wrap around mortgage - Posted by Jamaul Jones


#1

Posted by Kev(NC) on December 10, 1998 at 18:13:20:

Sec 1.163 is the in the Regs, not the Code.
Sec 163(h)(4)(D) is in the Code and titled “Special reles for estates and trusts.” I assume you were only searching the Regs.
TCM stands for Tax Court Memos.
I use CCH or RIA for all of my searches, but I don’t know what you have access to.


#2

wrap around mortgage - Posted by Jamaul Jones

Posted by Jamaul Jones on December 06, 1998 at 24:38:47:

A person called on my “I buy houses add”. He has a 3br 2ba, 1100sf, 2 car garage home built in 1994. The home has an existing 1st mortgage for $109,000, PITI $1008.

The owner and his wife are getting seporated and he wanted to get rid of the house. I offered to take over the loan “subject to”. The owner was interested but he needed more information on a “subject to” assumption.

The house comps from between $114,000 and $122,000. Simular homes are being built four blocks from this house and they are starting at $119,000.

I had a meeting with the owner and he is very motivated to get out of the property. The owner has tentatively agreed to sell the house to me for exactly what he owes on the mortgate. (subject to assumpion).

I am going to create a land trust on the house. I ordered the course “get the house out of my name” just waiting for it to arrive.

Once I become the owner of the house, I would like to sell it with owner financing for $125,000. I will require someone to put a minimum of $5000 down and I will finance the remaining $120,000. (wrap of the origional $109,000). The loan will be due in 7 years.

Questions:

  1. Should I use a title company to prepare the paperwork.(land trust transfering beneficiary) I will do my own title search on the property.
  2. Need name and number of company where I can get wrap around mortgage, promissary note, lease agreement, rental agreement ect on disk for my computer.
  3. Should I charge more for the property since I am doing owner financing?
  4. Does anyone have a form that advises the sellers of the due on sale clause that I can copy to have the sellers sign.

#3

Re: wrap around mortgage - Posted by karp

Posted by karp on December 06, 1998 at 06:15:36:

Okay-

  1. Yes, use a title company and also pay the money to have them do the title search. Also don’t skimp on title insurance in THIS case. You can be SO burned without it.

  2. There are tons of these forms floating around on disk and on paper. I personally like B. Bronchick’s stuff on disk…he has one called the Ultimate Collection of Real Estate Forms which he mails out free for the asking. (OKAY- that was a joke, I am sure there is a charge of some kind) Whatever it costs I can’t rememeber, but I can personally tell you it was well worth it.

  3. I think you should charge what the market will bear plus an opportunity cost that accounts for your holding period (where you are carrying the paper). On that note, I have not heard you mention a balloon for your buyer. I personally recommend this as it changes the situation from (“I am your bank.”) to (“I am your TEMPORARY bank, start thinking NOW about how you are going to get me out of this in a couple of years.”)

Also as a side note, it is sort of funny how addictive these wraps are- I just got cashed out of one about 3 months ago and realized my take was 9K down, 400 pos/month and 27K at the end. Total time into it just over 2 years.

As life would have it, I just got done liquidating a lot of residential real estate to focus on different things and my new partners in my mortgage company have expressed an interest in doing some of the things I just finished! Oh well, it’s back to the Real Estate Trenches for me (like I really mind…)

  1. I added this as a standard clause to my buyers real estate contract. Later, I got Bronchick’s forms again and his verbage was much, much better so I now use his language. Seriously, I would just order the forms and be done with it- there is not much better to be found out there.

Best of Luck with this deal,

karp
aka Karl Hartley


#4

Re: wrap around mortgage - Posted by Bronchick

Posted by Bronchick on December 07, 1998 at 10:11:11:

Funny, KARP, but my wife thinks I sell the stuff so cheap I practically AM giving it away for FREE!

Jamanual, you may consider selling on an installment land contract rather than giving a deed. I am giving a seminar on this - www.legalwiz.com/cashcow.htm or click on the banner at the top of this page.

