i am looking at buying a 2 unit building. the seller does not own free and clear. he owes around 140k. how can a seller hold paper when he doesnt even own free and clear? what is the best way to set this up? what is this type of deal called? is it a master lease? a lease option? a rent to own? land contract?please help!?!?
wrap around mortgage sounds right to me!
ill google wrap arounds and read all about them…but can you give your take on how they work? thank you for replying…
This example is the easiest I can say for all to understand and its the basic of basic. Draw a circle on a peice of paper, this represents the underlying mortgage. Now draw a circle around that circle. This is the land contract etc. You have just wrapped it. Really this is a AITD ( All Inclusive Trust Deed ) wrap or wraparound mortgage is like the slang. Get permission from the lender and have an Attorney write it up.
Herbster
The lender is probably not going to give permission to wrap their note. This will probably trigger the due on sale clause.
ok-let me simplify my question. if i am seeking seller financing, and the property im looking to buy is not owner free and clear…what is the best way to set up a deal? i want to be protected, but without a deed i feel vulnerable…
If you need to have the deed in your name, AND, if you can qualify for a loan, assume the seller’s first mortgage and then have the seller hold a second mortgage for the balance of your purchase price.
Your real estate attorney or a title company in your area should be able to walk you through settlement on this type of deal.
Just to clarify herbster’s comment: Consider this example of a property that should sell for a total of $200,000,
- but there is a preexisting mortgage on the property that still has a balance of $150,000 with an interest rate of 7%. The buyer is able to put $20,000 down on the purchase of the property, but needs to finance the $180000 balance of the purchase price. The seller agrees to finance the entire loan at 8%. The seller creates a wrap-around mortgage for $180000 which “wraps” a new $30000 second mortgage around his existing $150000 first mortgage with the total of both mortgages subject to an 8% interest rate for the buyer.
At this point, the buyer of the property will make his or her loan payments based on the loan balance of $180,000, while the seller continues to make the payments that s/he was already paying on the original mortgage for that property.
- OR, there is a preexisting trust deed on the property that still has a balance of $150,000 with an interest rate of 7%, and the buyer is able to make a $20,000 down payment on the purchase of the property. In this case, rather than a wrap-around mortgage, an all inclusive deed of trust may be formed at $180,000, with an interest rate of 8%.
The buyer of the property will still make his or her loan payments based on the new loan balance of $180,000, and the seller continues to make the payments that s/he was already paying off from the original trust deed for that property.
The all inclusive trust deed and the wrap around mortgage are separate and distinct documents. Each is used in a specific situation, but both accomplish the same thing.
The seller will put title into a trust and wrap the mortgage to you. The big concern is ensuring that the seller pays the underlying note on time so that the property doesnt get foreclosed under you.
As Dave T said, the short answer to your question is to get the deal under contract and then send it to the closing attorney and let him/her take it from there. Honestly you don’t have to worry about which forms to use, how to set it up, etc.
Besides, different states use different docs. Even if you were familiar with what docs to use, you don’t want to draw up your own notes, deeds, etc. Let the professional handle it and you’ll know everything is done properly. They will walk you right on through it.
This is a simple transaction that doesn’t need to be complicated.
I have done this myself on larger, income properties without any hiccups whatsoever …and I’m doing it as we speak.
First (after you actually have the deal secured), sign up with a note servicing company (NSC) such as “notecollection.com” which I use, to handle all the payments to the seller and the bank (or Google “loan servicing,” “note collection,” or “payment servicing.”).
You’ll have two notes and two payments. One payment to the bank and one to the seller for his equity. The NSC will handle payments on behalf of you and the seller. This keeps everything legal and separate from the seller so that everyone knows when, and to whom/what, the payments have been made ON TIME. The NSC will be bonded and licensed, so there’s no risk of failure to make the payment as recieved and escrowed. The NSC can pay taxes, insurance, and HOA’s, too, if necessary.
You will need a Limited Power of Attorney for the subject property. You will also need the socials, access pins, usernames/passwords, and maiden name of the borrowers as applicable, so that you can have access to all online/offline details regarding the loan…these are details the bank may require in order to release information without having to wave the POA under their nose, etc. and/or further involve the seller in the details.
You will want to provide the bank with a new billing address of the note servicing company so they can forward next year’s payment coupons to them. This is not an unusual practice. If the bank isn’t escrowing insurance funds, then update the insurance company with the note servicer’s address, etc. so payments can be made on your behalf.
You don’t want to do an AITD in the traditional sense, because it leaves the seller on title with you… That is an unnecessary, if not undesirable situation waiting to unwind on you. Also it’s a naked transfer of equitable interest, otherwise, and is just poor business practice in this environment.
Take title in a Land Trust and appoint yourself as the trustee. Nobody needs to be alerted publicly as to whom the beneficiary is. I would title the Land Trust as something generic such as, “Seller’s Name Family Trust”, or “Property Address Trust.” This is common and accepted practice and keeps your name off the books for snooping eyes.
Meantime, as long as the loan remains current and is NEVER paid late, banks don’t call loans due …even if/when there’s a deed transfer.
Banks don’t care who’s on the deed …unless the payment is made late, and then all Hell can break loose, and you’ll either be qualifying for a new loan, suffering a foreclosure, or giving the deed back to the seller. How fun!
Short of making a late payment, you’ll be fine doing a full transfer subject to the existing financing.
