You retain much more control over the deal. If you sell via wrap they are buying and if you sell via L/O they are leasing with an option to buy. You could sell it Contract For Deed aka Land Contract, which can be considered a wrap, get more down money and also make money on the interest however, I choose L/O because in my state you must judicially foreclose when doing CFD, as opposed to evicting when you L/O. In states such as Texas and Virginia you can evict buyers as if they were renters even using Land Contracts. This is not the case however in most states. Before you start selling via wraps you should check the statutes in your state to know what you are getting into should your tenant/buyer not perform. I have brought this up to one guru in particular and his responce was that there are usually provisions in the statutes that allows you to get around this, such as the ‘Power of Sale’ clause found in many promissory notes. That is true however, in my state there is also a provision to go aroung the ‘POS’ clause and force the lender(you) to use the judicial foreclosure route should the property be a homestead(they usually are). Wraps are a great tool but there are some caveats.
Posted by Michael-tx on March 01, 2001 at 08:15:00:
I would like to know what are the reasons the experienced
people here choose to sell on L/O versus a wrap, if the
wrap had, say, a two year balloon. This assumes a subject
to acquisition by the investor.
In a L/O the title still resides in your name and their occupancy is just a renter. You depreciate the property on your tax return. You don’t have to report the option consideration until they exercise the option. Much of the time, without help, they can’t qualify for a loan when the time comes. You then do it again. It can be a way of getting premium rents.
A wrap is an ambiguous term. It can mean an All Inclusive trust deed or a contract for deed and a number of derivations. You may charge a higher interest rate on the total loan. But legally you have sold. You should report it to the IRS as a sale. If you are a dealer you report all the income in current year even though you don’t get it. If you’re a small time investor you you use an installment sale method to stretch the taxes out as you take the income. Many people do not report it as a sale and get away with it because they are not audited. On larger homes where the owner is able to itemize and deduct interest and taxes on their return this would get noticed rather quickly.
As you may know I do Pactrusts because it has the advantages of these methods but without the problems.