Multi Wrap

Wrapping Properties Rick Otton

Wrapping is when a buyer purchases a property by paying installments to the seller.

The purchaser pays installments to the seller and a mortgage document binds the buyer to the seller. The seller, after receiving the installment payments from the buyer, then has to pay a financier or a lender who is also involved in the transaction.

There isn't a mortgage document or agreement between the seller of the property and his lender. The reason they refer to this as a wrap, is when you write the documents between the seller of the property and the buyer, they're actually wrapping around and including the underline debt that is owed to the outstanding lender.

Rent To Own - Rick Otton

That is why it is referred to as a 'wrap', so the buyer is paying the seller and the seller is paying his bank. That is 'wrapping' in its simplest form.

The benefits of a wrap, particularly to someone who is selling a apartment is that the property becomes exceptionally easy to sell if you make it easy for someone to buy.

But quite often by reducing the cost of a house doesn't mean it makes it easier for someone to buy. Here's an example:

If I have a property worth $7 million and I drop it to $6 million, it still does not make it any easier for you to buy. All I have done is reduced the price of the property.

So, what this strategy does is, it makes it much easier for the buyer to buy the property because now he can buy the property on installments direct from the seller (as opposed from a bank where they may not be granted credit) and in doing so, it allows him to do a number of different things including entering into a fast house deal quickly buying the house.

From a buyers point of view, to enter into a contract to buy a house may take 6-8 weeks. If he wishes to buy a house under a wrap or installment situation, it may take 5 - 10 days. So it is much faster.It is much Simpler.

In many cases, the deposit or the amount of money he needs to give to the seller is considerably less than what he would have had to give to a bank if he was doing it the traditional way. Normally a bank lending 80% would require a 20% deposit.

Whereas when he pays the seller direct, he may have to come up with a lot less then that, in some cases he may not have to give the seller any money up front what so ever.

Instead of a cash deposit the buyer could conduct some renovation work on the house, this in the trade is known as 'sweat equity'.

Another benefit for the buyer is, whilst they are paying the monthly installments, it allows them to build up a proof of payment record.

The type of buyers who prefer wrap situations are those who are newly divorced and need to sell their house double-quick, other buyers may have cash incomes or be new to the country and find it difficult getting credit from a traditional lender.

Investors who own multiple houses are also turning to wrapping as a method to buy more houses as the bank has simply said: "You have too many houses," and they will be held back from buying anymore.

Multiple house owners can buy more on installment contracts, they can buy a whole lot more houses as they simply pay the seller back direct and their money isn't tied-up in any bank.

The reason buyers like the wrap arrangement is because if there is an issue, it is an issue between them and the seller, not an issue between them and a bank.

Now, bearing in mind that most of these people buy the houses on installment contracts and then they refinance them about 12 months - two years down the road. When the house is refinanced from an installment contract they no longer need any more deposit money.

It is simply considered as transferring money from one lender to the other. So they can transfer from an installment contract to a bank loan contract with very little paperwork and without a deposit being required.

From the seller's point of view, the advantage of an installment contract is that the property sale moves very quickly, especially in a falling market, as a wrap makes it easier for the purchaser to buy the property whether that's within a falling market or a quiet market. You don't even have to discount the property, in actual fact I don't think I have ever discounted any of the properties I have sold in 15 years.

From the seller's point of view, the property can be sold very quickly.

When I sell properties very quickly like this, I have now created an income stream. An income stream is between the buyer and myself and I know I have a legal document that I am receiving installments.

What people don't realize is a little bit more of an advanced technique, you could then, sell and trade the new income stream or you can use it for security for cars or other properties, because it is a mortgage document it is very flexible and you can do all sorts of things with it.

Most people assume installment contracts and wrap contracts are for poorer markets or the working class. I no longer sell property at this end of the market anymore and there are a number of reasons why but I just want to show you how all segments of the market can use this strategy.

I recently negotiated with a seller to buy a $2.2 million house. Now, the seller couldn't sell the $2.2 million house because people who buy $2.2 million dollar houses want the house to be functional and all correct. Well, this house is just odd, it has got a few things about it, it has a couple of extra kitchens in it and there are a couple of extra rooms all over the place and it is just one of those houses, that in a quiet market with limited buyers, in the multi-million dollar range, will struggle to sell. But the house is worth $2.2 million and I said to her "What if I want it?"

