Creative Seller Financing: The All Inclusive Trust Deed (AKA: Wrap)

September 9, 2010 Hans Anderson Mortgage Information, 2

In these tough economic times, many homes have been languishing on the market, making it difficult for Sellers to move on. In order to make a sale, a Seller can offer to do a “seller carryback” or a “seller’s second” (seller finances their equity to help their buyer purchase their house).

Utilizing a seller carryback works well when the Buyer cannot come up with a big down payment or they may not fit into the “conventional” loan process because of their past credit history. With today’s tight lending standards, financing is becoming a bigger problem and seller financing solves this problem.

Seller finance takes many forms and one that is coming back big is the “All inclusive Trust deed” (also known as “AITD or a Wrap Around deed).

An All Inclusive Trust deed is a “seller carry loan” that “wraps” or includes an underlying loan or loans of record. It is usually recorded at the close of escrow with a Grant deed conveying full to title to Buyer and Title Insurance is issued. The AITD’s face amount includes the unpaid balance(s) on underlying encumbrances, plus the remaining unpaid balance of the Sellers equity carryback. The AITD becomes a junior trust deed, subordinate to the underlying trust deed(s).

The Seller remains responsible for the payment on the underlying loan(s) or until they are paid in full. The Sellers equity position in the note is always the difference between what is owed to the Seller and what the Seller owes the underlying lender.

The AITD Sellers Responsibilities?

1) Seller is responsible for any call on the note- acceleration- enacting of the due on sale clause.
2) Seller is responsible for payments, even when a collection (third party intermediary) is set up.
3) Seller is responsible for prepayment penalties, Rate adjustments, balloon etc if any on the loan. (Make sure you read the loan documents very carefully.)
4) Seller is responsible for any due date of the underlying loan wherein they fall due prior to the due date of the wrap.

The AITD Buyers Responsibilities?

1) Maintain the property within the guidelines of the agreement.
2) Pay insurance – additional to the insurance carried by the person named on the loan. Since Buyer owns the property, your insurance should cover the issue of fire or other applicable, and destruction.
3) Pay taxes – ideally they are set up in a impound account and included with the payment.
4) Make payments on time as directed by beneficiary (seller). It is a good idea to have a neutral third party makes the payment notifying both seller and buyer that the same has been sent in a timely manner.

What are the AITD Advantages?

1) The Buyer does not need to qualify for a loan with a lender and closing costs are minimal.
2) The Seller has advantage of installment sales income tax recording method, so long as payments are received in more than one tax year.
3) Because the underlying loan(s) may have a lower interest rate, or may have been paid down considerably, the Seller’s effective interest rate yield may be higher than the actual note rate.
4) The Seller benefits from the “Interest Override” which is the difference between the interest rate on the existing loans of record and the rate negotiated on the AITD.

What are the AITD Potential Problems?

1) The Due on sale provisions- included in the underlying deed of Trust. The lender does not have to enact them. However the acceleration clause of the contract gives the Lender the right to call the full amount of the remaining part of the loan due within thirty days.
2) Seller canceling property insurance, which alerts the lender of the sale.
3) Seller does not make the underlying payments and the property goes into foreclosure.
4) Buyer does not make the payments, and the Sellers credit takes a hit and can possibly a future foreclosure action.
5) Interest rate on the underlying loan should be lower or the same as the AITD rate. It is typical to charge additional points on the wrap as profit to the seller on his carryback.
6) Bad terms of the underlying loan such as prepayment penalties, balloon payments, and additional principal pay-downs and/or adjustable rates.
7) tax impounds not maintained.

How Do You Prevent AITD Potential Problems?

1) Hire a neutral third party collection account for all payments, including sending the seller’s monthly net check after the first mortgage is paid.
2) Record a Request for Notice of Default for ALL loans, both the underlying and the wrap itself, for the benefit of both the buyer/borrower and the seller/beneficiary.
3) Make sure you read and get legal advice on both the deed of Trust and Promissory Note.
4) Due on Sale clauses are not normally built into most AITD and deeds of Trust. In fact, I would suggest you make the AITD assumable, subject to seller/lenders approval.

Being able to sell a house quickly by not having to wait for a mortgage company to approve a buyer or having to rely upon an appraiser to come in with the “right” price can sometimes make this type of an arrangement attractive.

However, be sure to consult a real estate attorney and professional tax advisor on the implications (or benefits) before entering into a transaction.

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