Epic Real Estate Investing - What is a Wrap Around Mortgage? | 1205

Episode Date: May 24, 2022

In today’s episode, Matt is joined by Rochelle Jarvis, a real estate investor from constantclose.com. These two gentlemen explain what Wrap-Around Mortgage is, why you want to use one, how to put the paperwork together, how to close the deal, and ultimately how to find the right closing agent. BUT BEFORE THAT, you will learn how to buy a house with a zero down payment and what is Subject-To in real estate investing. Are you ready? Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Welcome to the Epic Real Estate Investing Shelf, and this is where we show people how to invest in real estate so they can escape the daily grind and retire early. Today we are going to talk about buying a house with zero down. Welcome to the all-new epic real estate investing show. The longest running real estate investing podcast on the interwebs, your source for housing market updates, creative investing strategies, and everything else you need to retire. Early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, EpicR-E-I.TV. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to r-ei-aise.com. Here's Matt. You might have heard about it or seen it on a late-by infomercial and maybe wondered how does this really work or does it work at all. Well, first thing is it most definitely works.

Second thing is, there aren't countless ways to do it. And there's countless ways that you can pull it off. And the third is I've got an example here for you today that I'm going to walk you through. I'll walk you through the process step by step. This is one of my recent deals. All right. So if you'd like to go deeper, though, with strategies like these and get some help with it, you might. light what I am doing next weekend, getting together live via Zoom with a small group of investors for a creative financing masterclass.

And if you'd like to join us, you'd get all of the details at creative financing masterclass.com. So here's the deal. This is a property that came to me via my network, and it was a fix and flipper who obviously was fixing up this house. And he was almost done with it. He had some foundation work still to tend to, but he got the interior here all nice. He got the roof up and he got the electrical and the plumbing and everything was really good. But something came up in his life and some sort of emergency and he needed to get out of it. And he called me up if I wanted it.

So I was like, sure. I always say yes. Let me take a look. But I need some additional information. So first I want to know exactly what it was worth. So I pulled some really, really quick costs and saw the fair market value at 143. and what he needed was 129.

That's what he had into it. He was going to try to get his money out. He was going to forego any sort of profit. He just wanted to break even. And at 1299, and it's like for a 143, he probably overinvested into this property and put a little bit too much money into it.

And I found herself like no way out. So I think panic a little bit. Anyway, it was all done as great workmanship. I had my people go over and take a look. And so the market rent was 1,200. And so those are like the basic pieces of information that I need. I need to know what the market is value says. What is the market saying about the value? What is the asking price? I need to know the condition of the property. And then I need to know what it rents for.

I just need those four pieces of information to be able to assess whether or not I want to look deeper into this deal. So I got that information. Obviously, I don't have the rehab up there because he just rehab it. So I'll turn my physical inspection. I'll figure out what the foundation is what that's going to run. First, I look for equity. So does this have equity? I'm going to look for the two things. The first thing is equity. And as I'm looking at this, there might be $13,000 of equity. Not a whole lot for sure. I wanted to flip this myself by the time I purchased it and took on closing costs and then resold it with closing costs. You know, it's probably in a gobble up at least half of that, probably $5,000, there might be $5,000 or $6,000 left for me.

So not really a flip opportunity for me. And so then can I buy and hold it? Let cash flow. So I look at just the market rent, right? The basic 1% rule made you've heard of this. But what I'm looking for is I want the market rent, the monthly market rent, to be greater than 1% of the purchase price. And the purchase price being, that's got to be your acquisition price and if there's any rehab to go with it. So those two together and constitute your purchase price. So as I'm looking at this, you know, it's $1.29 and the market rent is $1,200.

So not quite there. would need to match exactly to me to be 1299, right? That market rent was 1299. That would be 1% of the asset price of $1.99,900. So it's worthy of me looking into it deeper, but it's probably not going to be a great cash flowing property. It might eke out a little bit of cash flow each month. And then with the increasing interest rates,

so my payments are going to be a little bit higher on that loan if I were to get one. So I don't know. It doesn't seem like a real slam duck for me. But anyway, I'm going to make an offer on this property. so that it is a slam duck for me. So it does make sense for me. So I'm going to focus on the asking price. This is what he really needs.

This is where his motivation is. He wants to get his money out. And we know as creative real estate investors, we purchased a property in one or two ways by either our price and the seller's terms or the seller's price and our terms. As long as we can control one of those things, we can always create a deal for ourselves. Sellers, they're just attached to the price, right?

You and I, we might be familiar with terms and subject tos and lease options and wrap around mortgages, stuff like that. But most sellers happen the slightest, cluelest to what that is, and all they do is focus on their price. So a lot of the times, I just kind of give him their price. But then I propose the terms that I would need to make that price fair for me. All right. So here was my offer.

I offered the $1.29.9. And I offered him 10% down. He did own the property free and clear. I offered him 10% down. And then I offered 100 monthly payments of $600. And this is my 10%. typical first step, my first offer, my first approach. Because what I'm offering here is 10% down, so I'm giving them a little bit of cash,

and I'm offering half, $600. That's half of what the rent is. So that's my formula. I offer half of that, and then I'll offer them a bill of payment on the 101st payment. So that's where I kind of my starting point most of the time, unless there's like some other underlying circumstances with their motivation, the reason that they're leaving or the reason that they're moving. All right.

So he said, no, thank you. Didn't like that deal. So a couple of days later, he came back with a counteroffer after we thought about it for a while. So he wanted his price still, but he needed some more money down to closing. So he asked for a 20% down payment. I was like, all right. And then he asked for a 30-year amortized at 5%. And that would be a $563 payment.

See, me offering 100 payments of $600, those were principal-only payments that I didn't, it wasn't offering an interest rate. And so he was a little bit more sophisticated and asked for interest. So he wanted a 30-year advertised loan at 5%. 563, which actually brings my monthly payment down a little bit. So my cash flow position will probably be a little bit better. But he does want 20% down. So that's the exchange.