As far as “home depoting” your own contracts, I would recommend uslegalforms. They’ve got contract for every state in the Union, and are MUCH cheaper than an attorney who will pull out his own boiler plate contract that is equally state-specific, but costs several hundred dollars extra. If this is a one-off deal, then it’s wise to have an attorney review your paperwork. However, after the first time, you can save a boatload of money.
In 2011, you’re going to have to pay attention to and conform to the superfluous and nuisance-like Frank/Dodd “SAFE ACT” that interferes with, and regulates, for ZERO reasons, all seller financing by non-owner occupant seller financiers.
Anyway, hopes this helps… Have fun, and get rich.
Jay
Jay,
Are you sure about this? It is my understanding that the seller still remains liable for the underlying loan but ownership transfers to the new buyer. No joint title.
I think Dave is correct too. Ones a Grant Deed (ownership) and One is a Deed of Trust (instrument securing the promissory note)
I feel you should go for a a option of consulting someone having knowledge about all these issues, though the advice provided by all are also beneficial.
mortgage surety is the option you are looking for , the best way is to connect to your local bodies they can guide you the best .
You’re correct. The seller does remain liable for the note. AITD’s are the same as a generic “Subject To” transaction in that both situations transfer title and both leave the seller liable for the underlying loan.
However, when buying I don’t want the seller getting one check from me directly; one for his equity and one for the old loan balance. Why?
I want to know the old loan IS actually being paid by the seller and not being pocketed. Also, I want to make sure the seller is receiving his equity payments separately from the loan payments so again, there’s no confusion about what I’ve paid and for what.
When buying I like to use a Land Trust as described in my post above. When selling I only use Land Contracts. I don’t use an AITD for the reasons stated above.
Of course very few, if any (as far as I know) AITD’s leave the seller as a minority title holder today, since modern Due On Sale “clauses” give the bank the right to call a loan in the event of “partial” transfers of interest, not just full transfers.
Hope that still answered your question! :cool
well i am thinking to be a seller. but i am worried about my lender is going to call the my loan according to due on sale. sorry i dont understand the long writing above. can anyone give me a staight simple answer on this. thanks.
Here’s a short 2 point answer to your question…
- If You Have Lots Of Equity + Naked Sub2 (No Land Trust) + Late Payments = Bank Calls Loan Due & Pursues Trustee Sale.
Cures/Options: Reinstate loan, unwind sub2 title, or qualify for loan.
- If You Have Little/No Equity and/or Upside Down + Naked Sub2 (No Land Trust) + Late Payment = Bank Calls Loan Due & Either Waits To See If You Can Get New Loan Or Not, Waits Some More, Or Suggests Loan Modification, Or Negotiates Short Sale, And/Or Gives Up After 24 Months And Schedules Trustee Sale.
Cures/Options: Walk after failed short sale or loan modification, keep rents.
Better Cure/Option: Never make a payment late on a house with equity, or one you want to keep Sub2.
Bonus example:
We have taken property sub2 in Land Trusts that were already in default, paid the sellers a lump sum as a total advanced “rent payment” and leased the house out while concurrently negotiating a short sale as trustees. After many months we either got the short sale, or not. Meantime, we collected all the rents.
So just because a bank calls a loan due, does not mean they’re gonna schedule a trustees sale anytime soon regardless of the title holding situation.
Hope that’s clearer. :cool
That’s the best I can do.
thanks javipa. to be honest with you, you use too many terms that i am not familiar with. i never paid late. no trouble of the house. just think this is a good way to sell it and make some money. does the wrap mortgage trigger the due on sale or not? do i have to ask the lender’s permission to do it? just a simple straight anwser. if the answer is yes, what is going to happen most likely?
Here’s my two cents for selling or buying with an existing loan in place:
First go talk to the escrow or neutral note collection agency in your town. Schedule an appointment, take notes, and offer to pay for the advice. Find out how THEY like the deal set up so that they can take in the buyer’s money smoothly, and then pay the underlying note and the seller smoothly. Then ask whom they recommend for title insurance.
Now go talk to the title officer that was recommended and ask for a copy of their paperwork. How do they want it set up?
In my little town, there is one neutral collection/escrow agency and they do a superb job. They have the information I need on how to do it right.
In my little town, there are two title insurance companies. One won’t touch wraps, land contracts or sales with underlying mortgages. One does them all the time, and they have the contract I can just fill in.
So you don’t have to re-invent the wheel. You just need to find out how other sellers do it in your area. Take notes, look up the words that you don’t fully grasp, and you will get educated. For your area.
You can sell or buy safely, just know what the worst possible case is if the buyer doesn’t make the payments. Know what happens, and have a plan for dealing with it.
Good luck.
Furnishedowner
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Frankly, you’re asking about a sophisticated financing method that requires some finesse, that you’re not going to get from a title company or a loan servicing company, or even here on this forum. At best, you’ll get informed direction.
Meantime, there are about 7 or 8 things that will keep you out of trouble, avoiding hiccups, and make you money doing a wrap or Sub2, but if any one of the eight things is missing, you’ll be wishing you knew what those 8 things were later. You’re biggest threat is NOT the due on sale clause. That’s the least of your problems. It’s what happens if/when your buyer stops making payments on time (or at all). What then? What will you do to protect your equity, yourself, and your loan payments?
Are you going to use a Land Trust, Land Contract (Contract for Deed), or all inclusive trust deed (AITD) when selling and why?
My blog answers a lot of these questions, since this is my interest. There’s a lot there, but you can search it. :help
I hope THAT was short and simple enough… :biggrin
Have fun and don’t be nervous… :cool[/b]