What's the Difference Between a Subto and a Wrap?

The Short Version

In a subto transaction, the buyer simply agrees to take over the payments when buying a property from the seller.
In a wrap transaction, a formal lender/borrower relationship is established between the seller and buyer.

In both cases, the buyer pays the seller's mortgage. In both cases, the buyer is purchasing "subject to the existing mortgage."

In both cases, but the bank is not notified of the transfer of ownership.

This is a complex topic. Connect with Creative TC if you have a deal and need guidance.

Wraparound financing (wrap)

Also known as a "wrap" or "all-inclusive deed of trust" / "AITD," this is a type of financing in which the a new second mortgage is recorded against the property. The seller's new mortgage is "wrapped around" the existing mortgage on the property. Payments are usually made to a 3rd party loan servicer (additional monthly cost) rather than the seller's mortgage company.

With wraparound financing, the buyer makes payments to the seller (usually through a 3rd party loan servicer) rather than directly to the lender.

"Subject to" financing (subto)

Also known as a "subto" purchase, this is a type of real estate transaction in which a buyer commits to make the monthly mortgage payments on behalf of the seller, but does not assume the mortgage. This is sometimes called an informal assumption.

Wrap or Subto - which one should you use?

A wrap is more formal and complex. It is also an opportunity to update the terms of the loan (modify interest rate or total loan balance), but those same things can also be accomplished using a subto combined with seller finance (a hybrid).

Investor buyers may need to purchase property subto rather than with a wraparound mortgage. Depending on their plans for the property, some title companies may not issue title insurance if they acquired with a wraparound mortgage.

A subto transaction tends to be more flexible for investor buyers who understand better than an owner-occupant how to use a property to either pay for itself or produce profits. Even if their immediate plans don't require the flexibility of subto over a wrap, things change, and they prefer the option to pivot as the market changes.

When selling to an owner-occupant non-investor, a wrap is certainly the best option.

When selling to an investor, a wrap is a good choice, but may be overly-restrictive... If selling subto, it is critical to get the best documents at closing that will provide bulletproof coverage in case the buyer defaults.

If you're working a wrap or a subto, nobody knows creative finance real estate like Creative TC.

Book a call with us today