READ ME – Wraparound Mortgage

This article can be downloaded for free here or on my downloads page. You can also download any or all of the contract forms you will need to sell your house on a wrap. 

The following documents need to be signed and/or delivered before the closing:

Agreement for Purchase and Sale of Real Estate

This document does not convey ownership of real estate, it is simply a promise for you to sell and for the buyer to buy the property under certain conditions. Ask the buyer to make two separate payments to you – an option fee, which is non-refundable but allows the buyer to terminate for any reason within a certain time period, and earnest money, which is refundable during an inspection period when the buyer is allowed to inspect the property, review title, and possibly renegotiate the terms of the sale. Once the inspection period ends, the earnest money “goes hard” and is non-refundable unless the seller defaults. This document can be recorded but as the seller, you do not want the buyer to record it and create a “cloud” on your title, so the form includes a clause preventing the recording of the agreement.

Notice of Conveyance Encumbered by Lien

If you or the buyer is buying title insurance, this disclosure is not required. If neither party is buying title insurance, then you must deliver the notice to the buyer and the lender at least 7 days before the effective date of your Agreement. To do this, give the notice to your buyer at the same time you sign the contract, but make the effective date of the contract at least 7 days after the date you sign it, then fax or scan/e-mail the notice to the lender that same day. (Or if you mail the notice to the lender, make your effective date at least 10 days after the signing date.) Or just buy the title policy and save yourself all this hassle. This document is not recorded.

Authorization to Release Loan Information

As the seller, you do not have to give the buyer this document and it is not required for the transaction, but if the buyer asks for it, it is a fair request. The buyer is well within his rights to confirm your mortgage information before he actually takes over responsibility for paying it off.

Once these documents are executed, make a copy for the buyer and a copy for the title company, attorney, or whoever is going to conduct your closing. If neither you nor the buyer is going to buy title insurance, then you can proceed to closing as soon as the inspection period ends.

The following documents need to be signed at closing:

Special Warranty Deed With Vendor’s Lien

This is the document that conveys title to the property. Even though the first mortgage is not being paid off, you are selling the property to the buyer and the buyer is taking legal title to the property. The vendor’s lien creates a lien against the property that will allow the vendor (you) to foreclose if the buyer fails to pay you the note as promised. This document needs to be signed and notarized because it will be recorded in the county’s property records. The buyer should record the original deed and have the recorded original mailed or delivered to the buyer, with a copy to you or your trustee.

Note Secured by Wraparound Mortgage

You are the lender or payee and the buyer is the borrower or maker. This document is not recorded.

Deed of Trust to Secure Assumption

This is the actual “wraparound mortgage,” but it is officially called a deed of trust in Texas. In a technical legal sense, the Grantor (the borrower/buyer) conveys the property to a Trustee (usually an attorney) to hold for the benefit of the Beneficiary (you, the seller/lender). This document secures the buyer’s promise to pay the note by creating a lien against the property you are selling. (This lien is fairly redundant to the vendor’s lien in the special warranty deed, because in most cases, the seller and the lender are not the same entity. So this is a bit of a belt-and-suspenders approach, but too much protection is far better than too little.) The deed of trust also secures the buyer’s promise to pay your mortgage, even if the buyer is paying your lender directly. If the buyer fails to pay either the first mortgage (to the lender) or the second mortgage (to you), you would be able to foreclose. This document needs to be signed and notarized because it will be recorded in the county’s property records. You keep the original, record it and have the recorded original mailed to you or your trustee, with a copy to the buyer.

Closing Agreement and Due-on-Sale Acknowledgment

This is a crucial document that must be signed and initialed by both the seller and the buyer. It is an acknowledgment by both parties that the underlying mortgage (the first one, held by the original lender) is not being paid off at closing. This means that the mortgage is still in the seller’s name and must still be paid every month. It also means, most likely, that the conveyance of the property will trigger the “due-on-sale” clause, which would allow the original lender to accelerate its note or “call the note due.” If either of those things happens (the first mortgage does not get paid or the first lender accelerates the note), then the lender could foreclose on the property, which would wreck the seller’s credit and wipe out the seller’s wraparound mortgage and the buyer’s ownership of the property. So everyone needs to understand this and sign and initial this document. This document will not be recorded, but the seller needs to keep a signed original of this document and keep it in a very safe place (preferably a scanned digital copy and an actual signed original).

