Ep 172 - Our Journey Episode 4 - What is a Subject To / Wrap Around Mortgage?

We were doing mortgage assignments where we were selling an unsellable house to an unloanable buyer. This is 2009 2010 area and we were getting a fee for this so it was like wholesaling a subject to property. And then somebody said, why don't you guys do a sub to wrap and then you can be making monthly cash flow. And we're like, we like cash flow. Listen in today to learn how we earned monthly cash flow using sub to wraps and what the pros and cons are from our experience and perspective.

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What is the subject to? Subject to means I'm going to purchase a house subject to the existing mortgage. All that means is I'm going to essentially take over the mortgage. Then a wraparound mortgage means I now want to sell the house and I'm going to wrap a new mortgage around the existing one. I pay on the original mortgage and the new buyer pays on the new mortgage at a higher monthly payment. I can keep the difference as monthly cash flow. The five things that we talk about each of these journey episodes to help you out is as follows:
1) Risk Tolerance - Must have a high risk tolerance, it costs us a lot of money to win those lawsuits.
2) Time availability - You need a lot of time.
3) Knowledge - You need a lot of specialized knowledge to know how to do this right.
4) Your inner circle - You're going to need an inner circle especially with this one with the attorneys.
5) Access to Capital - Don’t need access to capital.

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Transcript

Hey, everybody Flip and Dani here, founders of the Freedom Real Estate Group family of companies, and welcome to another episode of our podcast, which is called Freedom Through Passive Income. 

See, I didn’t change a thing there, you like that? Welcome to another episode. And this is a 12 part series called our journey. And this is number four of our journey. This one is titled What is the subject to/wraparound mortgage? 

Yes. And this is a, I can't wait to explain it or go into this one. But you know, we've talked about, you know, how we were working on cruise ships. And then we went into, you know, and went into the art world, and then you went into the insurance and then mortgage business and then we both went into real estate. And then we became realtors, and we didn't like it. And so then we went into real estate investing. 

And so now this is the, this is the second stage of our real estate investing experience. But one thing that I forgot to mention yesterday is when we talked about, you know, what is it that you ask there, the access to capital, and so we didn't need any. And so one of the things and this is the story that I like to tell is, we used to we went to Sam's Club for $5, we got a ream of paper, really bright colored paper. And we took a white piece of paper and wrote, hey, we happen to be in your neighborhood, and we're looking for a couple more houses to buy. Give us a call if you're interested or if you know somebody's interested in selling their house. And then we signed it Dani, or Danielle or whatever it was put a woman's voice or a woman's name on it. And we wrote it up. 

We copied that on this color paper. And then we walked neighborhoods every morning. And we just walked in and put it in doors and we put it on people's front doors. Or you know, because a lot of people don't use garages and in Texas, because that's where they store everything. They don't put their cars there. So anyways, we put them on everybody's front door, and there was a lady on my side of the street. And I just went, Oh no, there's a woman and I could see her she's ready to talk to me. And so I immediately went to the other side of the street and Dani came over to my side of the street. And she hit the woman head on. And and I'm trying to I'm trying to listen, but you know, but I'm probably hiding behind a car. And I'm trying to listen. 

And then next thing you know, Dani's walking back across the street just with a big smile on your face. And I'm like, what happened? And she's What lady said, What are you doing? She goes well, we're in a racing values campaign. And we're trying to find some houses to buy in the neighborhood to keep the values of the neighborhood up. And lady said Oh, well, this person over here is looking to sell and this person over here is looking to sell. I'm like, raising values campaign. I'm writing that down. So I’ll never forget that because I was chicken I ran to the other side of the street. 

But anyway, so we were doing mortgage assignments and like we wrapped up yesterday, where we were selling an unsellable house to an unloanable buyer. This is 2009 2010 area and we were getting a fee for this so it was like wholesaling a subject to property. And then somebody said, Well, why don't you guys do subject to and wraparound, which is wraparound mortgages, which is called in layman's terms or in the the the jargon for real estate investors is just called a sub to wrap. And why don't you do those? And then you can be making monthly cash flow. And we're like, we like cash flow. And so, so I'll let you I'll leave it at that. And then you can explain.

