Sell Your House Fast, and Make a Profit! Wrap Transaction Explained

he Housing Market of Today…

Welcome to the post 2008 housing market. The interest rates are at an impossibly low rate, qualifying for a new mortgage is impossibly hard, and selling your home the conventional way may no longer provide a large windfall of cash.

Days on Market…

Selling your house fast in this housing market might seem like an impossible task. Average days on market in South Texas hovers around 190 days. In my home town of Harlingen TX, a full year on market is not unheard of. with this kind of turnaround time for a home sale, finding yourself in a situation where you need to sell your home quickly could prove to be detrimental.

There’s only one reason a house doesn’t sell…

Your house is not too ugly or run down, so don’t worry. I’m a firm believer that there is only one reason a home or any item of worth doesn’t sell, and that’s price! I’ve mentioned before that real estate agents don’t set the price; I would like to make an amendment. I need to add that tax value should also be taken with a grain of salt. The Market sets the price, Adam Smith’s invisible hand at work. Show me a run down, dilapidated, haunted home, and I’ll show you the correct sticker price. So how do you sell your home quickly and still walk away with a profit?

Forget the home, that’s not the asset…

In today housing market it’s important to let go of the traditional way of thinking. Selling your home does not have to be a slow and painful process, and selling your home fast doesn’t mean you have to sell it at a deep discount. If the home can’t be sold quickly, sell the mortgage. People need a place to live. If you would be willing to take a little risk, selling the home under what’s called a wrap could lead to big profits; or at least allow you to exit the property well off.

Tell me about this wrap…

I’m not an attorney, nor do I play one on TV, so you’re out of luck on the legal department. I suggest you get real familiar with your states laws, this information can be found on the internet. I can only speak for my state, and even then things change! Under Texas law, it’s legal to sell your home under a wrap note. A wrap is a form of owner financing. This means that you essentially become the bank and add a new mortgage to the existing one (your mortgage). This can add a lot of value to the home sale since the new buyer will not have to qualify for a bank loan. It’s hard for the buyer to negotiate a lower price when they are asking for owner financing.

Benefit of a wrap…

The benefits of a wrap transaction is that it allows you (the seller), to sell your home quickly. Many times you can sell at a profit, but wait, there’s more! It allows you to create monthly cash flow. Since you will be adding interest to the loan, say 11%-12%. You earn interest from the banks money as well. Put simple, you sell your home for $10,000 to $20,000 more than what you could selling the home using traditional methods. You originate a new note, (promissory note) for the extra amount and ask for 10% of the purchase price up front in cash. I’ll sum it up: $200-$300 a month in cash flow, $20,000 note that will need to be paid by the buyer if they ever want to sell it, and a nice chunk of change up front! You could then take your new note and sell it to a note buyer, but that’s for a different article. If you amortize the amount you will see that if the buyer does not refinance, you’ve created substantial wealth over the life of the loan. $100,000 at 12% interest for 30 years, is roughly $373,000. If the owner does refinance, your $20,000 note will get paid.

It’s not all sunshine and rainbows…

If you’re an economist like yours truly, you will be familiar with the saying “there’s no such thing as a free lunch,”. A wrap transaction does come with several different risk factors. First there’s the due-on-sale clause, which give the bank the option to call the loan due if the deed transfers. This is a risk you need to be aware of, and accept. Very few loans get called due, it should only become a problem when the bank stops receiving their money. Risk number two comes in the form of your new buyer. What if they stop paying? Well the quick answer is, you don’t stop paying. The bank never sees a late payment because you will continue making the payments. You should have saved some of that up front money, and monthly cash flow to help you out in this sort of scenario. The good news is, you can foreclose on the buyers quickly, and re-sell the home the same way you did before, and you get another down payment to off set the loses.

Handling risk…

We all have a different tolerance for risk. Keep in mind that the wealthiest people in America did not build wealth by playing it safe. Taking risk is just another part of life. With that said, learning to lower your risk when possible is highly advisable. You can save your self a lot of trouble by pre-qualifying your buyers, in Texas, it’s law.

Have your ducks in order…

From beginning to end, having a good real estate attorney is always advisable. Make sure the attorney will be able to help you if you need to foreclose on the buyers. You’ll sleep much better at night knowing that if things go south you have a plan and someone to help you execute it.

Don’t want to do the leg work? Call a good wholesaler…

A knowledgeable wholesaler should be able to juggle all the moving parts of this type of transaction. In addition to already having a good team of closing agents, and attorneys, they might already have a buyer! Keep in mind that wholesalers must insert themselves in a principle roll to facilitate a transaction like this. This means that they will be your buyer, you negotiate everything up-front. Then, once he or she as equitable interest in the property they can look for a new buyer to take their place. The wholesaler makes their money from the assignment fee.

Word to the wise..

As always, it’s good to do your own research regarding the state laws and regulations. I highly recommend asking a lot of questions; this advice is something I practice even when I’m technically done asking questions. There’s no excuse for not doing your own homework.