HOW TO USE A WRAP AROUND MORTGAGE PROPRLY - Posted by mike knight

Posted by Bud Branstetter on February 23, 1999 at 13:13:27:

1.can the buyer of the wrap take the tax write off?
The wrap is a debt instrument not title to the property. Only the owner on title(or possession) would be entitled to the deduction.

2.how does the seller protect himself from a buyer who doesn’t pay i.e.eviction or foreclosure???
As with any seller carry back financing due diligence is required. This including making sure the taxes are paid, the insurance is in force and the underlying payments are made. You can do these things yourself or you can hire it done.

3.how is the insurance handled so as not to trigger the due on sale clause
The wrap is not the preferred way to handle the due on sale clause because the wrap is typically recorded. By adding the buyer(payor on the wrap note) as an additional insured you can alleviate some of the problems.

  1. how does the buyer protect himself from the seller
    If this were a recorded wrap the deed would be recorded showing the change of ownership. A Deed of Trust or Mortgage would then be recorded showing the indebtedness. The insurance policy should be owned by the buyer but the buyer could be shown as a loss payee.

Wraps on assumable or private loans can be beneficial. In the cases were the title is not as secure as in a contract for deed the contract can still be wrapped by a contract. The problem becomes assurance that the title holder can and will deliver title. The Land Trust solves many of the problems and should be utilized even if the loan is assumable. Using it to deal with the due on sale is not fullproof nor should it be the primary reason.

HOW TO USE A WRAP AROUND MORTGAGE PROPRLY - Posted by mike knight

Posted by mike knight on February 23, 1999 at 07:12:09:

I have a few questions on the use of WRAPS???

1.can the buyer of the wrap take the tax write off?

2.how does the seller protect himself from a buyer

who doesn’t pay i.e.eviction or foreclosure???

3.how is the insurance handled so as not to trigger
the due on sale clause

  1. how does the buyer protect himself from the seller

Thanks for all of the input

Re: HOW TO USE A WRAP AROUND MORTGAGE PROPRLY - Posted by Bill Gatten

Posted by Bill Gatten on February 24, 1999 at 14:51:01:

  1. YES, a buyer under an All Inclusive Trust Deed (AITD) or “WRAP” is entitled to the tax write-off. See IC Section 163(h)4(D). The test for Qualified Residential Tax Deductibility is: 1) Does the tax payer have a contractual obligation to pay, 2) Does the tax payer reside in the property as his principal residence, 3) Does the tax payer have (and can he prove having) the full “risks and burdens” of ownership, 4) Does the tax payer have either: a) an “Equitable Interest” in the property, or b) a “Beneficiary Interest” in an estate or trust which holds equitable (and legal) title to the property.

  2. The seller is under the same threat of untoward actions of the buyer that any lending institution would be: he cannot evict, as the buyer has a true claim of “Equity” and must be foreclosed upon; the buyer can refuse to pay, force the seller into Ejectment Action and Quiet Title Action as well as Foreclosure, and can trash the property and detain it for months (or years) while the seller is forced to make the payments in order to protect his credit.

  3. In a FNMA, GNMA, FHA, VA loan there is no real way to handle insurance so that the lender would be shielded from the knowledge: except perhaps to just pay it on time and not give the lender a reason to review its escrow file. If the loan is a portfolio loan, rather than conforming, this becomes a mute point, as the lender then has nothing to do with the insurance unless it’s impounded in an escrow account.

  4. In a WRAP, the buyer really can’t protect himself from the acts of the seller: we know of two cases where sellers 1 and 2 years after the close of Escrow became embroiled in tax issues which caused the IRS to place lis pendens’ on all of their properties. In one of those cases, the buyer (resident) was stopped from selling until the legal action was removed, and was forced to sue for a lifting of the lis pendens.

Bill

Re: HOW TO USE A WRAP AROUND MORTGAGE PROPRLY - Posted by Sean

Posted by Sean on February 23, 1999 at 13:14:54:

  1. Yes, the buyer gets a tax deduction for owning the house.
  2. If the buyer stops paying the seller should foreclose.
  3. The underlying loans should be assumable to make the wrap easiest. If not, both you and the seller are taking a risk that the bank will find out and accelerate the mortgage or impose penalties. Someone has suggested a method to mislead the lender into thinking everything is kosher see http://www.creonline.com/articl53.htm for an explanation.
  4. How does the buyer protect himself from the seller. I assume by this you mean how can the buyer know the seller won’t just collect the buyer’s mortgage payment, not pay his own and skip town or something. The best way I know of is to have the seller place the property into a trust where the trustee handles the proper payment and is bonded in case they rip you off, you get reimbursed.