Wrap Around Loan – Gets the Deal Done
|What is the most important thing in ANY real estate market – Getting the Deal Done! There is a financing technique known as “All Inclusive Deed of Trust” (AIDT), also called a Wrap Around Loan that can be just what you need to get the deal done.
To put it simply an AIDT takes a preexisting loan and absorbs it into a new loan. The new loan is made by the seller of the property to the new owner. DISCLOSURE – THE LEGALITY OF THIS IS DIFFERS BY STATE AND THE PREEXISTING LOAN.
Example: I’m selling a property for a total of $300,000, and there is an existing mortgage on the property that has a balance of $250,000, with an interest rate of 6.5 percent. I’ve found a buyer who wants the property and is willing to put $30,000 down, but the buyer had a short sale three years ago and is having a hard time qualifying for a loan with a conventional lender. The buyer now has a good job, has proven they are credit worthy and can afford the property. So, as the seller, I decide to sell to them and use an AIDT to facilitate the financing. I create the AIDT for $270,000, with an interest rate of 7.5 percent. This means the AIDT is wrapped around the existing mortgage of $250,000. The buyer now gives me the $30,000 cash down payment and makes loan payments to me and I continue to make the payments to the bank on the $250,000 mortgage. I’m now making 7.5 percent on the $20,000 and one percent on the $250,000.
There are many benefits of an AIDT. It creates flexibility and the ability to negotiate all of the terms of the deal, including the payment, interest rate, maturity date, late charges, and prepayment penalty.
If the original mortgage includes a “due on sale clause” then the creation of an AIDT will require both legal and tax counsel in order to create a legal and practical AIDT.
Here are some of the steps to follow when creating an All Inclusive Deed of Trust:
- Make sure you have all the relevant information regarding the existing loan, such as the payments, the interest rate, the date of maturity, the balance of the loan, and any other additional terms of the loan.
- Execute an all inclusive deed of trust in your favor with the same terms that are used by the original loan except for the interest rate.
- Manage the rest of the transaction as though it was a standard loan; do a credit check, verify funds, have references and so forth.
- Use a servicing company to accept the payments from the buyer and pay the original loan. In this way you won’t be personally involved.
- Also consider having a note buyer review the terms of the note so you’ll know the marketability of the note if you need to sell it.
An AITD can also be a very powerful tool when marketing the property. In today’s environment there may be buyers who will be worthy to own property but who may have been through a difficult time and will need a little help getting back into the market.
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