Bill of Sale and Assignment

This is not a required document and as the seller, you do not have to volunteer to sign this agreement, but if the buyer asks for it, it is certainly a valid request. The bill of sale conveys the personal property that is located on the property (basically, everything that is not nailed down – or make that everything that is not permanently nailed down). Usually the personalty is addressed in the purchase and sale agreement, and if not, presumably you will have removed any personal property you want to keep before the closing. However, if there are any leases, security deposits, escrow accounts, vendor contracts or other agreements associated with the property, this document would assign those items to the buyer.

Wraparound Mortgage Bundle

This is a bundle of all of the documents listed above, including the READ ME article.

However, it is possible to sell your Texas house on a lease purchase, and in fact, that may be the best solution for some sellers and buyers. You just want to make sure you keep your transaction “out of the statute,” so you don’t have to jump through all those legislative hoops. And luckily enough, there is a statutory exception that will allow you to sell your house rent-to-own without worrying about having to give all the money back if you don’t follow every single technical requirement for the code.

Landlord-Seller 00 – READ ME Lease Option

This article, titled “Landlord-Seller 00 – READ ME Lease Option,” can be downloaded for $0.01 here or on my downloads page. (I wanted it to be free, but the shopping cart wouldn’t let me.) You can also download any or all of the contract forms you will need to sell your house with a lease option.

These are the documents you will need to sell your house rent-to-own:

Landlord-Seller 01 – Residential Lease Application

Even though you are qualifying your applicants as tenants, you are really qualifying them as buyers. Assuming you want them to buy your house, you are looking for tenants who can afford the eventual mortgage payments and all the other expenses of home ownership, especially if you end up selling them the house with owner financing. So you will want to see verified gross monthly income of at least 3% of the eventual purchase price (or, in other words, three times the estimated “monthly nut” of owning the house).

Landlord-Seller 02 – Residential Lease Agreement

This lease agreement does not mention the option to purchase and vice versa. This is not required by law, but it’s just a good idea to illustrate to your tenant-buyers that the option to purchase is completely separate from the lease, and that paying rent and otherwise being a good tenant is not what entitles them to purchase the house. It’s also worth mentioning that although the option to purchase itself needs to expire within 180 days of the effective date, the lease itself can be longer, so you can offer someone a 12-month lease with a 6-month option to purchase, just so long as they understand (and acknowledge in writing) that the option only lasts 179 days regardless of the length of the lease.

Now, I often get asked if it is legal to give the tenant-buyer a long lease (e.g., 3 years), and provide that the option does not begin until a date 6 months before the end of the lease (e.g., 2 1/2 years into the 3-year lease). The answer is: yes, it is legal, but that transaction will fall under the executory contract statute. Section 5.062(c) of the Texas Property Code says the statute does not apply to a contract

that provides for the delivery of a deed from the seller to the purchaser within 180 days of the date of the final execution of the executory contract.

So you cannot extend the closing date of the actual sale past 180 days in any case without being subject to all the statutory requirements. No thanks.

Landlord-Seller 03 – Option Agreement to Purchase Real Estate

This is obviously the crucial document in the transaction, the document that grants the tenant-buyer the right to buy the property. It is absolutely critical that the option agreement specify that the deed must be executed and recorded on or before 179 days after the effective date of the option, that there are absolutely no renewals or extensions of the option, and that the option consideration is absolutely non-refundable under any circumstances. This document doesn’t have any particular statutory requirements, but I would recommend putting some of the important language in bold all caps and having the optionees initial those paragraphs. This Option Agreement favors the Landlord-Seller very heavily.

Landlord-Seller 04 – Quitclaim Deed

The form of this deed is attached as an exhibit to my form of option agreement to be used whenever the tenant-buyers do not exercise the option to buy the property. Even though the option agreement specifies that it terminates automatically and that recording the option agreement is strictly prohibited and will also terminate the option automatically, it is a good idea to get the non-purchasing tenant-buyers to sign a quitclaim deed so that there is no doubt that they have no legal or equitable interest in the property.

If the tenant-buyers do exercise the option to purchase the property, congratulations! Most don’t. If they do, then you will need to execute a purchase and sale agreement quickly, and you may in fact be selling the house on a wrap or other owner financing now. If so, you will now need some of my seller financing forms, e.g., the wraparound mortgage documents.

Landlord-Seller 05 - Lease Option Bundle

This is a bundle of all of the documents listed above, including the READ ME article.

The purchase price for all downloads includes free updates forever.
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If you have a basic understanding of owner financing in general and wraparound mortgages in particular, you can buy a house on a wrap, hopefully faster and with less hassle than applying for a new bank loan. Like the garden-variety real estate sale, buying on a wrap involves a contract, an inspection period, and a closing, but because there will be no new bank financing (and possibly no title insurance), the entire transaction could take 7 days or less. If you have a seller who has agreed to sell you his house on a wrap, here’s a step-by-step guide to buying your a house with a wraparound mortgage.