And she said "Well you know, I owe like $1.2 million on it" and I said "Ok, well here is the deal, what if I paid you the $2.2, but I am going to pay you at a rate of $9000 a month". Now, a lot of sellers want their exact asking price, so I am quite happy to pay the price of $2.2 million.

Every body has been telling her they will pay her $1.5 million, $1.6 million, $1.4 million, but I am the first person who is going to pay her the full $2.2 million and I am paying it at the rate of $9000 a month.

If you headed into the bank tomorrow and borrowed $2.2 million, do you have any idea how much a month it would cost you for your home loan payment?

It is about $14,000 - $15,000. So, if you went to buy this house, it will cost you about that much. I now have an installment contract with the seller that I am paying $9000 a month. The $9000 a month becomes 100% principal off the house, so, when I pay the $9000 a month it comes off the $2.2 million. So what I did I had another installment contract with another person for $2.2 million.

I bought the house and then straight away I sold it on a wrap to somebody else for $2.2 million. Here is the difference, the person who is buying it from me at $2.2 million on the installment contract, I have given them the 30 year installment contract at about 7%.

In ten years time, they are going to owe me $1.9 million, so they would have paid off $300,000. So, in ten years time it has got what is called a balloon or maturity date, which means they have to pay me off or re-finance or sell the property.

So they are going to pay me about $1.9 million, well the day they owe me $1.9 million, I turn around to the lady who wrapped the house to me and I only owe her $1.3 million. So I have just made $600,000 doing this, the seller was happy, because the seller got the $2.2 million.

The buyer was happy because they got to buy a $2.2 million dollar house for $9000 a month instead of $14,000 a month. Which is what they would have had to pay if they went through the bank, and I am happy, because when they paid me off and I paid off the seller, I made $600,000 but I didn't have to put down any money up front.

Hopefully now you can see the potential for huge profits with wrapping.

Rent-to-own

Most individuals can borrow up to 80% of the value of their property. When it comes to their repayments, how much house can they buy? For instance, if it is a $400,000 house, roughly, how much do they need to earn to be able to buy a $400,000 house?

They have to be earning about $100,000 gross. Also the payments that they are going to make on the house can not be more than a third their gross wage and their credit has to be pretty clean. They also need to have stable employment; if they don't have stable employment it is going to be difficult.

When you advertise your house for sale on a rent-to-own basis, you may find some of the callers who are interested in just getting a house that they have a chance of finally owning abeit not straightaway, but sometime!

There are considerable tax differences between the 'wrap'/'installment contract' than with 'lease options'. The main difference is, with wraps/installment contracts, you have actually passed ownership of the property on in the minds of the tax department.

Under the lease option, you are still in the position of being the owner of the property and this is until someone has exercised the option. still the owneer until they tennant buyer buys it from you at the option price. This is important because there could be all sorts of tax considerations here.

At the end of the day, they are both strategies that create positive cash flow. For instance, when you sell a house using an installment contract, the person who enters into the contract has already made the emotional purchase of the house which normally means default rates are very low.

Whereas when you are selling a house or offering a house with a 'lease option' it means the tenants are renting the house with the option to buy it further on down the road if they wish to buy.

This scenario is slightly different as the tenants won't believe they are rightful home owners until the time that they have exercised the option to buy. This is important, because what you are going to find is, depending on weather that option is one year away, two years, five years or 20 years away, Sometimes buyers just don't always buy, they are happy to give the houses back!

They will pay the rent they just walk away, it sounds strange but its true.

Rent To Own - Rick Otton

They will find a whole host of reasons and will prefer to hand the house back but they will hand the house back in good condition, they're not going to tear the house up, they simply aren't going to take you up on the option to buy the house.

Now, this is a great strategy as the houses are profitable and they keep getting higher in value, whilst they keep comming back every few years.

About the Author

Well I’m Rick Otton and I’ve bought a bunch of properties for $1 and I’d like to share with you why?

I started buying my properties this way 22 years ago during the American Savings and Loans Financial Crisis in the late 80’s early 90’s in Texas.

I was an unemployed Aussie who had no money and available credit was virtually impossible to get as many financial institutions had fallen over. I realized that I had to create new systems to manage the new problems as the old pro

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