Should my seller consider a “subject to” offer or an offer that contains a wraparound mortgage?

QUESTION: I have a listing that has received a lot of attention from investors. One investor is proposing that my seller consider a “subject to” offer, and another investor wants my seller to enter into a wraparound mortgage. I have no idea what these terms mean, and these offers are on custom forms. Can you give me some guidance?

ANSWER: Both of these transactions should be avoided. That said, if your seller wants to consider either a “subject to” purchase or a wraparound mortgage anyway, then you should strongly advise them to seek legal counsel first.

A “subject to” purchase means that the buyer agrees to pay the seller’s mortgage, but the seller remains liable under the promissory note and deed of trust for any potential default. The buyer typically takes title to the property, even though the seller remains named in the loan documents.

A wraparound mortgage is similar to a “subject to” purchase in that the seller deeds their interest to the buyer and the seller remains liable on the original loan. The difference is that in a wraparound mortgage, the buyer agrees to pay the seller more than what the seller may owe on the original loan. The seller therefore offers the buyer a type of seller financing. When the buyer makes a payment, the seller pays their own mortgage and has flexibility to use any overage as they see fit.

Both of these arrangements have enormous risks. First, the seller has no title to the property for which they remain financially liable. If the buyer does not pay, the seller has no property to sell to satisfy their obligation to the bank. Second, unless the bank approves of the transaction first, the bank can accelerate the entire amount of the loan and demand payment once it discovers that the seller has violated the loan terms by conveying the property to the buyer.

In some rare circumstances, it may make sense for a buyer and seller to consider a “subject to” purchase or a wraparound mortgage, so long as the lender gives its approval (which will more than likely require the buyer to qualify and fully assume the loan instead). In those rare cases, both buyers and sellers will need legal guidance to help explain any custom forms and other attorney-drafted documents. The NC REALTORS® standard forms are not designed to facilitate these kinds of transactions.

Release Date: 12/19/2024