Buyer 00 – READ ME Wraparound Mortgage

This article, titled “Buyer 00 – READ ME Wraparound Mortgage,” can be downloaded for $0.01 here or on my downloads page. (I wanted it to be free, but the shopping cart wouldn’t let me.) You can also download any or all of the contract forms you will need to buy your house on a wrap. 

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The following documents need to be signed and/or delivered before the closing:

Buyer 01 - Agreement for Purchase and Sale of Real Estate – Buyer-Friendly

This document does not convey ownership of real estate, it is simply a promise for you to buy and for the seller to sell the property under certain conditions. This agreement allows you 30 days to inspect the property and the relevant documents and terminate for any reason or no reason at all within that option period. It also contains an agreement for the seller to convey all the personal property on the premises to you and a number of other pro-buyer provisions. If you are concerned that the seller may try to sell the property to someone else if a better deal comes along, you may want to record the agreement (or a memorandum of the agreement) with the county clerk, which would create a “cloud” on the title and allow you to enforce your agreement in several different ways.

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Buyer o2 – Notice of Conveyance Encumbered by Lien

This document is of no real concern to you as the buyer. If either you or the seller is buying title insurance, this disclosure is not required, and even if there will be no new title policy, the obligations and potential liabilities for non-disclosure fall on the seller, not you. If you’re interested in this sort of thing, you can take a look at the Texas statute that requires the disclosure and establishes the penalties for the seller who fails to comply.

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Buyer 03 - Authorization to Release Loan Information

You will definitely want this document when you sign the contract so that you can confirm all the information about the first mortgage (the seller’s mortgage that is not being paid off). Usually, requesting a copy of the latest statement will tell you the current principal balance, interest rate, monthly payment, and any amount in arrears, and sometimes will include information about the tax and insurance escrows, if any.

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Buyer 04 – Limited Power of Attorney for Real Estate

It is okay to ask for this document at contract signing, but it’s certainly fine to wait until closing to get the seller’s signature. When the seller executes the POA and names you as the seller’s attorney-in-fact, it gives you the legal right to “stand in the shoes” of the seller in any situation relating to the property. You can do anything with the property that the seller could do – sell it, lease it, service the first mortgage, communicate directly with the first mortgage lender, etc. It is not absolutely necessary that you have a POA for this transaction, and some sellers may object pretty strongly, but you are taking full responsibility for the property and you should want full control over the property. If you don’t comply with the terms of your agreement, however, the seller would be able to revoke the POA and foreclose if necessary.

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The following documents need to be signed at closing:

Buyer 05 – (General) Warranty Deed

This is the document that conveys title to the property. Even though the first mortgage is not being paid off, you are buying the property and taking legal title. The general warranty in this deed is the most expansive warranty of title allowed by law; the seller is warranting to you, the buyer, that no party has any superior claim of title to the property, including claims that may have arisen before the seller bought the property himself. The seller may reasonably request a vendor’s lien be included in the deed, but may not, because the seller will have a lien against the property when the deed of trust is recorded (see below). This document needs to be signed and notarized because it will be recorded in the county’s property records. You should record the original deed and have the recorded original mailed or delivered to you, with a copy to the seller.

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Buyer 06 – Note Secured by Wraparound Mortgage

You are the borrower or maker and the seller is the lender or payee. This document is not recorded.

Buyer 07 – Wraparound Mortgage

This is the actual document that secures your promise to pay the note by creating a lien against the property you are buying. If you do not pay the note as promised or otherwise default, the seller could accelerate the note, although this form does not include a power of sale that would allow the seller to foreclose easily. The seller may ask for a deed of trust and want to include a power of sale, which is standard. The seller may also ask for language in the deed of trust to secure your assumption of the obligations in the first mortgage (even though you are not formally assuming that mortgage, just agreeing to make the payments on it). This document needs to be signed and notarized because it will be recorded in the county’s property records. The seller should record the original and have the recorded original mailed or delivered to the seller, with a copy to you.

Buyer 08 – Closing Agreement and Due-on-Sale Acknowledgment

This is a crucial document that must be signed and initialed by both the seller and the buyer. It is an acknowledgment by both parties that the underlying mortgage (the first one, held by the original lender) is not being paid off at closing. This means that the mortgage is still in the seller’s name and must still be paid every month. It also means, most likely, that the conveyance of the property will trigger the “due-on-sale” clause, which would allow the original lender to accelerate its note or “call the note due.” If either of those things happens (the first mortgage does not get paid or the first lender accelerates the note), then the lender could foreclose on the property, which would wreck the seller’s credit and wipe out the seller’s wraparound mortgage and the buyer’s ownership of the property. So everyone needs to understand this and sign and initial this document. This document will not be recorded, but the seller needs to keep a signed original of this document and keep it in a very safe place (preferably a scanned digital copy and an actual signed original).