And then he wants the balloon payment due in five years. With those hundred payments, that's about eight in a half years, eight and a third years. We wanted his money a little bit sooner. And so I think, okay, well, we got a starting point. This is kind of what I'm always looking for. If I can submit a creative offer and just get a counteroffer back, I know I've almost always got a deal. If I can get a counterback from my creative offer, I can almost always make a deal.

So I get really pretty good about this. But is this really a deal? So I got to calculate it. So I want to know what my ROI is, my return on investment. And in this scenario, my actual investment would be the 20% down, $25,980. So what I need to do is take what's my annual income from the property, which would be $1,200. We're going to multiply that by 60%. okay so $12 is my monthly income multiplied by 60% and that's my quick and dirty map I take off 40%

for taxes insurance maintenance vacancy and property management if I get the property accepted and get under contract I'll go back and fine tune those numbers and make sure that they're right on but for the most part that's a good rule of thumb for me so I'll multiply by 60% minus the $563 the payment that I'd be making to the seller which is going to give me $157 a month right so now I know what my actual net cash flow will be my cash after debt service each month. Now to figure out my ROI, I need that to be annualized. So I have to take the 157, multiply it by 12, 12 months, and then divide it by how much money I'm putting into the deal, which is $25,900,000. So that gives me a 7% cash on cash return. Now, not a bad deal, right? I would be in the positive. I would all

a piece of income producing real estate and I'd get all the benefits of ownership. But You know, in today's market, you know, if you could find that on the multiple listing service, that's probably a pretty good deal. But if I was going to take $25,000, $26,000 and put it towards a deal, I can probably do a little bit better than that because I know how to find the deals off market. And so I'm not too excited about it. So for me, it was a big no thank you. Now, there's an ideology or a philosophy that I operate from,

and that's to never let the ball bounce twice in my court. So anytime you get an offer, always counteroffer. offer. Even if the original offer was terrible, even if it was, you know, way out of the ballpark wasn't even close, even if you're offended by that offer, always submit a counteroffer. You know, the name of the game in real estate investing is offers, offers, offers. If you're not submitting offers and not giving the other party the opportunity to actually sign a piece of paper, you're never going to do deals. So you always got to counter it. All right? So never left the ball balance fresh in your court. So I'm going to counter him back. And so this is what I came with.

left the price alone. And so I said, let's meet the middle. I'll give you 15% down. So it's $19,4 and $85. Now with the payments, I really wanted those principal only payments, right? I really wanted those because I want to buy down the equity. Because if I'm going to have that balloon payment,

I want to try to create a nice little equity position for myself. The appreciation alone will probably do it enough. But if I can create equity position a little bit more by buying down the debt, that's why I want those principal only payments. So what I have proposed is, is a 30-year amortization, but years one through two at three and a half percent. Okay, so he wanted five. So I'm going to say for years one or two, I'm a little bit lower three and a half percent.

I'll be $4.95 a month. That's going to allow me to apply a little bit more of the rent towards the loan paydown to create that equity position. And then years three from five, I'll actually give you more than what you asked for, five and a half percent. So that's the compromise. It'll take my payment up to $626. And then we'll go ahead and I'll grant him the balloon payment due in five years.

Now, he'd mentioned that there was. some issues with the foundation I just still need to be worked on. So I asked for a six-month moratorium to actually be able to get that work done. I know right now the contractor situation might be difficult for me to get a specialist out there to be able to do that type of work. Plus, the house is vacant, and I want some time to find a tenant as well. So I asked for a six-month moratorium on the first, and what that actually calculates to is a potential 29% cash on cash return versus the 7% return previously. So by leaving the price alone, And just tweaking the terms.

And we didn't tweak them that much, right? We took a little bit less money down. We're offering a little bit less money down. And we just did this escalating interest rates. Then we're asking for the six-month moratorium on the first paper. So there's not going to need any payments for the six months. That's calculus for potential 29% cash on cash returns. So I was like, okay, if you take this, I'm down.

And he did. So we had a deal. So I began my due diligence and ordered the physical inspection. I wanted to see how much that foundation work was going to be. And it wasn't as bad as I thought. It was only $3,500. And it's just good that it made them allow us for it. We went ahead and I just ran the detailed market analysis.

It turned out that the house was very close to $143,000. Conductive my due diligence, everything was up and up. He did great work inside of the property. There wasn't anything, any robust for repairs or anything like that. But I did have this $3,500 foundation work that needed to be done. I didn't calculate that because I knew I was going to ask for later. And I told him, I'll have a look at the foundation. We might have to have a talk about this later.

He says, okay, no problem. We got that. And so what I asked him for was a maintenance credit of $3,500. In fact, I think in this deal, I actually wrote it in as a foundation credit. And that's a key thing to ask for, rather than asking for a $3,500 reduction in the price, because the sellers very love with their price, you've got to leave the price with them. You've got to let them keep their price. I just ask for a maintenance credit or a foundation credit of $3,500.

And if you ask for a price reduction or a credit, to your bottom line, it's the same thing. just psychologically is something they're a little bit different for the seller they tend to accept that a little bit easier and if you can put a label on that credit that justifies what it's for so i call it a foundation credit typically i was asked for a minute's credit there's a bunch of repairs but this particularly deal asks for a foundation credit and what that does is it comes off of my actual down payment so instead of coming in with 19 000 485 dollars i like to come in with 15 000 nine or 85 so i reduced quite a bit there what i have to come in with. So 16 grand is what I need. I don't want to come in with the 16 grand either, though. So where

am I going to find that? Well, I have a neighbor's name is Peter. And I walked over at Peter's house and I said, hey, Peter, you know what, I've got an opportunity for it. How would you like to earn 6% on your money? And he said, that sounds great. It's in my CD right now. I'm not even getting 1%. Perfect. He said, they asked me how much I need. I said, I need $26,000. And that's typically what I will do when I'm going out with there for private money, particularly these types of bridge laws like this. It's because I want to put some cash in my pocket. Like I'm going to own this house.

