wrap-around mortgage

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I’m getting a loan from the owner b/c I got denied
Posted by: GDP Jun 2 2004, 09:39 AM
Bank denied my commerical loan request because the numbers on my tax returns didn’t meet the requirement. Now the owner of this commerical building offered me a loan, he said I can go through him, make monthly payment to him after the down payment, and the title being transferred to me, but my concerns are what if he goes bankrupt, how does the bank know he has sold me the property, what if the bank takes it back? What are some disadvantages? Should we sign some sort of agreement and get it notarized, will that help? Any advices would be greatly appreciated.

p.s. Is this considered as Owner financing?

Posted by: Clark Jun 2 2004, 10:43 AM
What is the type of comercial property and what are your scores. You may be able to go stated income depending on property type and scores.

Clark Barr
Monarch Financial
Posted by: loanuniverse Jun 2 2004, 08:06 PM

This sounds like something called a wrap-around mortgage. The current owner keeps the original mortgage {I am assuming that the current owner has a loan on the property}, and then he sells you the property and gets a promissory note from you. I would discourage you from doing this type of financing because of the following:

More than likely this is not permitted by his lender Chances are that his current mortgage has a clause prohibiting transfer of ownership. Sure he can transfer the property with a “quit claim deed”, but once the lender finds out, they will start foreclosing. At least that is what I would recommend if this happened to one of the loans in our portfolio.

Commercial real estate loans are underwritten using the cash flow from operations as the source of repayment I am mentioning this because you said that the bank turned you down because of your tax returns not meeting the requirements. What kind of tax returns are you talking about? How do you intend to pay this loan? Have you run the numbers yourself?

Can you control the seller’s payments to the current lender? I don’t think you mentioned this. What can stop this guy from just not paying on the loan that he has now and having the bank foreclose on the property? After all, he has no more equity in the property, chances are he cashed out when you gave him the downpayment.

The only way this could even be considered is with the help of a real estate attorney {working for you not the seller} so that he can draft the documentation and review the documents that are in place with the current lender. I would also not move on this without the blessing of the current lender, and I doubt that this will happen.

Good luck.
Posted by: The Fox Jun 11 2004, 02:31 PM
I would agree it would probably be best to avoid a transaction like the wrap-around – for the reasons outlined above.

My own suggestions are to talk to the bank that turned you down – to find out why, and if there’s anything that can be done for this yet. If the officer believes in the deal, sometimes the committee/senior officer(s) can be swayed with more information or a different structure.

Also, consider talking to other banks. Don’t give up on them yet and resort to the wrap. It’s also worth considering that the banks may be seeing something (cash flow issues, etc) that you are not. Learn from them if possible.

That’s about all I’ve got. Best of luck to you.
Author: Commercial Loan Underwriter