A wraparound transaction is a form of creative seller-financing that leaves the original loan and lien in place when a property is sold. The buyer usually makes a down payment, gets a warranty deed (title), and signs a new note to the seller (the “wraparound note”) for the balance of the sales price. This wrap note, secured by a new deed of trust (the “wraparound deed of trust”), becomes a junior lien on the property behind the existing first lien. The buyer makes monthly payments to the seller on the wrap note and the seller in turn makes payments to the first-lien lender. The original lender’s note is referred to as the “wrapped note” and it remains secured by the existing “wrapped deed of trust.” It is possible to wrap more than one prior note (e.g., an “80/20”).
Often the principal of the wrap note to the seller exceeds the amount of the payoff on the wrapped note. This is the seller’s profit. Alternatively, the buyer may make a cash payment to the seller for the seller’s equity, and the wrap note payment will then be structured to correspond closely to the amount of the payment on the wrapped note (referred to as a “mirror wrap”).
Specific wrap terms can vary, but the wraparound principle remains the same. Wraps may be done on both residential and commercial properties. Wrap paperwork begins with the earnest money contract which should include an addendum setting forth the terms of the wrap. At closing, details of the wrap should be contained in a comprehensive wraparound agreement.
Alternatively, if the parties are clear on terms and ready to move forward immediately, they can skip the contract phase and request that the attorney prepare wrap documents for immediate closing.
If and when the buyer gets a refinance loan, the wrapped loan is paid and released, and the seller keeps any cash that exceeds the payoff amount of this first lien. The main difference between a wrap and a conventional sale is that the seller must wait until the wraparound note matures or is paid in order to receive the full sales proceeds.
(1) a wrap note signed by the buyer;
(2) a wrap deed of trust securing payment of the wrap note;
(3) a warranty deed with vendor’s lien conveying title to the buyer; and
(4) a wraparound agreement covering miscellaneous details.
A short-term note for part of the down payment may also be included.
The interest rate on the wrap note is often higher than that on the wrapped note since seller financing usually carries a rate slightly higher than market. The wrap note is often amortized over 15 or 30 years. In the past, most wrap notes were ballooned in 3 to 7 years, giving the investor a reasonably short time horizon for realizing a profit; however, Dodd-Frank now requires that the seller affirmatively determine that the buyer has the ability to repay before a balloon may be used.
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