It's going to cash flow. I'm going to have all the benefits of real estate ownership. But I want some cash too. I want some cash and some cash flow. So that right there, you know, there's like a $10,000 spread. So let's do it a little analysis to see what we got. So a gross rate is $1,200. We're going to subtract insurance.

Now, instead of doing that $40, that in the 40 percent, up to the actual. numbers. So there's minus $68 for the insurance, property management is $120, property taxes, and then vacancy and maintenance about $120. That's a little bit of an estimation, but that's what we ended up. That gives us a net operating cost of $778. And we have to subtract the first loan of $4.95 a month and then subtract the second loan of $130 a month. And what that leaves me with, cash after debt service is what that $153 a month. So I've got the cash full of $153 a month. So what that does is since I borrowed this money from Peter, I don't have any money in the deal. So if we go over to the lower right-hand corner where our potential 29% cash on cash return

is, it actually turns that into an infinite return. And that's kind of my favorite types of deals. This is a zero-down deal. I didn't put any money into this deal, right? So it gives me an infinite return. So what I have here is I got about $10,000 of cash. I get to put in my pocket. and I got $153 a month of cash flow.

And then I've got this six-month moratorium where I'm not having to make any payments for six months. So the cash flow is going to be a little bit higher. And this is a zero-down deal. This is the typical deal that I'll do. You just kind of, you know, we want to get in a place where you can engage the seller to get them to be open to creative financing, to be open to seller finance. It's a subject to or a rap or a lease option or anything like that.

And as long as you get them open to the idea, then you got it. Now you can just go for the terms and you can negotiate back and forth until you both experience a win-win result. But the second loan, over that six months, I was able to flip a couple properties and pay off Peter's loan. So there is that. Then here's the other great thing about these deals, even though I paid full price and a lot of people, you know, I would never pay full price. You know, you can't look at it that way. You've got to look at the ROI and what it actually gives you. But here's something that I do with these types of deals is every six months,

I set a little reminder on my calendar to actually call the seller. And the conversation sounds something like this, a little different each time. But Mr. Seller, I just called to say hello and thank you for selling the property for me. It's performed really well. You did a right job on the work over there. And I just want to make sure that you're getting your $495 a month, getting your payments every month. Great, perfect. The second reason I'm calling is I'm getting ready to buy another property.

And on this property, I'm going to have to come in with about $80,000. And before I go and buy that property, you know, I like this one so much. I just wanted to give you a call and see if you'd be open to, you know, just a payoff of what I owe. I know it's not the full balance, but, you know, if you're tired to get the $495 and you can use the $80,000, I'd rather give it to you that, then go out and buy a new property. And that's the normal conversation. And I'll have that conversation every six months. And then every time I have that call, that $80,000 is probably going to come down to like $75,000,

or $70, it could get a little lower each time. And with that strategy, with that technique, we get probably 70% I think is our last in the calculation. 70% of those we pay off early at a big discount within three years of us taking this on. Almost never get to that three to five year at five and a half percent interest rate. Almost never get to the end. Most of the time we're able to pay it off at a big discount. All right.

So like I said, if you want to get together with us and we want to get together with a group of investors, live via Zoom for a creative financing master class. and we're going to talk about what we just did right here and a bunch of other stuff. I mean, when it comes to creative financing, you know, really the sky is the limit. You're limited only by your own creativity and a bunch of new ideas that you can work with and fill up your toolbox. And for those that register, today you'll get instant access to my ever-growing lending relationships. And right now they're providing 100% funding for your fix and flips, meaning they're going to come in. If you bring them a deal, they'll buy the property for you, and they'll, they'll,

give you the money to fix it up 100%. And they got a couple different programs around that structure. That's one thing. And then bridge funding for your creative deals like what we just did here. In case you don't have a friend like Peter, they've got those loans available for you there as well. And then asset-based rectal loans. And what that means is they're looking more the deal itself, more of the debt service coverage ratio of your deal and not as much as your credit score. A perfect credit score is not required to qualify for these loans. So you'll get instant access to that. And that's just one, just one of eight bonuses valued at $5,000. Those are the bonuses.

But here's the meat. This is what we're really getting together for. If you wanted to creatively finance your real estate investments from finding the right opportunities to negotiating the right terms or to structuring the paperwork, to organizing clothes, to collecting your profits, to do all that stuff. And you might want to just join us to learn what I and my rock star students are doing for their real estate portfolios. And we're going to orchestrate everything to apply it to yours so you could do this

immediately. We're going to show you how you can actually pull it off. All right. So it's a live interactive virtual class. It comes with a 300% success rate guarantee and all those deals can be found at creative financing masterclass.com. Here's what the actual day-to-day schedule is, the schedule of the day. Session one, the start was just kind of laying in the foundation. Start with the basics. So this is a new concept or a new subject for you. We're going to make sure You understand the effective to finance strategies, the meat balls of it, or meat potatoes. Bean balls, meat potatoes. That's the same thing, right?

The foundation. Then second, we're going to go over the secret to getting sellers to accept creativity. And this is really where the magic happens. This is where most people will get stuck is I can't find any sellers that are open to seller finance. Well, it's really, really easy if you know how to present it. And that's what I'm going to go over there. And then number of session three will go to how to create creative offers. I'm going to go over specifically the three option.

letter of intent. And this is a tool that I've used to build almost my entire portfolio up until just about two years ago when I started when I became lendable again. But I built almost my entire real estate portfolio up to 350 units based off of creatives financing using this three-option letter of intent. And one of my clients, Josh Miller, he did 55 extra deals using a three-option letter of intent. And he used it a different way that I did it. So I'm going to show you how he used it as well. He did 107 deals that year and 55 of those deals came from using this three optional letter at 10. And then we're going to go over how to session four is how to close creative deals, specifically the logistics and the paperwork. This is another sticking point for a lot

of investors because there's not a lot of closing agents, not a lot of escrow officers and title agents and even real estate attorneys that understand what we do here. And it can be tough to find someone to put all the paperwork together for you and people just get stuck there. And I don't you get stuck so I'm going to show you a nice little hat on how to make that work. So anytime you get one of these properties or one of these deals under contract, that's got out as a creativity into it inside of it, there'll be no problem to close and collect your check. Okay.

