– How to Protect Subject-to-Seller Financing in a Commercial Real Estate Purchase –
When you’re buying a property subject to existing financing, one of the seller’s biggest concerns is that, if you don’t make the payments on the first mortgage, he or she will be liable for the default on the existing loan.
To protect the seller’s interests and provide the comfort level that allows him or her to move forward with the deal, you can use something known as a “wraparound mortgage.”
In this scenario, you take over the seller’s current mortgage and he or she issues you a second mortgage to help get the deal closed.
However, instead of writing up the second mortgage as a stand-alone loan, it will be written up as a wraparound mortgage. This means the mortgage will “wrap around” both the owner-carry second mortgage and the existing first mortgage.
The paperwork is set up so that you send an amount equal to your payment on the owner-carry second mortgage, plus your payment on the existing first mortgage, directly to the owner. The owner then takes out the amount that is required to pay off the first mortgage and applies the rest toward the privately held second.
The owner can now ensure the existing first mortgage payments are made on time and the owner will feel protected. Plus, if you don’t make payments sufficient to cover both mortgages, the owner has the right to foreclose and take back the property.
This protects the owner’s credit from your default, and he or she is free to resell the property to another party. Please understand that all 1st lien holders may not approve a wrap around loan, so make sure that your commercial real estate broker and attorney help you to verify that the primary lender won’t call the 1st loan due. Do your homework before considering a wrap around loan.
Contact a Texas Commercial Real Estate Purchase Expert today:
Luke LeGrand, ePRO 210-843-5853
–
–
–
–
