring <\/strong>the transaction as a wrap<\/strong>, you have increased your cash flow from $214.92 to $337.96. <\/strong>That is $123.04 more a month!!!<\/strong><\/p>\n\n\n\n

But Tom, how is this possible? Both the 2<\/strong>nd <\/strong>lien note and the wrap were at 10%. <\/strong>The answer is simple. <\/strong>In the first example, you are receiving 10% on only the $20,000 you financed<\/strong>. By using a wrap mortgage<\/strong>, you are not only receiving 10% on the $20,000 <\/strong>that you are financing, but also the spread of 3% <\/strong>(10%-7%) on $70,000, which is money you did not lend<\/strong>. Let me say that again, and in another way, in case you did not pick up on it….YOU ARE RECEIVING 3% ON $70,000 THAT WAS NOT YOUR MONEY!!!<\/strong><\/p>\n\n\n\n

N = 180
I\/YR= 19.09 <\/p>\n\n\n\n

PV = -$20,000 <\/p>\n\n\n\n

PMT = $337.96 <\/p>\n\n\n\n

FV = 0<\/p>\n\n\n\n

Let’s see what your yield will be<\/strong>: Remember you have $20,000 loaned out<\/strong>, and receiving a cash flow of $337.96 <\/strong>monthly for 180 months<\/strong>. After we identify the variables<\/strong>, we will solve for I\/YR<\/strong>. Your deal looks like this:<\/p>\n\n\n\n

WOW! You will enjoy a yield of 19.09%<\/strong>, while Bob and Betty Buyer are paying only 10%. <\/strong>Do you understand why I call wraps a gift<\/strong>? There is a gift of an extra 9.09%.<\/strong><\/p>\n\n\n\n

There are several ways to structure wraps<\/strong>. This example is the least complicated, <\/strong>where you had N on underlying liens coinciding with the N on the wrap<\/strong>. You could also have the wrap longer than the underlying<\/strong>, where the underlying lien <\/strong>is paid off <\/strong>at some point, and you keep the entire wrap payment<\/strong>. That can be real fun<\/strong>. You could introduce balloons, graduated payments, or an endless amount of combinations. These combinations can give you even extra gifts.<\/strong><\/p>\n\n\n\n

A wrap note also gives the property seller a little more protection because he\/she has full control in paying the underlying lien. This is also another issue that cannot be<\/p>\n\n\n\n

addressed in this forum.<\/p>\n\n\n\n

Yes, there are disadvantages to wraps, which is also another topic for discussion. In this lesson I wanted to demonstrate how a wrap works, and how you can use a wrap to increase your yield.<\/strong><\/p>\n\n\n\n

This is just another arrow in your \u201cinvestment quiver\u201d.<\/strong><\/p>\n\n\n\n

As always, obtain competent legal and tax advice <\/strong>when venturing into the world of owner financing, especially wrap around mortgages.<\/strong><\/p>\n\n\n

buying real estate<\/a>, <\/span>high yield<\/a>, <\/span>note buyer<\/a>, <\/span>note seller<\/a>, <\/span>owner financed<\/a>, <\/span>owner financing<\/a>, <\/span>real estate notes<\/a>, <\/span>selling real estate<\/a><\/div>","protected":false},"excerpt":{"rendered":"

There are financial advantages to selling properties using a Wrap Note rather than taking back a second lien. There is the safety issue, but here I will discuss only the number crunching. There are \u201cgifts\u201d you can receive when you sell your property utilizing a wrap. <\/p>\n","protected":false},"author":1,"featured_media":25114,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36,26],"tags":[45,47,43,42,39,38,37,44],"class_list":["post-25108","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-article","category-free","tag-buying-real-estate","tag-high-yield","tag-note-buyer","tag-note-seller","tag-owner-financed","tag-owner-financing","tag-real-estate-notes","tag-selling-real-estate"],"jetpack_featured_media_url":"https:\/\/hpnotes.com\/newweb\/wp-content\/uploads\/2021\/07\/1cb3e7b5-3f7e-48d9-a11e-b6d9bc75e769-e1627154370668.jpg","_links":{"self":[{"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/posts\/25108","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/comments?post=25108"}],"version-history":[{"count":21,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/posts\/25108\/revisions"}],"predecessor-version":[{"id":25176,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/posts\/25108\/revisions\/25176"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/media\/25114"}],"wp:attachment":[{"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/media?parent=25108"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/categories?post=25108"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hpnotes.com\/newweb\/wp-json\/wp\/v2\/tags?post=25108"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}