A land investor emailed me last week with a question I hear more and more. He buys acreage, splits it into lots, and sells the lots on owner financing, usually with 5% down or less. His question: would we keep holding our loan while he writes wrap notes to his buyers?
He called the problem he was trying to solve a "liquidity crunch." Every time he sells a lot, his lender wants a release payment, and he has to find the cash. That is a real problem. Here is why it happens, and what to do about it.
Can I wrap my land loan?
Only if your lender agrees to it. Most do not. We do.
Wrapping your loan means you sell the land on owner financing while your own loan stays in place. Your buyer pays you, and you keep paying your lender. Most land lenders will not allow this because their loan has a due on sale clause. If your lender agrees up front, a wrap is a simple way to sell on terms.
Want a lender that allows wraps?
We fund your purchase, keep our loan in place while you sell on owner financing, and modify it into a long term loan at the same rate.
See Wrap FinancingGet a Free QuoteWhat is a due on sale clause?
It lets your lender call the whole loan when you sell.
A due on sale clause is a paragraph in most mortgages and deeds of trust. It says that if you sell or transfer the property, the lender can demand the full balance. On a land loan, it is how the lender makes sure it gets paid when the land sells. Selling on owner financing is still a sale.
Your buyer gets the deed. Your buyer signs a note and a mortgage or deed of trust to you. From your lender's point of view, the land it lent on has been sold, and the clause lets it ask for its money.
What happens if I wrap a loan without my lender's OK?
The lender can call the loan, and you may have to pay it off fast.
Some investors wrap anyway and hope nobody notices. I would avoid that. If your lender finds out and calls the loan, you need cash or a new loan quickly. Until you pay it, your buyers' lots are still tied to a loan in default. That is a bad spot for you and for them.
- You may have to pay the full balance on short notice
- Your buyers' lots stay tied to your loan until it is paid
- You may end up selling your notes at a discount to raise the cash
The takeaway: get the wrap agreed in writing before you sell, not after.
Why do most land lenders refuse wraps?
Their loans are short term, and your sale is how they get paid.
Most private land loans are bridge loans. The lender expects to be paid back in a year or two, usually when you sell the land. A wrap turns that short loan into a long one, because your buyers pay you over 5, 10, or 15 years. In my experience, most land lenders do not want to wait that long.
So they require a release payment on every lot you sell. You pay the lender its share of the loan for that lot, and it takes its lien off. That works fine when your buyer pays cash. It hurts when your buyer puts 5% down.
Which land lenders allow wraps?
We do.
We fund your land purchase, keep our loan in place while you sell on owner financing, and let your buyers' notes wrap around it. When you start selling on terms, we modify our loan into a long term loan at the same rate as your purchase loan. Your buyers pay you and you pay us. See the full program on our wrap financing page.
Rule of thumb: tell your lender you plan to sell on terms before you close, not after.
Is a wrap better than paying releases?
If you sell on terms with low down payments, usually yes.
With releases, your cash goes to the lender at every lot sale. With a wrap, the down payment stays with you and your buyers' payments cover our loan. We ran the numbers on a real sized example in wrap financing vs paying releases on every lot.
If you sell mostly for cash, releases are fine. If you sell on terms, a wrap keeps your cash working.
Planning to sell on owner financing?
See Wrap Financing →Frequently Asked Questions
Can I wrap my land loan?
Only if your lender agrees to it. Most land lenders do not. Damen Capital does: we keep our loan in place while you sell on owner financing.
What is a due on sale clause?
A clause in most mortgages and deeds of trust that lets the lender call the whole loan due when the property is sold. Selling on owner financing is still a sale.
What happens if I wrap a loan without the lender agreeing?
The lender can call the loan. Then you need cash or a new loan fast, and every lot you sold on terms is tied up until you pay it.
Which land lenders allow wraps?
Damen Capital does. We fund the purchase, keep our loan in place, and modify it into a long term loan at the same rate when you start selling on terms.