From Page 91 of THE NOTE PROFESSOR NOTEBOOK

I call a wrap around mortgage, or wrap, for short, a gift, because you will be earning interest on money you do not lend. Great gift, don't you think? A wrap around mortgage is also called an All Inclusive Trust Deed, and a "Tootsie Pop" mortgage.

A wrap is nothing more than a junior lien that "wraps" around senior liens. In essence, a wrap works like this. The buyers would make you a monthly payment for the wrap note. You then would make the underlying payments, and have a cash flow of what is left. Because your wrap lien includes the underlying senior liens, you will be collecting interest on the spread between your junior lien and the senior liens. Hence, the "all inclusive" term. By collecting interest on money you do not lend, you will greatly increase your yield, as we will later plainly see.

For example, if you had a property worth $100,000 with a mortgage of $70,000 you would have equity of $30,000. Not taking the due on sale clause into consideration, the terms are at 7% with payments of $629.18 for 15 years. Bob and Betty Buyer have offered you $100,000 with 10% down, and want you to finance the rest. You have two options to make this deal work. One is for you to take back a straight second with the Buyers assuming the 1st. The other is to take back a wrap around mortgage, where the Buyers would be paying you monthly payments, and you would be paying the underlying lien. Which would offer you the better yield? Lets' look.

If you structure the deal where the Buyers put their 10% down and assume the 1st lien of $70,000, you would then carry a 2nd of $20,000 dollars @10% interest with payments of $214.92 for 15 years. With this method, you would be receiving a 10% yield. Here is what the note would look like:

N = 180
I/YR= 10
PV= -$20,000
PMT = $214.92
FV = 0

Let's see what happens if you were to structure this deal using a wrap around mortgage. You would be carrying a $90,000 note that would include the senior lien of $70,000, plus the $20,000 you are financing. Your wrap note would look like this:

N = 180
I/YR= 10
PV = -$90,000
PMT = -$967.14
FV = 0

With the $967.14 payment, you would make the underlying payment of $629.18. Subtracting the $629.18 from the $967.14, you will enjoy cash flow of $337.96. By structuring the transaction as a wrap, you have increased your cash flow from $214.92 to $337.96. That is $123.04 more a month!

But PROFESSOR, how is this possible? Both the 2nd lien note and the wrap were at 10%. The answer is simple. In the first example, you are receiving 10% on only the $20,000 you financed. By using a wrap mortgage, you are not only receiving 10% on the $20,000 that you are financing, but also the spread of 3% (10%-7%) on $70,000 of money you did not lend. Let me say that again, and in another way, in case you did not pick up on it----YOU ARE RECEIVING 3% ON $70,000 THAT WAS NOT YOUR MONEY!

Let's see what your yield will be: Remember you have $20,000 loaned out, and receiving a cash flow of $337.96 monthly for 180 months. After we identify the variables, we will solve for I/YR. Your deal looks like this:

N = 180
I/YR= 19.09
PV = -$20,000
PMT = $337.96
FV = 0

WOW! You will enjoy a yield of 19.09%, while Bob and Betty Buyer are paying only 10%. Do you understand why I call wraps a gift? There is a gift of an extra 9.09%.

There are several ways to structure wraps. This example is the least complicated, where you had N on underlying liens coinciding with the N on the wrap. You could also have the wrap longer than the underlying, where the underlying lien is paid off at some point, and you keep the entire wrap payment. That can be real fun. You could introduce balloons, graduated payments, or an endless amount of combinations. These combinations can give you even extra gifts.

Next month we will examine a wrap note with different terms. You are going to love this one.

Yes, there are disadvantages to wraps, which is a topic for another discussion. Look for it in the NOTE PROFESSOR NEWLETTER. In this lesson, I wanted to bring out how a wrap works, and how you can use a wrap to increase you yield.

As always, obtain competent legal and tax advice when venturing into the world of owner financing, especially wrap around mortgages.

If you have questions or comments, be sure to CONTACT ME I get the topics for my newsletters from your input.

Copyright © H&P Capital Investments LLC
All rights reserved
Tom Henderson
a.k.a. THE NOTE PROFESSOR

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By popular demand, THE NOTE PROFESSOR NOTEBOOK is now available in easy, downloadable E- book form for a the low, affordable price of $39.95.

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Simply go to the NOTE BUYERS STORE. I can think of nowhere that you can find such information packed products at such incredibly low prices. We are still working out the bugs, so if you have any problems, be sure to contact me.

The Thanksgiving Holiday season is on us again. I think it is appropriate to remember the REAL First Thanksgiving and be reminded again how socialistic economic systems fail, while free markets produce abundance. Below is a reprint from the November, 2009 Issue of The Note Professor Newsletter. Happy Turkey Day.

A valuable lesson in economic systems can be learned from the First Thanksgiving. For the most part, we are taught the Pilgrims landed in America in 1620, and had a harsh winter. However, with the help of the Indians teaching the colonists how to plant corn, in 1621 the colonist had a plentiful harvest, where they invited the Indians for a feast. Not quite true.

While there was a feast in 1621, the feast was to celebrate only a successful hunting party, not a plentiful harvest. In fact for the next couple of years, the colonists almost starved to death. How could this be in a land so rich in natural resources? A look at the economic systems employed by the colonists will give us the answer.

Governor William Bradford, the leader of the colonists, describes in detail in his book "Of Plymouth Plantation", that because of religious reasons, the Mayflower Compact set up a system of socialism as a way to organize production and distribution of goods. It just seemed like the "Godly" thing to do was to take all the production from hunting, fishing and planting and, place it in a pool, and then "share and share alike". The results were not pleasant. Instead of harmony, harsh words, anger, resentment were the results when workers could not enjoy the fruits of their labor;

From "Of Plymouth Plantation":

" --the young men--did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong --had not more in division--than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes, etc-- thought it some indignity and disrespect unto them. And the men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it."

More importantly, because no one wanted to be forced to work for the benefit of others, the colonists almost starved. William Bradford, reported that the colonists went hungry for years, because they refused to work in the fields. They preferred instead to steal food. He says the colony was riddled with "corruption," and with "confusion and discontent." The crops were small because "much was stolen both by night and day, before it became scarce eatable."

Governor Bradford saw the system of "from each according to his ability, to each according to his needs" was not working. In the spring of 1623, Bradford changed the system. A plot of land was given to each family. However, what was produced on the land was the family's to keep. Any excess could be traded as the families saw fit. The same went for hunting and fishing. What were the results?

From "Of Plymouth Plantation"

"instead of famine now God gave them plenty," --"and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God."

Some will say the abundance was just by chance. Governor Bradford had a different recollection as evidenced by his remarks, "any general want or famine hath not been amongst them since to this day." It should also be added that in 1624, so much food was produced that the colonists started exporting corn.

So when you are with your family giving thanks for your loved ones and enjoying the beginning of the holiday season, take time to remember also the reason we are celebrating this holiday instead of remembering a tragedy. The reason was a change from a socialistic economic system to a free market system. Another example of free markets working, while socialism fails.

HAPPY THANKSGIVING

If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR Remember: If you know of someone who has a note to sell, I DO PAY REFERRAL FEES.

Copyright © H&P Capital Investments LLC
All rights reserved
Tom Henderson
a.k.a. THE NOTE PROFESSOR

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