Buyer 04 (again) – Limited Power of Attorney for Real Estate

If the seller has not already executed this document, the buyer should request it at closing. (See above.)

Buyer 09 – Bill of Sale and Assignment

The buyer’s purchase agreement should specify the personal property that will be conveyed along with the real estate, and if there are any leases, deposits, escrow accounts, vendor contracts, or other agreements associated with the property, the buyer should get an assignment of all of them at closing.

Buyer 10 – Wraparound Mortgage Bundle

This is a bundle of all of the documents listed above, including the READ ME article.

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The purchase price for all downloads includes free updates forever.

Texas Property Code § 5.016, which became effective on January 1, 2008, applies whenever a seller sells, or contracts to sell, an interest in residential real property “that will be encumbered by a recorded lien at the time the interest is conveyed.” That means the statute applies any time a residential property is sold without paying off the existing mortgage or other liens. So if you are selling a house “subject to” the existing mortgage, or selling on a wraparound mortgage, or – theoretically – even conveying a property to the dreaded Ron Legrand “land trust,” you will have to comply with this new law.

You know, technically speaking, a lease is an interest in land, so you could argue this law even applies to residential leases! But I’m sure that’s not what the legislature intended, and I can’t see anyone successfully arguing that this statute should apply to landlords. So let’s just worry about sellers.

 If your residential sales contract falls under the statute, then you must give the buyer and each lienholder a separate written disclosure statement in at least 12-point type that:

(1) identifies the property and includes the name, address, and phone number of each lienholder;
(2) states the amount of the debt that is secured by each lien;
(3) specifies the terms of any contract or law under which the debt that is secured by the lien was incurred, including, as applicable:
(A) the rate of interest;
(B) the periodic installments required to be paid; and
(C) the account number;
(4) indicates whether the lienholder has consented to the transfer of the property to the purchaser;
(5) specifies the details of any insurance policy relating to the property, including:
(A) the name of the insurer and insured;
(B) the amount for which the property is insured; and
(C) the property that is insured;
(6) states the amount of any property taxes that are due on the property; and
(7) includes a statement at the top of the disclosure in a form substantially similar to the following: 

WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY.

Yikes! That’s a hefty disclosure. Not only that, but the disclosure must be delivered at least 7 days before the effective date of the sale or the effective date of the contract, whichever is earlier. Whoa – did I say before the effective date of the contract? Yes indeed, that’s what the statute says, even if it may not be what the legislature meant. This certainly throws a wrench in the plans of investors who want to sell their properties within 7 days.

So what should an investor do to comply with the statute? Well, the easiest solution is to insist on title insurance for the buyer, which is an exception to the disclosure requirement. Of course, that adds cost and complexity to the transaction. If that’s not an option, then the best thing to do is probably to deliver the disclosure – to the buyer and lienholder – with the executed contract, but make the “effective date” of the contract 7 days later. You can still close at any time after that, even on the effective date of the contract, if need be. But remember that the statute also says that if the buyer does not receive the notice with the contract, he can cancel the contract for any reason up to seven days after receiving the notice.

Selling with seller financing or on a wraparound mortgage is still an excellent way for Texas real estate investors to maximize their profits and minimize management headaches, and I recommend it to many of my clients. But take care that you’re doing it right, either with title insurance or all the proper disclosures.

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The Texas legislature has made it extremely difficult to sell a residential property on a lease option and comply with all the statutory provisions in the Texas Property Code. Chapter 5, Subchapter D of the Code applies to certain “executory contracts for conveyance,” meaning a real estate transaction where title (deed) does not transfer to the buyer immediately. And a 2006 amendment to this subchapter makes it clear that these provisions apply to lease purchase agreements in Texas:

an option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, is considered an executory contract for conveyance of real property. Tex. Prop. Code § 5.062(a)(2).

So the statute applies to lease options, but there are a number of exceptions and carve-outs that define what lease option sellers must do (and make the statute almost impossible to read).

First of all, the statute does not apply at all to rent to own contracts with a term of 180 days or less, so if your tenant-buyer can exercise the option within 180 days, you don’t have to worry about the statute.

However, if the option term is more than 180 days but less than three years, the landlord-seller must jump through a lot of hoops to comply with the statute.