BB


#5

Re: wrap around mortgage - Posted by Jamaul Jones

Posted by Jamaul Jones on December 06, 1998 at 11:56:14:

How do I stop the mortgage company from enforcing the due on sale clause. I will be taking over the payments, not qualifying. I think the only way for the mortgage company to know the house was sold is the following:

  1. The mortgage company does a title search.
  2. The name change is done on the homeowners insurance.

When I buy the house, should I put it in the land trust?

When I sell the house on a wrap-around mortgage, how would I have the new owners insure the property. Should I have them obtain a whole new homeowners insurance policy. There is an existing policy on the home for the person who is selling the home to me. This policy is paid through the mortgage escrow account. Is there a way to change the name of the insured on the insurance policy to the new owner without spooking the mortgage company. Or am I just being paranoid.

When I sell the home with the wrap around mortgage, should I again use a title company to prepare the paperwork or should I spare the expense and do it my self?

Would a contract of sale work better for me when re-selling the home?

Does anyone know where I could obtain software to keep track of wrap-around mortgages?

Am I required to send the new owners a statement at the end of the year showing how much interest they paid on their mortgage?


#6

Re: wrap around mortgage - Posted by Bud Branstetter

Posted by Bud Branstetter on December 07, 1998 at 12:50:02:

Jamaul,

I am doing one very similar. 105K value 88 Mtg Balance. I will be putting ownership of the property into a land trust. All perfectly legal. Some people even send a letter to the mortgage company so advising them and ask for confirmation. I will probably not. I will then do a contract for the beneficial interest in that trust. The present owner would like that the loan not effect his ratios if he wants to buy another house. If I would do a straight L/O then the payment would count against him and he would only get 75% credit of the income. I will ask that they contact their insurance and have the Land trust added as an additional loss payee. Mortgage company will still pay the premium.

I will then Lease Purchase the property to a tenant/buyer. As soon as I get them qualified to buy (and buy) then I can collect my profit. If your doing it as a business you should be sending them a 1098 for the interest received.

For the exercise, calculate the present worth of you series of payments and balloon. See if it doesn?t come out less than if you get your money in a year or two. If you did the same deal through your Roth IRA the profits would not be taxable. Sorry I don?t know of a good cheap program . Tvalue can probably handle it but it is not free. I am just using an Excel spread sheet to do calculations on my wraps.


#7

Re: wrap arounds - another idea - Posted by Bill Gatten-

Posted by Bill Gatten- on December 07, 1998 at 21:21:16:

Just as an alternative idea (I have a one-track mind):

Instead of a Wrap, may I suggest having the seller put the property into a Land in his own name, assigning a 3rd party unrelated trustee to hold title Trust; then have him assign 90% of the beneficiary interest and all of the use and possession to you (i.e., what we refer to as a PACTrust). The seller then agrees to forfeit his 10% at the termination of the trust, 6 months or XX years down the road. His staying on and forfeiting later, does many things for you, such as: Avoiding the DOS; Protecting you from his actions by providing non-partitionability by creditor or tax judgment liens; Preventing property tax reassessment; Complying with IRS requirements for minimum beneficiary interest that can be held by a land trust beneficiary; avoiding conveyance or transfer tax; etc.).

Some downsides of an AITD (all inclusive TD) are: The seller’s tax liens or creditor judgements, bankruptcy or divorce actions could cause legal actions to attach to or be filed against the property, long after the sale (e.g., via lis pendens or direct lien or levy), Due-on-Sale clause violated; Provides Constructive Notice to the world that you have something worth suing you for; etc.

Bear in mind that if you tally up all of the real or potential negatives of AITDS, Lease Options, Land Contracts, etc. they can all be virtually eliminated by a 3rd party trustee land trust conveyance.

Also note that using a Land Contract has even more negatives, including (but not limited to) the inability of a contractee to justify high enough payments due to an inability to take the tax write off. To take the write-off the form must be a Contract “OF” Sale, as well as a Contract “FOR” Sale (e.g., Contract for Sale, Warranty Deed, Contract for Deed, etc.), which would tend to nullify the whole purpose of the land contract in the first place (See WD Belden, 70 TCM, 274 Dec 50,802M, re. interpretation of IRC Sec 1.163-1(b): “Contractee must be a legal and equitable owner of record [which a Land Contract does not convey], and or be a beneficiary in an estate or land trust which holds legal or equitable ownership” in order to take the income tax deductions for interest and property tax on an otherwise Qualified Property - see also IRC Sec. 163(h)4(D).

