Seller wants a wrap and I do fast flips. The numbers don't fit.

You're not borrowing a long hold structure, you're borrowing cheap money for five months. The thing you have to nail is the exit and you've already spotted it. Get "prepayable in whole or part at any time without penalty" in the note in those words or something your attorney likes better. If she says no, the deal is a different deal and you should reprice it.

Wait. She's carrying 200k but only owes 141k. Where does the other 59k come from? She's not handing you cash.

@solder, she isn't. The 200k is the price minus the down payment. 141k of it corresponds to her existing loan and the remaining 59k is her equity, which she's turning into a note instead of cash. So she's financing her own equity plus collecting a spread on the bank's 141k. That's the whole trick.

When @flint sells in month five, does the buyer's title company just pay off the seller's note and then she pays her bank, or do both loans have to come off at the same moment? Because it sounds like there are two payoffs stacked and only one closing.

@compass that's the right thing to ask. The senior lien has to be released for clear title to pass, and the seller's payoff has to be enough to do it. Standard practice is the closing pays the wrap note, and the funds route through so the underlying gets satisfied and released as part of the same closing rather than on a promise afterward. Escrow and closing practice differ by state so the mechanics of who holds what and when vary, and a title company in the state where the house sits should walk it through before anything gets signed.

Run the actual dollars because your comparison is missing the 15k. Hard money: 2,350 x 5 = 11,750, plus 4,900 points = 16,650, and you keep your 15k. Wrap: 1,264 x 5 = 6,320, plus 15k down that you get back at sale. So you're 10,330 better on carry and you've got 15k tied up for five months. That's a real improvement and not as big as "less than half."

Two things wrong with your model.

First, you priced the wrap at 215 and the cash purchase at 215, and she said she won't discount for cash. Would she actually have taken 195 cash? Because if a cash buyer gets 195 and you're paying 215, the extra 20k eats most of the 10,330 @windlass just calculated and the wrap is roughly break-even against hard money.

Second, hard money funds your rehab. Does the wrap? She's carrying purchase price. Where's the 30k coming from, and at what cost? If it's your own cash then you've got 45k out on this deal instead of 15k plus points, which changes your return on cash considerably even if total cost is lower.

On the due-on-sale piece over five months, the exposure is short but it isn't zero, and what gets a lender's attention is usually a change in the insurance or a transfer showing up in county records. Recording practice differs by state, and roughly a dozen states don't publish sale prices at all, so how visible the transfer is depends entirely on where this house is. Your attorney will know for your county.

The prepayment point deserves more weight than it's getting. From her side, the whole reason to do this is the spread and the tax timing she mentioned. A note you can repay in month five gives her neither. She may have proposed a three year balloon precisely because she's assuming three years of income. If you counter with unrestricted prepayment you're removing her reason for doing the deal, and I'd expect the price or the rate to move in response. Better to find that out now than in escrow.

The thing that stands out to me here is that @flint has never signed a note to a private person and is contemplating one where the counterparty keeps a mortgage on the house he's buying. That's two new things at once on a deal with a five month clock.

@ledger is asking the only question that matters. Everything else here is comparing the wrap to hard money on the same price, which assumes she wouldn't have moved on price for certainty of cash. Sellers say they won't discount for cash all the time and then discount for cash.

On the rehab funding: you can sometimes get the seller to carry a smaller note and bring a rehab line separately, but a private note holder in second position behind a bank isn't going to be thrilled about a construction lender coming in ahead of her. Lien position ordering is where this gets complicated and it's a document question, not a spreadsheet question.

My actual answer to your decision: counter with 195, no balloon shorter than 12 months, and unrestricted prepayment. If she takes it you have a good deal. If she takes only two of the three, you learn which one she cares about, and that tells you what the note is really worth to her.

So the seller ends up owing a bank on a house someone else owns, and if @flint doesn't pay, she has to keep paying anyway? Why would anyone agree to that side of it?

@rigging because she gets 6.5% on money that costs her 3.25%, and she gets it without redeploying her equity into anything. That's the trade she's making, and yes, she's taking @flint's credit risk to get it.

@flint, one thing nobody's said. If you're planning to flip in five months, your buyer's lender will look at your title history and see a wrap that was created and extinguished inside half a year. That's not fatal, and it does invite questions and can slow a closing. On a thin margin flip with hard money already priced out of the deal, a two week delay costs you real money. Ask a title company how they'd handle it before you sign, not after.