How much of your own cash does it take to sell a lot on owner financing? If your lender wants a release on every lot, the answer can be a lot more than you think.
A land investor who subdivides and sells on terms told me he keeps running into a "liquidity crunch." He sells a lot with 5% down, then has to find the cash to pay his lender's release. Here is the math behind that crunch, and how a wrap (short for wraparound mortgage) gets rid of it.
What is a partial release price?
It is what you pay your lender to take its lien off one lot so you can sell it.
When a lender funds a tract you plan to split, the loan covers the whole tract. To sell one lot with clear title, you pay the lender a release price, and it releases that lot from its lien. The release price is usually at least that lot's share of the loan, and some lenders add a premium on top.
More on how these work in how partial release clauses work.
Selling lots on terms?
Keep our loan in place and wrap it. No release payment at each lot sale. Written quote in 24 hours.
See Wrap FinancingGet a Free QuoteWhy do releases cause a cash crunch when you sell on terms?
Your buyer pays 5% down, but your lender wants the full release price at closing.
Say you buy 40 acres for $200,000 with a $130,000 loan and split it into 8 five acre lots. Each lot's share of the loan is $16,250. You sell a lot for $59,900 on owner financing with 5% down. Your buyer brings $2,995. Your lender wants $16,250. You bring the other $13,255.
Do that 8 times and you have put $106,040 of your own cash into releases, before closing costs. Your buyers' notes pay you over 10 years, but your cash is gone today. That is the crunch. The usual fix is to sell the notes at a discount to get the cash back.
The takeaway: releases work with cash buyers and punish low down payment sales.
How does a wrap fix the cash crunch?
Our loan stays in place, so the down payment stays in your pocket.
With a wrap, nothing is due to us when a lot sells. Your buyer's note wraps around our loan. You keep the $2,995 down payment on every lot, $23,960 across all 8. Your buyers pay you $6,505.08 a month in total, and you pay us $1,516.67 a month at 14% interest only. We modify our loan into a long term loan at the same rate, so you are not racing a 2 year maturity.
See how the program works on our wrap financing page.
Wrap or releases: how do they compare?
Same deal, same lots, very different cash position.
| Paying releases | Wrap financing | |
|---|---|---|
| Due to the lender at each lot sale | The release price ($16,250 a lot in our example) | Nothing |
| Your cash after 8 lot sales | $106,040 out of pocket | $23,960 in your pocket |
| Monthly | $6,505.08 in, loan paid off | $6,505.08 in, $1,516.67 out |
| Pressure to sell notes | High, to get your cash back | None, sell when you want |
| Your loan | Short term bridge, paid down lot by lot | Long term loan at the same rate |
Example only: 8 lots at $59,900, 5% down, 11.9% over 10 years, $130,000 loan at 14%. Release price assumed at each lot's share of the loan with no premium. Lots under 10 acres need a perc test showing a conventional septic system.
When does paying releases still make sense?
When your buyers pay cash, or when you sell each note at closing.
If a buyer pays cash for a lot, the release comes out of the sale proceeds and nothing comes out of your pocket. The same is true if a note buyer buys the note the day the lot sells. Our sell at closing program does that for notes with a larger down payment. In both cases the release is simple.
Rule of thumb: sell for cash, pay releases. Sell on terms, wrap.
How do I set up a wrap with Damen Capital?
Tell us on the first call that you plan to sell on owner financing.
We fund the purchase with a land flip or subdivide loan. When you start selling on terms, we keep our loan in place and modify it into a long term loan at the same rate as your purchase loan. Send the parcel, your price, and your lot plan to the instant land loan quote and we will reply within 24 hours.
Stop paying releases on every lot.
See Wrap Financing →Frequently Asked Questions
What is a partial release price?
The amount you pay your lender to take its lien off one lot so you can sell it. It is usually at least that lot’s share of the loan.
Why do releases cause a cash crunch when you sell on terms?
Your buyer pays a small down payment, but the lender wants the full release price at closing. You cover the gap with your own cash.
How does a wrap fix the cash crunch?
The lender’s loan stays in place, so nothing is due at each lot sale. The down payment stays with you and your buyers’ payments cover the loan.
When does paying releases still make sense?
When your buyers pay cash, or when you sell each note at closing. Then the release is paid from the sale and nothing is out of pocket.