Best of luck in whatever you do.

Bill


#8

Re: wrap arounds - another idea - Posted by Jamaul Jones

Posted by Jamaul Jones on December 09, 1998 at 09:58:59:

I understand your idea when I am the buyer having the seller create the land trust and transfer the beneficiary interest to me.

How would it work if I am the seller. Here is an example. I had a person who wanted to sell their house to me for exactly what they owed on the mortgage. $100,000. I would take over payments on the existing mortgage, subject to. I had them create a land trust and assign me 100% beneficiary interest.

The payment on the loan was $750. I wanted to sell the house for $125,000 with $10,000 down and the remaining $115,000 financed with a payment above the $750 due in 5 years.

How would I structure sale of the property.

Would I assign beneficiary interest to the buyer, prepare a AIDT, having the trustee sign the deed of trust and the buyer sign the promissory note?

Should I keep 10% interest as a beneficiary?

How about this??? Everything in the above example remains the same except. When I bought the house from the owner, the owner remained 10% of his beneficial interest which he would forgive after 7 years.

When I sale it to the next person and they sign the note does the person whom I bought the house from have to sign the note as well.

In the event the person whom I am selling the house to doesn’t make their mortgage payments, does this make the forclosure more dificult.

I received the manual :get that property out of you name and it doesn’t answer all of my questions.

any help would be appreciated


#9

Re: wrap arounds - another idea - Posted by Bo (GA)

Posted by Bo (GA) on December 08, 1998 at 17:13:40:

Bill:

Could you please clarify a couple of things for us amateurs:

  1. What does the TD stand for in AITD?

  2. I found IRC Sec 1.163-1(b) on http://www.access.gpo.gov/nara/cfr/waisidx/26cfr1v2.html but I am having problems finding IRC Sec. 163(h)4(D). Could you please verify that 163(h)4(D) is correct?

  3. I would like to look up WD Belden, 70 TCM, 274 Dec 50,802M on the net also. Any tips?

Thanks

Bo


#10

Re: wrap arounds - another idea - Posted by Bill Gatten

Posted by Bill Gatten on December 10, 1998 at 21:18:23:

Jamaul,

Let me take your questions in sequence.

Rather than a 100% assignment of the beneficiary interest to you: take 90% with an agreement in the Bene. Agreement that they (the seller you got it from) will forfeit their 10% percent to you when the trust is revoked. This keeps them on, so that: 1) they keep voting rights, so as not to trigger a property tax reassessment (no more than 50% of a trust’s beneficiary interest can be transferred without triggering reassessment (most counties in most states); 2) by retaining the 10%, the seller is in conformity with Garn-St. Germain and Due-on-Sale regulations; 3) 10% is the minimum a legitimate beneficiary can have under IRS guidelines, and 4) doing it this way gives the seller a real sense of secuirty and trust in you, in that he doesn?t have to put you on title until you have performed (which has no negative effect on you at all).

Now, whether you refinance, or just have your new buyer make the payments to you (after paying you whatever down payment you want); you can sell your interest in the trust by giving the new buyer an 80% interest with an agreement to relinquish your 20% as consideration for prompt payments and strict adherence to all contract provisions throughout its term? after you’ve received your $125,000. Don’t forget that the percentage of ownership of beneficiary interest has nothing to do with how much benefit any party in the trust gets. You can own 10% and still have 100% of the tax write-off and half of the appreciation. Or you could have 10% interest and have 100% of the equity build-up, use occupancy, possession, littoral rights, riparian rights (i.e. big words that mean nothing?it?s the ?Fee Simple? or ?Fee Defeasible? ‘Bundle of Rights’ in RE ownership).