Oh, so I'm gonna define them because yesterday's episode I don't, I don't define things. You just kind of kept on going to the stories. I'm like you, nobody knows what you're talking about here babe. I’m a bull in a china store going through.

So what is the subject to? subject to means I'm going to purchase your house Flip subject to the existing mortgage, right? So that's really all that means is I'm going to essentially take over his mortgage, that's it. Subject to the existing mortgage mortgage, I want to buy your house and then a wraparound mortgage means I now want to sell the house to Joe and I'm going to wrap the existing mortgage with a new mortgage. So if Flip’s house was $140,000 loan balance and his payments are let's just say 1200 a month. Then that's now my responsibility right because I bought your house subject to that mortgage. Now Joe over here, I want Joe to buy it for 160,000 This house I'm wanting him to buy the house for 160,000 which gives me a $20,000 gap between what I was willing to take it off Flip’s hands for and I want Joe to pay $1,400 a month so I get $200 a month in cash flow. So I just bought Flip’s out subject and I just sold it to Joe With a wraparound mortgage to allow me to have $20,000 of equity in the middle, or cash, because it really wasn't really equity at the time, but it will turn into equity. Yeah, and $200 of cash flow a month, right. So that's a subject to wraparound mortgage. And in the jargon is, I did a sub to wrap right. And people understand what that meant, right? And this is different from the mortgage assignment because the mortgage assignment, you were just strictly taking this mortgage from this guy, or gal and giving it to this person straight across for a fee, and you stepped out. Yeah, you took a fee. But this guy was paying 1200? Exactly, yeah, that's a mortgage assignment. You're just assigning the mortgage, but the sub to wrap. That was when we got to change things and create cash flow for us. Yes.

So we really liked that idea. So here's some of the pros: the seller was able to get a higher price, we were able to pay a higher price, because we're just taking over an existing loan that was already there. We didn't have to get approved for it. We just had to say, hey, Flip this mortgage makes sense to us. We're willing to make the payments and we're willing to buy the house. So Flip won. We won by being able to do that. Yep. Another one. Again, it's the least worst option. You got all these options of what this what the seller can do with the property. This one's the least worst.

Yes. Now we're in the middle. So that was a pro for us because we were getting the cash flow. It was a pro for Flip because remember a con when we were talking about mortgage assignments was Flip was having to depend on Joe. Now flip is having to depend on me. I'm saying I'm an investor. I'm buying it from you. I'll worry about Joe

Flip’s the seller. I was like, wow, this is awesome. Yeah. In this scenario, yeah, right now. So he's depending on me, because I'm going to stay in the middle. I'm going to sell it to Joe. I'm going to get the cash flow. But if Joe defaults, I'm going to take care of it. So that was a pro for me in a pro for Flip. Yes, it's a situation now the buyers have ownerships you know, there's no tenants, there's no toilet. So you know, which is just incredible.

Yes. Again, it helped avoid the foreclosures on the market. We talked about that in the last episodes, we didn’t go into deep detail of it. But the market tends to go down in value, the more foreclosures are so we just stopped Flip from having to go through a foreclosure or short sale. If he was the seller in this scenario.

Yep. And then if the buyer defaults, then we handle it. Yeah. I mean, there were numerous times where we actually because we just got the fee for getting for marrying these two people together. Yeah, this person defaulted. We had to go in and get them out. Yeah, I'm gonna go ahead and get them out. Because then I'm going to put another one in there to get another fee. Yes, exactly. I think we even have a picture of me standing at the courthouse steps. I’ll have to find the picture. I'll see if I can put it on this video. We stand on the courthouse steps reading a foreclosure because we had to foreclose on somebody. Yep, that's right.

And then the buyer gets ownership when they couldn't have otherwise. So again, his line Flip’s line about selling unsellable houses to unloanable buyers, when we found Joe, the buyer to go ahead and take over this, you know, or have this wraparound mortgage that we had created. He couldn't get a loan otherwise. So he was super excited to be able to, you know, pay a fee to be able to get into this property and have this opportunity to have home ownership.