And then pitching the right market for creative financing. So there's a lot of different things to look at in the markets. And this is where Josh Miller is actually going to be showing, showing up with me and going to show you his new market picking tool. And it's a total free tool to use. He'll give you the link and you can go and knock your stocks off and look all over the country for different markets. Maybe you're living in the one that's the best one for you.

If you want to do it virtually, then you can do that as well. So he's going to give back to you. Then session seven, this is getting a little bit more advanced. It's called the deal after the deal. You see, with every creative financing deal, there are the terms of the sale, there's the terms of the loan, and then there's the terms of the paperwork. And most people understand the terms of the sale. Most people understand the terms of the loan.

But there's so much money. to be made in the terms of the paperwork that we call the deal after the deal. And I'm going to give you that paperwork so that you can use on every deal and you not leave it anything on the tape. All right. The last session, session eight, I'm going to show you what I've been doing. Createdly, kind of moving my money around to really maximize the ROI and how part of my money works for me times three.

It's called velocity investing. And I multiply my ROI while simultaneously reducing my risk. We'll be back with more, right after this. Boarding for Flight 246 to Toronto is delayed 50 minutes. Ugh, what? Sounds like Ojo time. Play Ojo? Great idea. Feel the fun with all the latest slots in live casino games and with no wagering requirements.

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Today I'm going to talk about subject to, subject to real estate investing. What this is, is where you get to purchase a property. It's a really popular strategy. Where you get to purchase a property of which the existing loan on the property stays in place. So you take ownership of the property. your name ends up on title and the loan stays in the seller's name that loan doesn't get paid off it passes along with the property so it's really nice because you get to buy the property with the financing already in place so you own the property and you make the payments on the seller's

law that's how it works and i'll show you a recent deal of my own and how it all came about and then how i put the paperwork together and how i actually overpaid for it i paid more than what it was actually worth and still got a 53% return. Actually better than that, but I'll show you how I did that. Okay, there's the house. It was actually a condominium. And I don't buy many condominiums, but this one was kind of unique. And it was really nice and a nice part of town.

And I wanted it. I wanted to have a property down there. This is in a nice area of St. Louis. And the tenant was already in place. So I didn't have to find a tenant. Management was in place as well. And it rents for $1,050 a month. So there we are so far.

Now, the value was $110,000, but there was a seller-financed mortgage, not a traditional bank mortgage, but a seller-financed mortgage of $90,000 on the property. And it was pretty appealing because it had zero percent interest and the monthly payment was $450. And the property had just been rehabbed and the tenant was relatively new. And so it needed zero repairs. I could just take it over and it would be a actual-ling asset for me. So I'm looking at $10.50. My month's payment is $450.

You know, I'll probably clear somewhere between $150 and $350 a month would be my cash flow. So I was kind of cool with that. But the seller wanted $40,000. And if you take $90,000, what's owed on the mortgage and the seller wants $40,000, that's $130,000. And the house is only worth $110. So I was like, okay, we might have to do something about that. This is what had my attention.

That's something I normally wouldn't look at. because we'd add zero equity and then the property, it would probably cash full a little bit, but it was this zero percent interest loan that was in place. I mean, this looked like something I wouldn't have done. So if somebody got there and put this in place, that was what I found appealing. And I'll tell you why in a second. So I made an offer subject to. I want to leave that seller finance mortgage in place.

And instead of $40,000, I offered them $30,000 for their equity. And so that would be, I'm paying. 30,000 plus 90, I'm paying $120,000 for this property. And it's only worth 110, so I'm still overpaying for it. But I said, I offered them to do $15,000 of clothes, and then I'd given them $15,000 in two years. And they countered back and they said one year, which is really kind of what I wanted already. So doing one year, so I'm good with that. And we had a deal.

So it was really easy. Now, why would I be willing to overpay for this property? Well, we know that, you know, as real estate investors, we want to purchase property one or two ways by either our price in the seller's terms or the seller's price at our terms. We only need to get control of one. And they were stuck on getting $40,000 and leaving that mortgage in place. But I got it down to 30. But I'm still overpaying by 10 grand. But I'm okay.

I got the terms. And I'll show you how this works at a second and how this ROI is calculated. But when you go to put it on the purchase agreement, now that we had this agreement in theory, so to speak, or the idea was agreed to. How do you put it on the contract? A lot of people think you need a special subject to purchase agreement. And you really don't. I don't even know if there is such a thing. There's subject to disclosures and there's distress seller disclosure or stuff like that.

But as far as the purchase agreement goes, it's just the basic everyday purchase agreement. So what do you do with the purchase price? They're number two at the top. You just write in $120,000 because $90,000 for the mortgage, $30,000 for the equity or the cash that I'm giving them. Okay, so that's 90 plus 30 is 120. So that's your purchase price of the property. And now in the terms, you need to write out what you agreed to here. And a lot of people get stopped here because they think they need some special clauses or they need to be like a lawyer to write this out.

And it's not necessarily the case. If a long as you can write it out in plain English and you and the seller both understand what the agreement is and your closing agent understands, that's enough for them to put those escrow structures together, and it's enough for them to put your seller finance milk together. So this is how the terms would look. Subject to existing financing. So what that means is subject to existing financing, meaning that $90,000 is going to stay in place.

Now for the $30,000, buyer to pay seller $15,000 cash at close, and then the second $15,000 is going to be payable like this, $175 a month for 12 months. months from the closing date, then the balance is due on the 13th month. See, very simple, plain English. The seller understood what we were doing. I obviously understood because I wrote it and it was clear enough for the closing

agent to understand it as well. So that's how we put this deal together. Very simple, very straightforward. No special contracts, no special anything, just the price and terms. Now, let's see how this calculates. So we'll take the rent is 1,050. minus the mortgage, the one that was already placed, minus the property tax insurance, the HOA, the property management.