First and most importantly, § 5.085(a) of the Property Code provides that a “potential seller may not execute an executory contract with a potential purchaser if the seller does not own the property in fee simple free from any liens or other encumbrances.”  That seems to say that a seller cannot lease-option his property if there is a mortgage on it!

But hold the phone, because subsection (b) of 5.085 seems to indicate that there is an exception for purchase money mortgages (a deed of trust securing the payment of money used to buy the house).

Subsection (b) says that you can lease option a house with a mortgage on it if:

1. The mortgage was used to purchase the house; and
2. The seller gives the buyer a written disclosure not less than 3 days before the lease-purchase contract is signed (click here to download a disclosure that complies with the statute); and
3. The lien covers only the property being sold and secures a payment amount that is never greater than the amount owed by the buyer; and
4. the lienholder (lender) does not object to the executory contract and consents to verify the status of the loan on request of the purchaser and to accept payments directly from the purchaser if the seller defaults on the loan; and
5. the contract contains certain specified covenants (click here to download a rent-to-own contract that complies with the statute).

And that’s not all. In addition to all of those requirements, if the tenant-buyer defaults on a payment under the contract, the seller must provide a specific written notice of default to the tenant-buyer and allow the tenant-buyer at least 30 days to cure the default. Click here for a notice of default that complies with the statute.

Finally, section 5.073 of the Property Code prohibits landlord-sellers from including certain terms in the lease-purchase contract (such as the forfeiture of the option fee for a late payment). Click here to download a contract that complies with the statute.

So there’s a lot to do if you’re planning to sell your house on a lease option. If you don’t comply with all of these statutory requirements, you could end up forfeiting every penny that the tenant-buyer pays you, or have to pay treble damages and attorney’s fees, or something else horrible.  

Click here to download the contracts, forms and notices you need to legally sell your house on a lease option in Texas, or contact me to talk more about legally selling your house on a lease option, lease purchase, or rent-to-own program.

1. Choose an Effective Date

The effective date of the contract does not have to be the date the contract is signed. It can be the date the contract is receipted by the title company, the date the last party signs it, or another date that you choose. Regardless of what date you choose, you should put the effective date in a prominent position at the top of the contract so it’s easy to find later, when you’re calculating deadlines.

2. Identify the Parties

You will want to make sure that the contract spells out who the seller is and that the seller is who actually owns the property. If the property belonged to a deceased family member, you’ll have to get information on the probate process. If the property belongs to a corporation or other entity, you’ll need to be sure you have the right entity listed on the contract. And if the property belongs to an individual who is married, you will want to have the spouse sign the contract too, because under Texas marital property law, there is a good chance the spouse has some interest in the property, even if it was bought before the marriage.

When entering your name as the Buyer, you can add “and/or assigns” if you wish, but it’s not technically necessary, since as a general rule, Texas contracts are freely assignable.

3. Property

You must include a legal description of the property you are selling. Ask the seller for a copy of the deed that conveyed the property to them, and copy it verbatim into the new contract. Make absolutely sure that the legal description is correct or you could have major headaches at closing and even beyond. This section should also include an agreement by both parties concerning the transaction, e.g., “Seller hereby agrees to sell, transfer, assign and convey to Buyer, and Buyer hereby agrees to buy from Seller, that certain parcel of real property located in _____ County, Texas, and further described as follows….” You can also use this section to specify whether or not any personal property will convey with the real estate, and under what conditions.

4. Purchase Price

It goes without saying that the contract should include the purchase price, but sometimes it can be pretty tricky figuring out how to specify the exact number. If you, the investor, are taking over payments on a loan, or planning on doing a short sale, or paying a price per square foot, you might not be able to nail down an exact figure. That’s okay, as long as you specify what portion of the price will be in cash, what portion will be seller financing, etc., and that it is very clear what you are paying and what you are not.

5. Earnest Money

Sellers will obviously ask for as much earnest money as they can. They will usually tell you something about how 1-2% earnest money is “standard in the industry.” Whether or not that’s true, it’s certainly not true that any particular amount of earnest money is required to make the contract enforceable. As an investor, you will always want to put as little earnest money down as possible. It can be as little as $10 and the contract will still be binding. However, just to be safe, you should make a small portion of the earnest money non-refundable. Call it “independent consideration” and specify in the contract that the Seller gets to keep that independent consideration no matter what. It may seem like an archaic formality, but it will erase any doubt that you have a legally valid and enforceable contract.

6. Financing

The contract should specify how you, the investor, will bring funds to the closing table, even if that doesn’t mean you’re paying a dime in cash. If this is a creative deal, you may be paying part of the price in cash, part with seller financing, part with third party financing, assuming a note, and/or doing a short sale! My contract form has a different paragraph for each type of financing and allows you to check off the ones that apply. You can do it that way or just insert the applicable provisions when they come up.