No. You don’t need the AIDT (or “AITD”). You don’t want the buyer on title, or to be in any way associated with his/her potential for liens, suits, judgements, marital disputes or BK’s. The resident beneficiary gets exactly same benefits as a title interest could provide, by just leasing (triple net) from the trust in which he/she is a beneficiary. And you retain a say-so throughout, as to their care and maintenance and potential for damage to the property. In addition, by avoiding title involvement, you don’t have to worry about them trying to declarie “an equity interest” to forestall eviction or foreclosure if you should have to have him evicted. In other words, there is not need for Foreclosure, Ejectment or Quiet Title, in order to restore yourself and the property if something goes wrong.

Regarding Promissory Notes: No. Don’t do that! Secured promissory notes require income taxation long before you receive any money (a 5 year note with P&I due in five years is taxable THIS YEAR as a negotiable instrument): this is avoided with a 3rd party trustee, land trust conveyance (e.g., 10/10/80). And more importantly to foreclose on a secured note, you have to exhaust your security before you can proceed for lines against other assets

Regarding who signs when you sell… NO you can sell your beneficial interest, or any part thereof, without the concurrence of the party, if the Beneficiary Agreement doesn’t prohibit doing so. However, I would suggest not circumventing such verbiage, so as not to raise questions later by the IRS. You don?t to do anything that would make them characterize the transaction as a sham or disguised Securty Agreement (another reason to leave promissory notes out of the deal). I.e., I would set it up so that the first 10% holder agrees in advance to let you do anything you want to with your beneficiary interest… (kind’a like giving you the power of attorney to deal with your share as you please): we do it that way all the time.

Regarding ?Ease of Foreclosure?.. in a 3rd Party Land Trust Conveyance (e.g. as in a PACTrust™: Foreclosure is never necessary; and removal of an errant co-beneficiary is a quick snap for these reasons: The contract provides that any default on the part of the resident beneficiary is Constructive Notice to the non-defaulting party of the defaulting party’s intent to relinquish its interest in the trust at Fair Market value, as would (have to) be determined by an MAI appraisal, following payment of a $2,500 default fee. If it is determined that any moneys are due to the defaulting party (after subtracting the $2-3,000 MAI costs, the Default Fee, the missed payments, late charges, penalties and interest): such amount due is paid in the form of an unsecured promissory note, to be paid only at the end of the scheduled trust period, or when the property sells for a sufficient amount to be able to fully cover such amounts. Remember that since the resident beneficiary can’t claim “Equity” (in that land trust trustees are the holders of both ?Legal? AND ?Equitable title?): they are is removed with a simple Eviction (without the need for a 30 notice, in that the defaulting party is actually evicting himself by prior contract). Failure to honor the 3-Day Notice to Pay or Quit can be followed instantly with an Unlawful Detainer Action, with no escape possible by claims of “Equity,” Or ?Judge, I didn?t understand.?

Bill Brochiks?s “Get that Property out of Your Name” is an excellent piece of material, and a mainstay of my business; but it isn’t intended for 3rd party Land Trust conveyance techniques… That?s another entirely different issue.

Zis help??

Best of luck, and best regards,

Bill


#11

Re: wrap arounds - another idea - Posted by Bill Gatten

Posted by Bill Gatten on December 12, 1998 at 15:51:56:

Bo,

Sorry to have taken so long to get back to you on this one.

  1. AITD (or AIDT) means “All Inclusive Trust Deed” or All Inclusive Deed of Trust." They wrap around existing security instruments on the property: hence the term “Wrap.”

  2. Re. 163(h)4(D) go to the the U.S. Master Tax Guide – the entire thing is on the net. I had it in my “Favorites” for a hunnert years, but can’t find it right now. If you have any trouble, e-mail me and I’ll have located it again.

  3. Regarding the Belden case, I would suggest going to a law library to find it. However, if that’s not convenient, e-mail me and I’ll run it down and send it to you (perhaps I can scan it and send it as attachment, if I can figger out this dang contraption). The case had to do with a wrap arrangement wherein the tax payer was clearly not an owner of the property, and was clearly not on the loan or title, and clearly had No legal interest in the property: however, since the transaction had been structured as a contingent contract for sale, the transaction constituted a Qualified Property under the regs, and Belden was allowed to keep all tax deductionss for interest and property tax (a real landmark for our business). It was the first time we knew for sure that 163(h)4(D) would hold with a land trust co-beneficiary.

Best of everything in investing.

Bill