That gives me $214.58. There's the net operating income for this property. So that's my cash flow. But I borrowed that 15, making payments on that second $15,000. So that second mortgage is 175, same $175 a month. So my cash flow is $39.58. Not too exciting, right? So let's be out with the ROI is there.

So $39, we have to multiply that by 12. And then we have to divide that by how much money we're putting into the deal. So we're really only putting in that $15,000 right now. Oh, so my annual cash after debt service, I can miss something here. Oh, yeah, that's good at 3958 times 12 is 474.96. Divide that by the 15,000. That gives me a 3.1% cash on cash return. Not super exciting, right?

But there's more to your return here. And it has to do with that 0% interest. Because that's a return as well. What that means is every payment I make to the mortgage, 100% of that payment is applied to the principal. 100% of that payment creates equity. And who's making that payment? My tenant is paying me to make that payment.

My tenant is buying this property for me. My tenant is creating the equity position for me. So let's look at that. If I take the mortgage payment is $624. So that's the first and the second. It's $625 based there, but the change and everything, it was like $624, multiply that by 12 because we've got to get the annual mortgage payment,

which is $7,500. Now we're going to divide that by how much money we put in the deal. This is $15,000, right? So divide that by $50,000, $15,000. And we get a 50% ROI on the equity buy down. So now you can kind of see why I was very interested in this deal. At the time I see 0% interest, I get a little excited. And usually I'm putting them together that rarely, not rarely,

this is the only time I've ever been able to take one over subject to there, I had 0% interest. So I have my 3.1% cash on cash plus my 50% amortization, my mortgage pay down, my debt paid out. So it gives me 53%. That doesn't count the deductions and the depreciation. It doesn't count the appreciation, right? But then, and then all it took me to do this was $15,000.

That's all I had to put in there. So I'm getting a 53% return just about those two profit centers for the $15,000. So I like to do every deal. I like to get into every deal using none of my own money. So I didn't want to come on with the $15,000. So what I did, I was able to get a bridge loan from my lending network that they gave that money to me. And why do I want to do that?

Why do I want to borrow that even if I have the $15,000? And I learned this like in the beginning because when you're short on actual money, actual currency, you have to rely on your intellectual currency, right? You have to rely on your creative deal structuring. And so in the beginning of my real estate investing career, I had very little money at all to speak with, speak of. And having just got out of the music business and had to close that business down because of the digital download. Napster came and destroyed me. The wife didn't like that.

So she left. So I got left with all her debts. So in 2001, I had to file bankruptcy. So I wasn't lendable. I couldn't go to a bank and I didn't have any money. So I had to learn how to do this with my brain. I had to learn how to do this with all these creative structures. And I got to a point where now I have money.

But I still don't want to use it because I don't have to because I have all of these tools. So I think sometimes some regards, if you're starting out investing in real estate with no money, it could be very much to your advantage. But I got this bridge loan. And what that does is now that I have no money in the deal, it takes my 53% return and makes it an infinite ROI, an infinite return on investment. Can't calculate it. It can't divide anything by zero.

So it creates an infinite return. And so just with my ideas right there and other people's money, I was able to take the subject to and create an infinite return, just right out of dinner, right? So I'm making that $7,500 a year in the mortgage paydown. I'm making about $500 a month, cash bill out a big deal. I also get the tax deductions and I also get the benefits of appreciation. And we know that the market is moving up and it's slowing down a little bit,

but it's still moving up. So I'm anticipating this to be a really good property and it's in a really nice area. It's got a great tenant. It's going to be a great asset for me. Thanks for sitting tight while we pay our light bill. We'll be back. Right after this. It's the matcha or the three ensemble Cado Cephora of the FACET

that I just de-niche who me energize so much. It's the ensemble. The form of standard and mini-regrouped, what abemn? And the embellage, too beau, who is practically pre-a-donned. And I know that I'd love these offrary, but I guard the Summer Fridays

and Rare Beauty by Selena Gomez. I'm, I'm just the best ensemble the Codes' Cadowd of the Fettos'E You know, it's Shephora. Summer Fridays, Rare Beauty, Way, Cifora collection, and other part of quick. Procurre you see form of standard and mini, regrouped for a better quality of price. On link on Cifora.C. or in a magazine. Ever hear someone say, I have too much money?

Me neither. Let's get you some more. Back to the show. The wrap around mortgage. Maybe you've heard about it, but a lot of people just don't know what it is or how it works. And so we're going to go through that, all right? why you even want to use one? So I'm going to answer those questions and a lot more.

And then how to put the paperwork together, how to close the deal, how to find the right closing agent. That's going to help you do this because I don't know if you know this, but there's a lot of title agents, escrow officers, and even real estate attorneys that this would be like hieroglyphics to them. They wouldn't even totally get it. So to help me out with this subject and answer your questions, I've invited a good friend of mine, very accomplished real estate, best or very knowledgeable

in this area from creative closers. that's miss rachel jarlis rachel welcome back to the epic real estate investing show thank you i'm so excited to be here with you guys today let's do it super yeah notes i see that i teach a lot of these creative strategies and a lot of people get it

and i help them actually you know make that connection and get it actually the seller on board for the idea but once they've got all under contract it kind of falls apart for them and they can't you know closing agents i mean just this is like something totally new to to your typical title agent or escrow officer. So I want to give people a little bit inside on that. Okay.

So a wraparound mortgage. This comes straight from Investopedia. A wrap around mortgage is a type of junior loan which wraps or includes the current note due on the property. The wraparound loan will consist of the balance of the original loan plus an amount to cover the new purchase price for the property. These mortgages are a form of secondary financing. The seller of the property receives a secured promissory note, which is a legal

I owe you detailing me I'm out. A wrap around mortgage. It is also known as a RAP loan, overriding mortgage, agreement for sale, a carryback or all-inclusive mortgage. Or it could also be an all-inclusive trustee, I'm not what state you're in. So to kind of give you a visual of what this looks like, we'll take this house right here, value at $100,000. Here's the owner.

