Real Estate Answer Man

These are the most common (or, you might say, “frequently asked”) questions I hear from real estate investors, buyers, sellers, and everyone else who finds out that I am a “creative real estate attorney.” The most frequently asked questions are at the top of the page. As always, my answers are legal information only, and not legal advice, and I am not your lawyer. If you have a real estate question that is not answered here, please submit it at the bottom of this page.

Q: How can you sell a house without paying off the mortgage? Isn’t that illegal? OR My lawyer / realtor / cousin / chimney sweep told me wraparound mortgages are illegal, so how can you do them? OR If I do a wraparound mortgage, won’t the lender just call the note due and foreclose?

A: WRAPAROUND MORTGAGES ARE 100% LEGAL IN TEXAS. I repeat: wraparound mortgages are 100% legal in Texas.

I am not sure exactly why everyone seems to think wraps are illegal, but it is by far the #1 question I get when I discuss creative real estate with people. The truth is that wraparound mortgages are not only legal in Texas but have been for more than 100 years. The only thing I can think of is that there are a couple of things about wraps that are illegal-”sounding,” I guess.

The first thing is that when you sell a house on a wrap (or any transaction where the existing mortgage is not paid off), that transaction will most likely trigger the “due-on-sale” clause in the mortgage. It is not always a default or even a violation of the mortgage when this happens, but it does give the lender the right, but not the obligation, to accelerate or “call” the note and demand payment in full, or else foreclose. The due-on-sale clause strikes fear into the hearts of sellers, buyers, and investors everywhere, but it really shouldn’t, because as a practical matter, LENDERS NEVER INVOKE THE DUE-ON-SALE CLAUSE AS LONG AS THEY ARE STILL GETTING PAID. You can read more about this here.

The other illegal-sounding thing about wraparound mortgages is a new Texas statute that requires a “notice of conveyance encumbered by lien” in certain circumstances. If you sell a house (residence) in Texas on a wraparound mortgage (or any transaction where the first loan stays in place), AND NO ONE BUYS TITLE INSURANCE, then the seller must notify the lender and the buyer about the underlying financing. This seems like a big deal to those who live in fear of the due-on-sale clause, but it is really not much of an issue. First of all, most residential real estate transactions involve title insurance, so the notice isn’t even required in those instances. And if there’s no title insurance, it’s actually better to make sure everyone has full disclosure of everything, because if the bank is going to object to the due-on-sale violation, it’s better to find out before you close than after. You can read more about this here, or download all the wraparound forms you would ever care to see – including the Notice of Conveyance Encumbered by Residential Lien – here.

Q: What kind of entity do I need to protect my assets if I invest in real estate? OR What kind of insurance do I need to invest in real estate?

A: Coming soon…