We were chatting with Eric Grannemann today about the November Meeting, more on that next week. He was sharing that there are a few people in MAREI who are using private and other short term money to initially fund a long term deal. Now the short-term lender wants paid and the investor doesn’t quite know what to do now.

We know quite a few people in this situation and thought it was a good question worth exploring.

What if you have short term lender with a long term deal?

We saw the question posed on Facebook by Vena Jones-Cox

When you’re borrowing money to buy a property subject to:

It happens all the time…you need money to pay back payments for the seller and/or to make repairs or upgrades to the property. (note this could be the money for any short term deal . . . like the mansion in Cedar Creek that some investor bought with a 9 month hard money loan then moved in. The hard money lender wanted paid, now and the investor could not get a loan to refinance the hard money lender out. NOTE TO NEWBIES – Hard and Private Money is for less than a year and they can and will foreclose if you don’t pay them.)

You go to your favorite private lender, and (because the property has 20% equity over and above the combination of the now TWO loans), she cheerfully agrees to loan you the money, in second position to the loan you are taking subject to, at 14% interest or whatever.

The problem: she only wants to make the loan for 1 year, because in her head, that’s how long private loans are.

So here’s the question: what are YOU going to do in 12 months?

To take the lender out, you’ll either need to sell the house (and why bother to negotiate a sub to for a 1 year hold?), or refinance THE WHOLE PROPERTY (thus losing the benefit of the low rate on the mortgage taken subject to) or find another private lender to take out the first one.

None of these are really ideal, if the goal is buy and hold the property.

What you’re looking for isn’t a traditional private 2nd mortgage or hard money:

No you want something different that will make the deal work for long term

1. A wrap, which a smart lender is willing to let you keep for almost the whole life of the loan, because the longer you keep it, the higher their return or

2. An equity sharing 2nd, which a smart lender is willing to let you keep FOREVER, because the longer you keep it, the higher their return and the more money they get when you sell or

3. A partner

In other words, something you don’t have to worry about finding the money to pay off in a couple of years. What would YOU do?

That what would you do question generated a few responses:

4. A private lender who allows an extension clause in the Note if approved by said Lender, possibly good for multiple cycles.

5. A different private lender who will replace the existing second, possibly with slightly better terms.

So as we look at these answers, most are straight forward

Equity Sharing: Find someone who will replace the short term lender for a percent of the equity in the deal.

Partner: Find someone who will replace the short term lender for some negotiated part of the deal, cash flow, equity, appreciation, tax deductions.

New Private Lender who will let you keep extending over and over or one with better terms.

But what is a Wrap.

Generative AI on Google explains:

A wrap loan, also known as a wraparound mortgage, is a type of seller financing that allows a buyer to purchase a property by signing a mortgage with the seller instead of a bank: 

• How it works: The buyer’s mortgage “wraps around” the seller’s existing mortgage, and the buyer makes monthly payments to the seller. The seller then uses the buyer’s payments to pay off the original mortgage. 
• Benefits: Wraparound loans can be easier to get for buyers with low credit or short credit histories. They can also expedite the home-buying process. 
• Risks: Wraparound loans can be risky because the seller is responsible for the full default risk of both loans. If the buyer defaults on payments, the original mortgage lender will be repaid first from the proceeds of a foreclosure sale. 
• Other considerations: Wraparound loans often have a higher interest rate than the existing mortgage. The buyer and seller must both agree to the wraparound mortgage, and the seller must first get permission from their lender.

We will . . . I mean Vena and Anita will be talking about Wraps in Saturday’s Master Class. And we found a past hour or so class that Bill Cook and Vena Jones-Cox did a few years ago on Wrap mortgages.