A Glance At Wrapped Financing

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So you have heard that seller financing is a great way to market your investment properties. It broadens your consumer base and puts a little extra money into your pocket in the form of interest charges. But, there is only one problem. You already have an existing mortgage, and you cannot pay it off unless you receive the sale amount in one large chunk.

Before you totally exclude seller financing from your real estate investing strategy, you should know that there is a financing solution that will allow you to finance the property without paying off the existing mortgage in one go. It is called contract financing or wrapped financing, and it is an attractive financing solution that property investors can use to market their real estate investing properties. Wrapping also increases residual income by adding interest fees to your profit margin.

Simply put, wrapped financing occurs when an investor keeps the current mortgage that he has taken out but offers to finance the property for the buyer himself. An example of this would be an instance where an investor is holding a $50,000 mortgage at 7 percent interest and wishes to sell the property for $200,000. The seller would loan the buyer the full $200,000, minus any down payment, at a higher interest rate of 8 percent. The monthly payment for the $200,000 would then be split with part of the payment being directed toward the original loan and the rest going to the seller. The seller would also profit from the 1 percent interest hike on the mortgaged amount.

As you can imagine, there are many factors that you need to consider before adding wrapped financing to your real estate investing strategy. Mortgages with sliding interest rates might not be ideal for this type of financing. You will also need to make sure that the existing mortgage will allow wrapped financing. Many mortgages demand payment in full upon sale of the property and would not be suited for this type of seller financing.

It is also a great idea to use a third party collection agency to collect the loan payments and disperse payment to you and to the original mortgage holder. This not only protects the buyer's interests but yours as well.

Loan wrapping is a great way to introduce seller financing to your real estate investing marketing plan, but it is not for everyone nor is it for every sale. Be sure to study each deal thoroughly and follow all legal requirements. Failure to do so might result in the existing loan becoming abruptly due. If this happens, it could affect your bottom line or negatively impact the real estate transfer.

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