And they had a mortgage of $50,000 on the property. And for one reason or another, the buyer can't go out. in or the property won't qualify for a traditional finance of something maybe something wrong with repair wise something about it's obsolete maybe it's just in an area where no one's going to lend it to be all different types of things that make it not appealing to conventional lending so the seller could go ahead and sell this property with their own financing and leave that bank mortgage place and essentially to bridge that gap between the 50,000 what they owe on it and the $50,000 of equity they'll put another loan around it creating a whole entire

new mortgage of $100,000. So $50,000 for the seller financing $50,000 for the bank, gives you $100,000. They can charge a little bit of an interest, bought that up a little bit. The buyer then makes the payments to the seller. The seller sends the bank their portion, and the seller keeps their portion. Right. So that's what a wrap-round mortgage looks like. I've got another couple of scenarios.

One way to use it as a buyer, one way to use it as a seller. And I guess I'll just go through that. And then we'll spend the rest of time with Michelle. Okay. So we'll say that you are the buyer this time. You're going to buy a property that we'll use the same property. It's valued $100,000. There's this bank mortgage of $70,000 at 6%.

Now, something about the property is not lendable. The bank will not loan on the property until the seller makes $10,000 worth of repairs. Well, the seller doesn't want to make the repairs. So what are your options as a buyer? Well, you know if you're going to wholesale this property or flip this property. You're going to have to look for a cash buyer. And all of your cash buyer is going to see that $70,000. thousand dollar price or the mortgage and then up to depth 10,000 so they're going to have to want to pay more than 60,000 for it.

So your typical wholesaler, your typical real estate investor would be out of options. Like, well, I can't give you more than 60,000, but you owe 70,000 so you're short. So either you got to negotiate a short sale or the seller has to cut in with money to close. And they never like that either. But what you can do as the creative real estate investor is you can offer to purchase this property via a rap. And you can put a new mortgage around this, say it, $80,000. and then go ahead and give the seller $5,000 to be on their way. So they got something out of the deal.

So you have an existing mortgage of $75,000 at 6%. So your down payment was $5K that you gave the seller. You got this new mortgage of $75,000, $10,000 repair. And now you got $10,000 of equity. And this might be a really, you might want to do this for a property that would be good in your portfolio. You just needed a little open. And now you got it.

And all it really took you was the price of the down payment, the price of repairs. So for $15,000 you have got this property. added your portfolio. Love it. Am I all right, Prachel, so far? You're doing great. I love these examples.

It really breaks it down for the seller and buyer. You got it. And we can talk about other reasons why, but let's get through your slides and we'll get to that. For sure. Yeah, one more. So let's go to this scenario that you're the actual seller. Okay.

And same scenario, values of $100,000. And you got this bank mortgage of $60,000. Now, what you can do when you're selling a house is you can sell your property for a premium if your buyer, particularly if it's an unlendable buyer, can't go to a bank or doesn't want to go to a bank. So a lot of people will pay more for a property just for the convenience. So if you refer to a rap,

you could sell this for $110,000, for sure, it's the day's market, but pretty much any market. So you get a 20% down payment. That goes to you, the seller. You wrap around the balance at $80,000. You get the $22,000. then you get the monthly payments from your $88,000,

so you get $585 there. But then you have to pay the existing mortgage because you left that in place. So your balance there would be $106 a month in cash flow. Yeah. And there you go. So that's why you might want to do it as a seller. So those are the two scenarios.

Love it, love it, love it. Perfect. Okay. So what you do all across the country in all 50 states as you close these creative deals for me. So why don't you tell us a little bit about your service? Yeah. So at constant close, that's exactly what we do. We do wholesale and creative,

but we've gotten pretty popular for our creative niche, right? Because back to what Matt was saying in the beginning, you guys, is that learning how to do this or having partners, knowing how to do this, even attorneys, it can be very, very hard when you're adding all of these creative strategies, especially a wrap. Because wraps can go very, very deep. They can get into the weeds.

I mean, you can take your rap note and put two wrap notes underneath that. So it's really our value is coming in, understanding the process, making sure that everybody's on the same page, everybody's learning at the same time, and then making sure that we do it the right way. And if you don't mind, I'd love to go that way in regards to, so what does that look like, right? And as we're explaining the process of what that scenario would look like

for the seller of the buyer. There are some things that I want you guys to write down or pay attention to when you are doing these notes. With my company, Constant Close, I like to play or I do play like Devil's Advocate for all my clients, making sure that when you're done with a property and you're taking it down, that it goes into your portfolio,

does exactly what it needs to do, and you're not thinking about it. So what are those different elements that you need in your transaction that I would recommend? And if you're doing one right now, listen to this, take a look at it and see what you could implement. So a couple of things. So like Matt had mentioned, you do have some what we like to call homestead buyers, what are homesid buyers. Homestead buyers are people that like to buy these rap notes or these rap mortgages

and they're called different things in different states because some of them aren't makeable. Some of them might have had an issue with their credit, gone through a divorce, had a foreclosure, but that doesn't mean that they don't have the funds or the income to be able to pay on this rap note. So what does that mean? That means that you can qualify them through a national underwriter to make sure that they qualify for this rap mortgage. Now, why would you want to do that? If your interest is in rap mortgages or notes and you want to add a big part of that to your portfolio, it's a very good strategy

and it's also making sure that you could never ever be in a court or anything like that to where you could be accused of predatory lending. Like I said, getting the deal done the right way so you don't have to worry about it after you close. So what these national underwriters are called is RMLOs.

So, and you know what? Matt, I couldn't even think of what RMLO stands for, but I know they are a national underwriter. Do you know what the abbreviations are? Registering mortgage loan originator. Yeah. And that's exactly what they do. We'll take a homestead buyer that has the 20% down and they'll qualify them. They'll look at their W2s. Now they're going to be a little bit more lenient with the interest rate, right? Because we know that these are these types of buyers. But they're going to make sure that they can make those payments. They'll certify them and say, yes, they can qualify for this mortgage. And that is for your files to say, I have done my due diligence, making sure that this person or this entity, whatever it might be, can qualify. or can handle making these payments. So that would be something in the transaction that I would be looking for.