7. Title and Survey

Even though title insurance is expensive, I always strongly recommend by clients get it for each property they buy. The convention in Texas is for the seller to provide the owner’s title policy at their expense, so you should always write the contract that way. Give yourself an inspection period for the title commitment – say 10 days after the effective date for your seller to provide the title commitment, and 10 days after that for you to make your objections. If there is a fairly recent survey, you might just ask the seller to provide a copy, but if there have been any significant changes to the property since the previous survey, you will want a new one. Ask the seller to pay for it. Some won’t, but there’s no harm in asking.

8. Access and Inspection

This section is one of the most important parts of the contract, because it will give you the wiggle room to get out of the deal if you discover something that makes you change your mind about buying the property. Include in the contract a provision that allows you to access the property upon reasonable notice to the seller. You can use this access to conduct inspections, but also to show prospective tenants and buyers, if you’re planning to quick flip the property. Give yourself an “inspection period” that is as long as possible, and put a clause in the contract that you can terminate the agreement for any reason during that inspection period. That way, if you don’t like your financing terms, or you’re not sure you can flip it for a profit, or if you just decide you don’t like the deal anymore, you can terminate and walk away after a free look. Be sure to mention that if you terminate, the Seller agrees to notify the title company and agree to release your earnest money back to you.

9. Closing

You don’t have to pick an actual date (like November 4th) for your closing date. Instead, it can be “a date not more than 30 days after the expiration of the Inspection Period, or such other date mutually agreed upon in writing by both parties.” This section should specify when and where the closing will take place and what each party has to do at the closing. As the buyer, you will only need to show up with the money, but the seller will need to deliver a general warranty deed (conveying the real property to you), a bill of sale (conveying the personal property to you), a title policy (insuring your ownership in the property), and perhaps other documents required by the particular transaction or the title company. You should specify how property taxes will be prorated, if at all, and who will pay which closing costs, and in what percentage.

10. Default

Make absolutely sure you include a default provision specifying that if you walk on the deal, the sole and exclusive remedy for the Seller is to keep your earnest money. Do not agree to a contract where the Seller has the right of specific performance, as the last thing you would ever want is the seller suing you to try to force you to buy a property that you don’t want.

11. Special/Miscellaneous Provisions

Don’t get bogged down by a form; there may be some unique circumstances in your deal that require some special provisions to be written in. You don’t necessarily need a lawyer to write in that you want the carpet to be cleaned within a week before closing. And there are a ton of so-called “boilerplate” provisions that can offer you some extra protection, such as a “merger” clause. This is a provision that makes it clear that what you sign is the complete agreement between the parties and supersedes all “prior or contemporaneous oral or written agreements” between you and the seller concerning the property. This is important because it prevents your Seller from suing you after closing and claiming that you verbally promised to pay him an extra $10,000 within 60 days after closing and that that agreement was part of the agreement you signed. (I won’t get into an academic discussion of the statute of frauds as it pertains to this hypothetical, but in general, real estate contracts have to be in writing to be enforceable, but there are a few exceptions to that rule that you really don’t want to end up in court arguing over.

My standard investor’s contract form is only 3 pages long and it covers all the bases. You can draft your own investor-friendly contract without too much trouble and save yourself thousands of dollars in the process — not just on attorney’s fees for drafting the agreement but avoiding some of the seller-friendly provisions that can cost you a great deal of money “down the line.” Good luck.

Investor-Friendly Agreement for Purchase and Sale of Real Estate – $29.70
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The rest of this article won’t make sense unless you have a blank TREC form in front of you, so go ahead and download it now and print it out.

Section 1: When you are filling in your name or your company’s name as the Buyer, you can put “and/or assigns” if you want to, but it’s not necessary and it might raise your seller’s eyebrows. Contracts in Texas are freely assignable unless they specify otherwise, and there’s nothing in the TREC form to prohibit you from assigning it if you’re just flipping the contract.

Section 2: For the love of all that is holy, be sure the legal description is correct. The best source for an accurate legal descriptiong is the deed that conveyed the property to your seller.

Also, the convention among Texas agents is that appliances such as washer/dryers, refrigerators, dishwashers, etc. do NOT convey along with the house — even though section 2.B says “all equipment and appliances,” it is referring to fixtures that are permanently attached. If you want the appliances and everything else in the house to come along with the house, then you should add a clause to the special provisions (section 11) that says something like, “Notwithstanding anything to the contrary in this contract, the definition of ”Property” includes all items of personal property that are located on the premises as of the effective date of this contract.” That way, if the Seller wants something not to convey, the Seller will have to bring it up and list it in the contract.

