DEAR BENNY: I have a full-price offer on my duplex that involves a wraparound mortgage. I am a little leery of a small down payment with high-interest payments for a few years with a balloon at the buyer’s refinance later. I’m told they are quite legal, but I really need to know the pros and cons. Can you enlighten me please? –Bobbie
DEAR BOBBIE: Here’s how a wraparound mortgage works. Let’s say that you sell your house for $500,000, and have an existing mortgage (deed of trust) on the property for $300,000. Title is transferred to your buyer, who pays you $10,000 in cash, and you take back a mortgage in the amount of $490,000. This is a second mortgage, because your existing mortgage is not paid off at the closing (escrow).
Your first mortgage carries an interest rate of 6 percent and the new second trust will be paid at 8 percent. Each month, your buyer sends you a check based on the 8 percent interest rate, and you send your current lender the regular monthly payment you have always made.
There is a monetary advantage to you. You receive a 2 percent differential on your existing $300,000 (because your buyer is paying you 8 percent) and you also receive the full 8 percent on the remaining $190,000 ($490,000 minus $300,000).
But there is also a disadvantage. Your buyer has put up only $10,000 and can easily decide to walk away from the deal, leaving you (1) stuck with your existing mortgage and (2) having to foreclose on the property.
Additionally, because your buyer is taking title "subject to" the existing mortgage, you (and your buyer) run the risk that the lender could exercise the "due on sale" clause and call the entire mortgage due and payable.
We used these wraparounds in the early 1980s, when interest rates were very high and buyers wanted to take advantage of the existing lower rates that were already on the property.
Yes, the transaction is legal, but there are too many risks. Unless your buyer puts up a lot of money — say 20 percent or 25 percent of the purchase price — I cannot recommend that you pursue this further.
DEAR BENNY: I could use help with a rent-or-buy decision. I am living comfortably and modestly in a rental unit that is governed by city rent-control laws. Now that I’m paying only 60 percent of market value, I feel the landlord’s subtle pressure to move out. I have saved the difference and could finally qualify as a first-time homebuyer in the outer suburbs.
On the upside are the new tax credits for purchases and those for when I eventually sell. On the downside are thoughts of purchasing depreciated property with depreciated stocks, adding a long commute, safety questions, and the fact that I would rather spend my time finding a new man — however remote the possibility. I am 10 years from retirement. –Carol
DEAR CAROL: I can’t help you find that new man, and I am not sure that I can help you make up your mind as to whether you should buy. That’s a very personal decision, which only you can make.
Clearly, this is a good time to buy. Real estate prices are depressed and mortgage interest rates are very low. And as you know, there are tax credits if you are a first-time homebuyer — depending, of course, on your income.
There are also negatives involved. You — and not a landlord — will have to take care of the house and maintain it. (Of course, some landlords do not honor their obligations to their tenants, but that’s a story for another column.)
I don’t agree that you have to buy "depreciated properties." If you are seriously interested in exploring this further, you might want to speak with a couple of real estate agents and ask them to assist you in finding a nice place to live. You can also do this on your own, if you have the time and patience.
I believe the stock market will eventually rebound, and there is serious talk here in Washington that Congress may allow nonhomeowners a similar tax break that is currently available to homeowners who can deduct their mortgage interest payments. So your decision should be based on where and how you want to live — and not solely based on economics. For several years now, I have been advising my clients (and my readers) that buying a home should not be considered an investment — but a place to live and enjoy yourself. If the property increases in value (as I believe most properties will over time), then more power to you. …CONTINUED
DEAR BENNY: I recently negotiated a deal where the buyer would purchase my single-family residence for $259,000, and I would pay $4,000 of his closing costs. The only contingencies were the appraisal and the interest-rate cap of 6.5 percent.
The appraisal came in at $230,000. This neighborhood has only two streets, and the majority of the previous sales were trashed and "everything-stripped" foreclosures. The buyer is well-qualified, and poses no risk to the lender.
I have always seen appraisers go into each job knowing the number they need to be at, and they pull the right comps from outside the neighborhood to make things work if necessary.
In my lifetime I have personally needed 26 appraisals to complete all of my real estate transactions. The first 25 were not even close to ever being an issue. However, No. 26 is going to cause me to walk away from my residence, and be another statistic.
I need to sell to make it financially, and tried to do the right thing. How can one person’s opinion on my property legally influence my life so drastically? This individual could have been persuaded to come in with a low number to force me to sell lower. He could be just plain ignorant. He could have just made a mistake, as we all are capable of doing.
In this unstable market, who can really possibly know what a property is worth? I thought anything and everything is worth what someone is willing to pay?
Aren’t appraisals in place to assure the lender that the property really does exist, and that it is not an outhouse or a barn, that it is at least in the ballpark of the funds they will lend? Who has the authority to step in and demand a second appraisal? Apparently it’s not me, even though my property is being evaluated. Who can I file a suit against for this buffoonery?
One person is taking a win-win business deal, a happy seller and a happy buyer, and sending the seller to foreclosure unless another buyer comes by quickly. This blows my mind, that in this housing crisis, a sale is killed on one opinion, and I believe a very ignorant opinion! –John
DEAR JOHN: I can see that you are very upset. I have challenged erroneous appraisal many times — both for myself and my clients. I have often written that the appraisal business is an art and not a science.
But, I have to differ with your assessment of how appraisers work. Yes, it is true that all too often appraisers will magically come up with the contract price to make the deal go forward. And while I cannot point the finger of blame on just one group for the current mortgage mess that our country is in, one of the factors causing this economic crisis does lie at the feet of appraisers. Just a couple of years ago, when sales were booming, lenders were fast and loose with their loans, and many appraisers were similarly fast and loose with their valuations.
But it is not true that the appraiser’s role is merely to state that the property exists. A legitimate lender is making a loan, and wants as much assurance as possible that the home is worth at least as much as the loan amount — if not more. Lenders are not in the business to lose money (or at least they shouldn’t be), and their only security is the home itself.
We all make mistakes. Ask your buyer — or the lender that ordered the appraisal — to either get a second opinion, or at least go back and challenge the current appraisal. I have to point out, however, that if your neighborhood has a lot of foreclosures, and sales are not taking place, perhaps the appraiser was, in fact, doing his/her job correctly.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@sandbox.inman.com.
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