And also making sure that your notes are written the right way. So someone might think, hey, I'm hiring an attorney. I'm hiring a title company to do these rap notes. Why would I need to make sure that they're written the right way? You guys, it's always just people are human, people make mistakes. This is something that I would do if I had your transaction, is saying, was the right people put on there? is the terms exactly what they have agreed to.

Is it 500,000 at 5% with the installment payment? Is there any other nuances? Is there any balloon payment? So all of those terms, do your due diligence. Make sure you're looking over all of those notes. Because once they get recorded, it's kind of a mess to go back and have to refix things. So those are things that I could think of just right off the back in your transaction. That's something we do.

But if you have your own, run them through an arm aloe. I know it's an extra cost, guys, but it's worth it for your business. At least I think it is. What do you think, Matt? What do you think in regards to? Well, if you're selling to resident owners, they're almost required. Yeah. You know, if you can, I think they give you what two or three they allow you to do.

Right. If you move a business out of it, then you're selling to resident owners, but I actually don't live in the house. Then you have to use them. Yes. Yes, absolutely. Yeah. And there's different things.

I mean, a lot of people do these in LLC. but you know he's exactly right there's other things you need to think of Dodd-Frank there's other laws that we need to pay attention to when we're doing these wraps and that is making sure you have someone like an expert like me or a mentor like Matt that can kind of educate you on how to get it done the right way

to be honest with you this is my favorite strategy I love taking these down one other thing that I could add if you don't mind if I go there there's a lot of people you teach about sub two right and the value of sub two where they can wrap these sub two mortgages to a homestead buyer. So the other thing that I'd like to make a recommendation, guys, is when you're wrapping a sub two loan, what are some things that you need to be thinking of

for this homestead buyer? Now, obviously, this homestead buyer, the nature of their life is not to know all the different nuances about the sub two. So let's make sure that if we're wrapping a creative deal like subject to that we have all of our disclosures, that we have all of our disclosures. That we, the homestead buyer knows that they're taking over an underlining lien of someone else's credit, that they understand that they can't call the lender, that they have all of the information to make sure to, that they can make those payments. So what would that look like? Hire a servicing company.

You know, hire a servicing company, put those things in the process that can make the process efficient and easy. So you can follow that diagram that Matt did where they debit the. buyer's checking account, that money goes to you as the seller because the fact that you wrap that note, you are the seller. And then the seller can take that money and pay the underlining lien. So make sure you're adding all of these things in the process to get it done the right way. Perfect. So let me ask you this.

And we're talking about paperwork. And I know paperwork is an issue, not issue, but it's something to be very much concerned about when it comes to dealing with selling to resident owners. It's a bad investor of investor like nobody cares. It's the resident owner that comes in a flight. That's typically where you're going to be able to sell the property with using Iraq and get that premium dollar for it. So it's important if you're looking to maximize the return on the deals that you get. Right.

So disclosures and disclaimers, and we have all of that. All that can be taken care of in due diligence. The report part is to get the actual agreement signed first. Like let's get it agreed to in principle by the seller. Then let's put it in writing. And then once you. got it in writing and take it to somebody like Rochelle. There's actually nobody like

Rochelle. So take it to Rochelle. And then she'll give you the disclaimers and the disclosures and everything else that you can go get signed during due diligence, correct? Right. Absolutely. Perfect. So what do you need from the seller or from the buyer, from the investor that's going to hire you? Do you need a special contractor? You can just use your standard everyday purchase agree. I would love for people to use my contract just because my contracts are set up the right way that make it clear and concise about what the terms are and all the nuances. If you have it locked down with your homestead buyer or rat buyer, we can come in and just add everything supplemental that we need. So if I will overview your contract, I will make sure it has everything that I would want to be in

there if it doesn't. I will add to it. But I think the best way to do it is to kind of see how to do it the right way first. So use my contract. We can help you write it up. And there's so much value in that because we can show you how to do it. How do you list it? How do you write it? What's the verbiage, balloon payment? How do you do? Because there's a lot of nuances when it comes to these. So that's what I would suggest is allow us to teach you how to write it up. But if for some reason you have a PSA, we'll look through it and we'll make the changes that are needed. Perfect. No, and you want to do it the right way. But my whole thing with my students is don't let trying to do it the right way, get in the way of you actually closing the deal. A hundred percent. Get the deal aside. All

my students I say just go out there and make a mess, get a signature, bring it back, and we can fix it up later. Yes. I agree. We've got 100%. Yeah. Don't lose the deal. Don't wait. Don't wait. Don't wait. Yeah. It was for Shell's contract. I can't find it. I know. Get on a napkin. Get something side and then she'll get the doctor. Yeah. You definitely could. Absolutely. I agree. And as she was saying, everything can be done via supplements and add dumps and all that's not to be handled. But lack of the deal. Yeah. Oh, all right. So it all starts essentially with a subject to though. Right? It's subject to. And then you're wrapping around seller financing around that.

Yeah. Right. So yeah, no, you're exactly right. And I'm feeling, I'm always asking myself, what would I ask if I was learning about this? Now, why? Why do people want to do this? Right? We're showing you kind of how. would get done and the things that you need to put into the transaction. Well, you guys, the whole thing of this, right, is you learn how to build capital through wholesale, but part of creative finance and the power of it is cash flow. And it's cash flow with you not having to be a landlord, which is in my mind the best type of, that's probably why it's one of my best investment strategies. is because you become the seller, the lender, and you're able to get that cash flow. So back to the diagram that Matt did,

I mean, it was only 106. We know that cash flow could look different if it's a homestead buyer, if it becomes an Airbnb, if you use a different strategy. But that's the whole name of the game of why these are amazing, is because you can get that cash flow. Now that wrap note that you have that's in different states, it'll be called a deeded trust, a note, a rap mortgage. But even that wrapped note, like I said, notes can get, you can get into the weeds a little bit more.