Section 3: This is important for the entire contract: whenever there is a blank, make sure it is filled in. For example, in section 3, if it is a no-money-down deal, then write “$0.00″ in the first blank in section 3 (cash portion of the purchase price).

Section 4: Again, if there is no third-party financing, write ”N/A” in the blank. If you are getting third-party financing, pick a number as high as possible for the amount of the loan, and make sure that the contract is subject to financing approval (check the box in Section 4.A.(2)(a)).

Section 5: Most realtors will tell you that one percent or more is “standard” as the amount of earnest money, but you do not have to put down that much as earnest money. Period. In fact, given the fact that there is a provision for the independent right to terminate the contract (section 23), earnest money is not even required at all to make this contract enforceable. Plus, it’s refundable anyway.

Also, you don’t have to get title insurance, and you can use an attorney as your escrow agent if you wish — like, say, Drew Shirley, P.C. (I can help you close escrow with a title company as well.)

Section 6: It is “standard” for the Seller to pay for the owner’s title policy, so you can throw that back at the seller’s agent. However, in subsection B, it allows the seller 20 days to furnish a title commitment, but I think 10 days is plenty of time for the commitment.

If the survey is more than a few years old, you probably want a new one, and you can negotiate who pays for it. You will want to make sure all of the exceptions listed on the title commitment are depicted or noted on the survey, and vice versa.

You will want to write a “title objection letter” to the title company after you receive the title commitment, objecting to some of the standard exceptions to title that appear in the first draft of the commitment. Plus, you will want to review the exception documents to make sure they affect the property you are buying, that they don’t restrict the use of the property in a way that you are intending to use it for, that they haven’t expired, etc.

Section 7.D.: There is no need for you have to identify the repairs you would like the Seller to make as you are signing the contract — you have an inspection period to determine what those are. I would just check box 2 and put “To Be Determined After Inspection” in the blank.

Section 8: If you are dealing with only one broker, you may want to include language to that effect in the special provisions.

Section 11: In addition to what I’ve mentioned already, here’s a good contingency clause to put in the special provisions: “Notwithstanding anything to the contrary in this contract, Buyer shall have the absolute right to terminate this contract, for any reason or no reason at all, by delivering written notice of Buyer’s intention to terminate the contract on or before the date which is thirty (30) days after the effective date of this contract. Upon Buyer’s delivery of such written notice to Seller, Seller shall cause the earnest money to be immediately refunded to Buyer in cash or other immediately available funds, and this contract shall be terminated and shall have no further force or effect, and the parties shall be released from all rights and obligations contained herein, except to the extent such rights or obligations, by the terms of this contract, survive any termination hereof.” That pretty much gives you a free 30 day look.

Section 12: the Seller can pay up to 3% of the purchase price as Buyer’s closing expenses, so go ahead and put 3% of the purchase price in the blank at section 12.A.(1)(b).

Section 15: If you are the Buyer in a TREC form contract, do not, repeat, do NOT sign the contract unless you have crossed out the specific performance remedy for Seller. Specificially, you should cross out a portion of the first sentence of section 15 and replace it with some other language, so that it reads: “If Buyer fails to comply with this contract, Buyer will be in default, and Seller may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b), as Seller’s sole and exclusive remedy, terminate this contract and receive the earnest money as liquidated damages, thereby releasing both parties from this contract.” This is the most important change in the contract, and I would not sign this contract unless this change is made. A deal breaker. If you, the Buyer, defaults, then the Seller can keep the earnest money and find a new buyer. He doesn’t get to force us to buy a house we don’t want or can’t afford. Period.

Section 21: If you do not want to accept legal notices in a certain way, then cross out the method you don’t want and do not fill in the blank. (For example, if you do not want to receive valid legal notices by e-mail, then cross out the words “electronic transmission”).

Section 23: Obviously, you want the termination option to be as long as possible, but if you have your special provision about termination, then that provision will control. And like earnest money, $100 may be “standard” as an option fee, but it’s all negotiable.

The TREC form is not a great contract for investors, but if you know what’s in the contract and know where to make a few strategic changes, you can turn it in to a much more buyer-friendly contract without losing the deal. If you have any questions about this article or the TREC form, please give me a call at (512) 417-6171 or send me an e-mail.

The wraparound mortgage is an excellent and perfectly legal way for investors and homeowners to sell their properties faster and for more money than by selling for cash only. It’s also a great way for realtors to get their listings sold before they expire and avoid losing their commissions.

