Real Estate Investing Strategies - Subject To Vs Wraparound Mortgage

Many new investors are easily confused by the concepts of "Subject-Tos" and "Wraparound Mortgages." Both are very useful types of financing that can help you get a deal done when conventional financing isn't possible, without having to use expensive hard money.

Subject-Tos or "Sub2s" are deals where the buyer purchases a property subject to the existing mortgage. The buyer will obtain the property and continue to make the payments of the existing mortgage. The seller will often times just hand over the payment booklet to the buyer. There is no new mortgage. Sub2s are often used when the seller is behind on their mortgage, and typically the buyer will pay the seller a small amount to cover moving.

One thing to be aware of when buying a property Sub2 is the Due-On-Sale clause. Most mortgages have a due-on-sale clause that states the balance of the loan is due if the property is sold. Normally, this would mean the seller has to payoff the loan when the property is sold. However, banks rarely enforce this clause. As long as the mortgage is still being payed, the banks are usually happy. Remember: banks don't want homes to go to foreclosure, as they are not in the business of buying/selling real estate. So, while you need to be aware of the Due-On-Sale clause, it usually isn't an issue.

"Wraparound Mortgages" or "Wraps"

A Wraparound Mortgage is commonly used when you sell a property that you have an existing mortgage on and are willing to owner finance. You set the terms of the new loan so that the buyer is making you a monthly payment that is higher than your current payment on your existing mortgage. So the buyer is making you a payment which you will use to make your payment, thus the "Wraparound." The difference between their payment and your payment is your monthly cashflow.

So the takeaway from this is, use Sub2 when you buy and use Wraps when you sell.

Braxton Beyer is a Realtor in Austin, TX. He focuses on helping his residential clients buy and sell their homes. He is also a successful real estate investor. Visit his Austin Real Estate website where you can search for your new home

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