You could even sell those notes. You could even sell those notes and gain capital that way. There's a lot of things that you can do with this, but the whole name of the game is cash flow, right? And that's why they're so powerful and amazing and why a lot of people like them. Plus, giving somebody a solution to be a homeowner is something in my mind that is gratifying. There's a lot of people out there that are wanting these sets. second chances to be homeowners. They have the money. They have the job. So it's gratifying to me to say, listen, I know you've had an issue with your credit. Something happened. And I can provide

them with a home and they can be a homeowner. So them paying that higher purchase price and higher interest rate, I get that question. Why would someone do that? Because they want homeownership. It's not something that's hard to convince people to do. It's a value and solution for these homestead buyers for sure. For sure. I mean, that's part of our whole promotion is. you know, why rent when you can own. Yeah. We'll position it and structure our wraps to be in a place where it comes just slightly less of a payment than what it costs them to rent. Yeah.

So they're like, okay, well, and even though we're making a whole lot more money on the deal, and we might not be making a huge amount of cash flow that we put as a landlord. Right. But, you know, well, instead of a 30-year amortized, maybe it's 40-year amortized, right? Maybe it's, you've got, you purchased it a really good price, and now you can sell it with a really high interest rate just to bring up that payment to be just less than rent. So there's a lot of different ways that you can approach this. So this is a very much an advanced strategy. This is not probably what someone's going to do on their very first one.

And even people that have got some experience under their belt and kind of mess it up. What do you see commonly, you know, maybe some of the mistakes investors make or some of the reasons that they don't go all the way to the finish line? I would say people just don't know how to sell these the right way. they don't understand kind of what we're talking about, the value, who is your rat buyers, and maybe not having access to a mentor, things of that sort. So I think sometimes they get so excited about getting the deal that they forget to do some of the disclosures that are really important and it ends up kind of biting them in the butt.

And then making sure that their terms are the right way. What I see a lot of times is you guys need to also be paying attention to your interest rate, right, making sure that you're not, you're doing it. It's fair, but at the same time, it's not ridiculously high. So it's really just people understanding this type of strategy, who you sell it to, the value in the solutions that you are providing, especially if you are wrapping a subto mortgage. So do your due diligence to follow someone like Matt or hire someone like me, like an expert, to know how to be able to put these deals together or JV with somebody. I'm sure some of your students could be such a value at these people of learning how to do it the right way.

So I would say them just not know how to work their terms, not disclosing it the right way. And I do see that a lot of people do not want to hire an RMLO. There's a lot of people that don't want that extra cost. But you guys, I couldn't say it enough about how it's invaluable to just do it the right way. So those are the kind of the things that I see all the time is them not wanting to do those things are not knowing quite how to structure their terms. For sure. The term, structuring of the terms, I would say what I see where people have a little bit of

a challenge is, you know, we're here talking about this. We talk about this every day. This is our industry. We have jargon and we have this rack run or we have subject to. Right. And remember sellers, particularly those sellers of the motivated nature, you know, aren't finding themselves at the best place in life at the moment. And you start dropping those types of terms off.

people on sellers, you can really confuse them. Yes. Right? So what I really practice on explaining these things as if you were talking to a fifth grader. And not in a patronizing way, but just in a very simple structure. Yeah. So this is like for a mortgage, this is what we're going to do.

I'll go ahead and I'm going to take over the payments and I'll take over the maintenance on your property. I'll go ahead and take over those payments. And then we'll give you a little bit of extra, which I'll make those payments directly to you. and we'll just kind of bundle it all up into one nice package. So it's all managed and everybody knows exactly where it's going to go. So the bank on your current level will get their money,

then you'll get your money, and then I'll get the house and everyone will be happy. So that makes sense. Yep, perfect. Just like that. So I didn't use rap. I didn't use subject to. I didn't use anything like that.

I just said you're going to get all of your money and the bank's going to get theirs on time, and you're going to get yours on time and you're going to go and visit your grandkids in Arizona or whatever, whatever their motivation is, right? I agree 100%. I think something, like I just said, it's not the nature of their world, right? So they're probably like, what are you talking about?

And that could lead us into another conversation of how sometimes there's risk, right? Because we don't do it the right way. They're not going to, you know, if a lender calls them and they say, hey, I actually sold my property to Rochelle, they're not going to remember how they sold it. So it is really good to kind of bring it down, talk to them on their level and help them understand it. And what you said was perfect. That was a perfect way that's cleaning it. Sweet.

Yeah. Perfect. All right. So if you want to work with Michelle and have her close your deal, like the pro that she is, you go to creative closers.net for your next deal. And then, Rochelle, so I know you've got to be working with me joining me next weekend. What do you have plan? You have something new that you're going to be sharing with everybody. Yeah, I like to talk to everybody about kind of what I'm seeing. I'm seeing a lot of foreclosures right now. You guys, we all know that there has been some distress over the last couple of years with COVID. And back to my point of being able to provide solutions, I'm always looking for something intentfully in my business, how I can impact people. The bottom line is to make money to get a portfolio, but as being able to serve these sellers in my mind for closure leads are leads that are basically raising their hands. and saying, I need help and I need assistance. And they don't know that we can serve them in these ways.

So I told Matt that I would love to share with this thing that we have going on next week, my financial foreclosure ebook and share it with your audience of giving them some value of if you have somebody that's going to auction in the next week or two, how can you push off that foreclosure date so you can find a solution for them? So I would love to give that to everybody that enrolls or signs up as a value just from me to constant clothes to help you help those people because for pleasures are back. And so that's something that I'm seeing in the industry and I want to provide some value so the investors can get out there and help them.

Rochelle, thank you very much for being here. Really appreciate you. Perfect. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them.

God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home for us. We got the cash flow. This podcast is a part of the C-suite Radio Network.

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