The traditional, “garden-variety” house sale works like this: Sam Seller owns a house. He’d like to sell it for $210,000. He owes $160,000 on his first mortgage (deed of trust in Texas) to Big Bank. Sam puts his house on the market, either with a realtor or FSBO (For Sale By Owner). Bill Buyer comes along and wants to buy Sam’s house, and they agree on a purchase price of $200,000. Bill puts down some earnest money, they sign a contract, and then Bill applies for a new mortgage from Bigger Bank. Bigger Bank checks Bill’s credit, asks for his tax returns, pay stubs, and a pint of blood, and makes Bill pay for a new appraisal, a new survey, loan fees, underwriting fees, fee fees, etc. At closing, Bill pays Sam a down payment and Bigger Bank pays off Big Bank’s mortgage, Sam’s realtor, the title company, etc., before giving Sam whatever is left over. Big Bank’s mortgage is paid off completely and goes away when Big Bank files a ‘release of lien’ in the county records. Bill now owns the house and Bigger Bank has a first position lien on the house with the new mortgage.

The wraparound mortgage works a little differently. Remember, Sam Seller owes $160,000 on his mortgage with Big Bank. Sam enters into a contract to sell his house to Bill Buyer for $210,000. But this time, Bill does not apply for a new mortgage with Big Bank. Instead, Sam acts as Bill’s bank and mortgage lender. At closing, Bill pays Sam a $21,000 down payment (10%) and gives Sam a promissory note for the balance of the purchase price ($189,000), plus a deed of trust or wraparound mortgage securing Sam’s lien against the property. Sam gives Bill a deed, so Bill now owns the property, but Sam does not pay off Big Bank. Instead, Bill pays Sam every month, and then Sam pays Big Bank out of what he receives from Bill. Bill’s new debt has “wrapped around” Sam’s old debt – hence the name. (“Hence the name” is a phrase that should be used more often, in my opinion.)

This arrangement – Bill pays Sam, Sam pays Big Bank – can continue indefinitely, with Sam getting monthly cash flow from the spread between his payment to Big Bank and Bill’s payment to him. If Bill and Sam agree, they can include a balloon payment in Bill’s note, so that Bill will need to re-finance or re-sell the house within a certain time, usually 3-5 years. When that happens, Bill will pay off his note to Sam and Sam will pay off his note to Big Bank, and the new loan will take a new first position lien on the property. But until Bill sells the property or refinances, there will be two mortgages on the property – Sam’s mortgage with Big Bank and Bill’s mortgage with Sam.

What are the advantages of the wraparound mortgage? Well, for Sam Seller, he gets a cash down payment at closing, monthly cash flow for as long as both mortgages are in place, and another cash payment when Bill Buyer re-finances in a few years. He also gets a better price, better terms and a quicker closing for his sale, because he doesn’t have to wait for Big Bank to process the loan, do the appraisal, etc. And if he sells with 10% down, he can still pay his realtor commissions and keep everybody happy.

Bill Buyer also gets the advantage of a quick closing, and he doesn’t have to go through the lengthy loan application process, credit check, etc. If Bill has some credit issues or other reasons why he wouldn’t be able to qualify for a new mortgage loan right now, he can still buy a house now and have a couple of years to get his credit issues straightened out.

Now, it is true that selling a house on a wrap usually violates triggers the due-on-sale clause in the original deed of trust. That clause, which is included in almost every deed of trust, says that if the seller conveys the property without paying off the first note, then the lender can accelerate the note and call it due. It is not necessarily a violation of, or a default under, the deed of trust, and it is absolutely not “illegal” to do this type of transaction. It is simply a clause that gives the lender the right, but not the obligation, to call the note due.

It is true that this is a risk for both seller and buyer in this type of transaction. But how great a risk? Banks are not in the business of foreclosing on houses and owning real estate. Banks are in the business of making loans and getting paid back. As long as the payments remain current, what incentive does the bank have to accelerate the note? They have enough non-performing loans to worry about, why would they care about one that was being paid on time? As a practical matter, banks almost never “call notes due” based on the due-on-sale clause as long as they are still getting paid. In fact, I have never even heard of it happening if there were no other violations of the mortgage or other issues with the note.

It is a minuscule risk, but it is an actual risk and one that should be disclosed to everyone – the seller, the buyer, the title company, even the lender itself. And Texas law requires a notice to the lender and the buyer if a property is being sold on a wrap and no one is buying title insurance. For more on that particular issue, click here.

With more and more buyers having trouble getting financed for a traditional bank loan, seller financing in general and wraparound mortgages in particular will become more and more common. You can click here to download all the contracts and forms you need to sell your house on a wraparound mortgage, or you can click here to see my fee schedule.