Yep. Now the cons in this, because there are some cons, finding a good third party servicing now, we needed a third party servicing because when the new buyer comes in, we're not going to say Okay, listen, your mortgage is actually 1200. But 200 needs to get sent to us. So write us a different check. And you know, we don't even mess around with that. They send the $1,400 to the third party servicing company, then the third party servicing company sends it to the bank when they meet with the bank and then they send us the remainder. Yeah. And so finding a good one, because we went through a few. Yeah, we did go through. 

Another con was the sellers who decided to change their mind years later. So they tell you that if you're an active investor, not a passive investor, you probably don't have to worry about this as much. I haven't heard of a passive investor ever getting sued. If you're an active investor, You have to understand that you've not been in real estate long enough until you've gotten sued, you're gonna get sued in real estate. It's just one of those facts. And so we were like, Okay, well, I understand that, well, we're gonna do everything, right. We've got high ethics and integrity. And like, you know, we study, we surround ourselves with people who know what they're doing so that we're doing it right and not wrong. So we're okay with that. Well, we did get sued. And I think we got sued three times. We won every single time. That's still a con. It costs us money to win, it costs us mental energy to win. Yeah. So it stinks. This is one of those episodes, where we're talking about short sales and mortgage assignments and subject to and wraparound mortgage, there's a lot of legalities around doing these types of transactions. And you have to have a strong legal backing, if you're gonna get into this type of thing. So in this part of our lives, and we were doing it, we knew and understood that we just didn't know the backlash, and the sellers had no right to come after us. They just decided two years down the road when their house was back up to you know, it's now $160,000 And they only owed 140. And this Joe guy had paid down their mortgage for the last two years and I want miles back. I'm gonna sue that Flip and Dani got me into what like, was illegal. We actually helped you and we had attorneys and all the paperwork. And so again, we still won but it was a huge, huge con to have to go through all of that.

Yep. And then lastly again the due on sale clause. Yeah, it rears its ugly head again. Yes and if you didn't listen to yesterday's episode it's just a clause in the mortgage that gives the bank the right to call the note due but the banks are in the business of loans not home so even if Santa Claus is writing the check the banks are gonna want to cash it they don't care who's writing the check? It doesn’t matter, it says they may have the right. We have attorneys that have like they've done lots of stuff. We've talked about it more in yesterday's episode, so you can just watch yesterday's episode to learn more about the due on sale clause. 

If you want to know again, we're just sharing our journey with you so you can learn a little bit about all the things that we've tried and done giving you the pros and cons you can decide whether you want to go after them not go after them after everybody hears about the lawsuits you might not want to go after this one. 

But the five things that we talk about each of these journey episodes to help you out is Flip what was the risk tolerance for this? Oh, that's a risk. Yes. Dealing. You don't yeah, it costs us a lot of money to win those lawsuits. Time availability? Yeah, you need a lot of time. Yep. Knowledge? You need a lot of knowledge to know how to do these right. Your inner circle? Yeah, you're gonna need the inner circle especially with this one with the attorneys. Yep. Access to Capital? Still don’t need that access to capital. That's right. 

Yep. So that is today's journey episode where we're at this stage of our career in real estate. In the next episode, we're going to be talking about seller financing / owner financing. It's the exact same thing everybody uses a different term. So I said both so that you know, it's about both

That's right. So make sure you head on over to our website freedomcapitalinvestments.com to join our investor club to see all the stuff that we're doing today, not what we were doing before. But also make sure you hit the like button. You hit the like button because you like again, this journey journey we're teaching you a ton this is since 2008. Like this is a lot of years, a lot of knowledge in our noggin that we don't even talk about anymore. So I hope you liked these episodes. 

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But we like them. All of our episodes with Invest Smart, Live Happy bye everybody.

Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate, financial or business professional for individualized advice. opinions and information on the show are not guaranteed. All investment strategies have the potential for profit or loss.

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