Some people have heard of "wraps" or maybe have witnessed a few as a real estate agent, but few really understand what a wrap is.

A wrap (short for "wraparound") is an owner-financed sale where the seller leaves the underlying loan in place.  Most people think that a seller must have a free and clear property in order to sell with owner financing, but that is a myth. An owner carry sale via a wrap is an effective way to sell a house quickly and for top dollar.

Different Kinds of Wraps

There are basically two kinds of wraps. The first type of wrap is called a "mirror" wrap. In this case, the financing carried by the seller will mirror or match his underlying loan. For example, if there's a 30-year fixed-rate mortgage that has been paid down for 5 years, the buyer will pay the seller the EXACT payment on the underlying loan (including property taxes and insurance), and the seller will pay his underlying loan with those funds. Whenever the buyer is ready to refinance or sell the property, his payoff to the seller will be exactly what the seller owes on his underlying mortgage.

Example: Seller owns a house worth $300,000 and owes $258,000 on his mortgage, with payment of PITI $1,870 per month. The buyer gives the seller $42,000 cash at closing and signs a note to the seller for $258,000 that mirrors the terms of the underlying mortgage.

The second kind of wrap is an "equity" wrap. This is where the seller has a substantial amount of equity and/or a very low-interest rate on his mortgage. The buyer may give the seller some cash at closing, but the note he signs to the seller is more than the underlying mortgage and the interest rate is hiked up a few points.

Example: Seller owns a house worth $300,000 and owes $178,000 on his mortgage, with payment of PITI $1,230 per month, with an interest rate of 4%. The buyer gives the seller $22,000 cash at closing and signs a note to the seller for $278,000 that has an interest rate of 6%. The payment the buyer makes to the seller is more than his underlying mortgage payment and thus seller has a monthly spread of cash flow.

If you are interested in learning more about how to structure a wrap, contact the law firm of Bronchick & Associates, PC.