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

Hey everybody, Flip and Annie 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 how to change the thing there. Anyway, welcome to another, welcome to another episode. And this is the, this is our 12 part series, called it Our Journey. And this is, this is day four, or number four, not day four, number four of our journey. This one is titled what is a subject to slash Wraparound Mortgage.

Yes.

And this is, I can't wait to explain 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, we 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. Experience. But one thing that I forgot to mention yesterday is when you talked about, you know, what is it that you asked there? The access to capital. And I said 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 had 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 interested in selling their house. And then we signed a Danny or Danielle or whatever. We always put a woman's voice or a woman's name on it. And we rolled it up, we copied that on this color paper. And then we walked neighborhoods every morning and we would just walk in and put, put it indoors and we put it on people's front doors or, you know, because a lot of people don't use garages in, 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 Danny came over my side of the street and she hit the woman head on. And I'm trying to, I'm trying to listen, you know, But I'm probably hiding behind a car, and I'm trying to listen. And next thing you know, Danny's walking back across the street just with a big smile on her face. And I'm like, what just happened? And she said, well, lady said, what are you doing? She goes, well, we're in a raising values campaign, and we're trying to find some houses to buy in the neighborhood to keep the values of the neighborhood up. And the lady said, oh, well, this person over here is looking to sell it. This person over here. I'm like, raising values campaign. I'm writing that down. So. But I 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 was 2009, 2010 area. And then. And we were getting a fee for this. So it was like wholesaling subject to property. And then somebody said, well, why don't you guys do subject to, you know, and wraparound, which is wraparound mortgage, which is called in layman's terms or in the. The. The jargon for real estate investors is just called a sub 2 rep. And why don't you do those? And then. Then you could be making monthly cash flow.

And we're like, we like cash flow.

I like cash flow. And so. So I'll let you. I'll leave it at that. And then you can.

Oh, so I'm going to define them, because yesterday's episode, I don't know.

I don't define things.

You know, he just kind of kept on going in the stores. I'm like, you get the. Nobody knows what you're talking about here, babe.

Bull in a china store. I'm just going through.

So what is a subject to. Subject to means I'm going to purchase your house, Flip, subject to the existing mortgage. So that's really all that means is I'm going to essentially take over as mortgage. That's it. Subject to the existing 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 mortgage, 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, 1,200amonth, 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 want him to buy the house for 160,000, which gives me a $20,000 gap between what I was willing to take off flips 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 flips house subject to. 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. Turn into equity and $200 of cash flow a month. So that's a subject to wraparound mortgage. And in the jargon is I did a sub 2 wrap and people understand what that meant.

Right. And this is different than mortgage assignment, because a mortgage assignment, you were just strictly taking this mortgage from this guy or gal and giving it to this person. It's just straight across for a fee.

And you stepped out.

Yeah. You were not in the fee, but this guy was paying 1,200. This guy is paying 1200.

Exactly. Yeah.

That's a mortgage assignment. You're just assigning the mortgage. But the sub 2 wrap, that was when we got to change things and get to create cash flow for us.

Yes. So we really liked that idea. And so here's some of the pros was that the seller was able to get a higher price. We were able to pay a higher price because we were 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 one.

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 the investor. I'm buying it from you.

I'll worry about Joe and flip's the seller. I was like, wow, this is awesome 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 and a pro for Flip in this situation.

And now the buyers have ownerships, you know, there's no tenants, there's no toilets, 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 won't go into deep detail of it, but the market tends to go down in value the more foreclosures there are. So we just stopped Flip from having to go through a foreclosure or a short sale if he was the seller in this scenario. Scenario.

Yep. And then if the buyer defaults, then we handle it.

Yeah.

I mean, there was numerous times where we actually. Because we just got the fee for getting. For marrying these two people together.

Yes.

This person defaulted. We had to go in, get them out. Well, I'm gonna go in there and get them out because then I want to put another one in there and get another fee.

Yes, exactly.

I think we even have a picture of me standing at the courthouse steps. I'll have to find that picture. I'll see if I can put it on this video. Let me stand on the courthouse steps reading a foreclosure because we had to foreclosing somebody.

Yep, that's right. And then the buyer gets ownership when they couldn't have otherwise. So again, his line Flips 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. And 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. They send the $1400 to the third party servicing company. Then the third party servicing company sends it to the bank what they need, what the bank gets, 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 camp. Another con was the sellers who Decided to change their mind years later. So they tell you that if you're an active investor, passive investors, 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 have 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 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 were okay with that. Well, we did get sued and I think we got sued. We won every single time. That's still a con. It cost us money to win. It cost 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 going to 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. They're like, I want my house back. I'm gonna sue that flippin Danny who got me into it.

We're like, didn't do anything. What they did 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.

Yep.

It rears this 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 going to want to cash it. They don't care who's writing the check.

Yep. Again it says they may have the right.

They may have the right.

Exactly. We have attorneys or they make may for any.

We have attorneys that have, like, they've done lots of stuff. We 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. Don't 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 at the end of each of these journey episodes to help you out is flip. What was the risk tolerance for this?

Oh, that's a risk. Again, you're dealing.

Yeah. It costs us a lot of money to win those lawsuits. Time availability.

Yeah, you need a lot of time.

Yep. Knowledge.

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.

Again, still don't need that. Access to capital.

That's right. Yep. So that is today's journey episode of where we're at at this stage of our career in real estate. In the next episode, we're gonna be talking about seller financing slash owner financing. It's the exact same thing. Everybody uses a different.

Yep.

Term. So I said both so that you know it's about both.

That's right. So make sure you're heading on over to our website, freedomcapitalinvestments.com to join our investor club to see all the stuff that we're doing today. But also make sure you're hitting the like button. You're hitting the like button because.

Because you like. Again, this journey, we're teaching you a ton. This is since 2008. Like, this is a lot of years and a lot of knowledge in our noggin that we don't even talk about anymore. So I hope you like these episodes. Episodes.

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There you go. But we like to end 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 text. Legal, real estate, financial or business. Professional for individualized advice. Opinions and information on this show are not guaranteed. All investment strategies have the potential for profit or loss.