How to Explain a Subject-To Wrap to Your Seller

Today, we’re diving into a crucial real estate topic: explaining a subject-to wrap to a seller. How do you communicate that you want to take over their house with no liability, make money from it, and leave them with the responsibility of the due-on-sale clause? Let’s explore the best ways to make this clear, honest, and beneficial for both parties.

Understanding the Seller’s Perspective

Listening to the Seller

Before you can explain anything, you need to listen. Understand their concerns, fears, and what they need to feel comfortable. Here’s what might be on their mind:

• What if you don’t make the payments?
• What happens if they need another mortgage?
• What will you do with the property?
• What about the due-on-sale clause?

To address these fears effectively, you need to create a detailed profile of your seller:

1. Situation Details: Are they married? Do they have financial troubles? Are they facing foreclosure?
2. Fears and Pain Points: Are they worried about their credit? Are they afraid of being left in the lurch?
3. Desired Solutions: A clear, simple way to get out of their current situation.

Building Rapport

It’s essential to connect with the seller. Use stories and analogies they can relate to. Position yourself as a helper, not just a buyer. Remember, the seller is the hero in this narrative, not you.

Solving the Seller’s Pain Points

Addressing Non-Performance Concerns

If they’re worried about you not making payments, you need to explain your incentives:

• Why You Will Perform: Emphasize that as an investor, you make money by keeping the property and the payments going. Highlight that losing the property means losing money, which you won’t allow.
• Legal Recourse: Explain that if you don’t perform, they have the right to foreclose on you. This ensures they have power and control.

Explaining the Due-on-Sale Clause

The due-on-sale clause can be daunting. Here’s how to break it down:

• What It Is: The bank can demand full payment of the loan if the property is sold. However, historically speaking, banks want their money, not the property.
• The Historical Rarity: Mention that out of tens of thousands of transactions, very few loans are called due.
• Your Plan: Assure them you’ll handle the situation if it arises, involving attorneys and buyers to keep things smooth.

Drawing a Visual Explanation

Some sellers are visual learners. Here’s how to illustrate your point:

Step-by-Step Explanation

1. Seller’s Current Situation: Draw the seller with a line linking them to the bank, showing their current mortgage.
2. You as the Buyer: Draw yourself taking over the responsibility of payments to the bank.
3. Ownership Transfer: Show that the seller will transfer ownership to you via a warranty deed.
4. Finding a New Buyer: Illustrate finding a family (use the term “new family” for added empathy) to buy the property from you.
5. Payment Flow: Draw the flow of payments from the new buyer to you and from you to the bank.
6. Foreclosure Rights: Explain that if the new buyer stops paying, you can foreclose and find another buyer. Emphasize that the only transaction that matters to the seller is between them and you.

Contrast with Assignment of Contract

Many investors use assignments to shift responsibility:

• The Flawed Approach: Draw another scenario where the intermediary assigns their contract to the end buyer, removing themselves from the equation. Explain that this exposes the seller to risks if the buyer defaults.

The Key Phrases

Here’s how to explain it:

• “You’re always at the top of the totem pole.”
• “If I don’t do what I said I’m going to do, you can take the house back.”
• “Your worst-case scenario is better than your current situation.”

Explaining the Wrap-Around Mortgage

Here’s where the “wrap donut” analogy comes into play:

The Existing Loan

1. Illustrate Seller’s Debt: Show an $80,000 loan at 4.5% interest, highlighting the principal and interest payments.
2. Your New Buyer’s Loan: Draw how you will sell the house at $100,000 to a new buyer with a higher interest rate, say 9.5%.

Visual Representation

Create a simple diagram showing:

• Inflow and Outflow: Payments coming in from the new buyer and out to the bank.
• Your Profit: The difference between these payments, illustrated as a “money donut.”

Why It Matters to the Seller

Explain that this structure allows you to pay more for the house than traditional buyers, solving their problem quicker and more efficiently.

Wrap-Up

Explaining a subject-to wrap to a seller requires empathy, clarity, and honesty. By listening to their concerns, addressing their fears, and using simple visuals, you can build the rapport and understanding needed for a smooth transaction. Remember, always position the seller as the hero and yourself as the trustworthy guide ensuring their worst-case scenario is still a win.

Are you ready to dive into creative real estate strategies? Visit CreativeCashFlow.com and Propelio.com for more tools, resources, and education to help you close more deals and make your business thrive.

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