Selling to a buyer who has limited cash and less-than-wonderful credit…

How many of you know what a wrap is? Not the kind that you eat when you’re trying to get some healthy fast food in your favorite mall. It’s a real estate device that has the official name of “all inclusive trust deed” or AITD. It’s a very handy device when trying to sell a property that already has a loan on it and the buyer can’t come up with the rest of the money to make the purchase.

Not that kind of wrap!

Imagine that you own a house or other real estate and it has a bank loan on it. If you want to sell the property and you want to make it easy for a buyer who may have less than perfect credit and a limited amount of cash, this is the perfect situation to use a wrap. The basic idea is that you keep the loan in place so that the buyer doesn’t have to qualify for a new loan and then you lend him the money to make up the rest of the payment after he or she puts down a comfortable (hopefully for you) down payment.

If this sounds a bit like assuming a loan or seller financing, you’re close. It involves both of those concepts and it combines them in a unique way. Basically, you sell the property with a note (loan) written to the seller so that he will be paying you on the total loan to him at an interest rate that you have agreed upon. This loan “wraps” around the original loan so that part of his payment goes to pay the original loan and the rest of it goes to you. Now you are making the terms and you can charge up to the legal limits that may apply (see the applicable Dodd Frank rules for owner-occupied properties or applicable state usury laws for selling to an investor). This means that even if you have a $100,000 loan from the bank at 5% interest, you can loan that money to the buyer at 8% and make a 3% spread on the money that the buyer is borrowing.

If you had a 30 year loan with 10 years left on it and you made the wrap note for the same 10 years, here’s how it would look (neglecting fees, etc.):

So in this scenario, you the seller would be able to make 3% on the bank’s money and 8% on your equity in the house that you are lending to the buyer to make the purchase.

If this sounds intriguing, I hope you will share with us in the comments below and let us know how you would like to use this cool technique. If you have any questions, tweet me @garypeyrot or send me an email at gary.peyrot@gmail.com.

– GP