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What Questions Should I Ask About Wrap-Around Loans?
Question: What are some of the issues to consider with wrap-around financing?
Answer: Wrap-around financing usually means that there is an assumable loan on the property, say $30,000 at 6 percent, and that a seller or other party takes back a loan for the buyer, say, $100,000 at 8 percent. The $100,000 consists of the continued obligation to repay the old $30,000 debt and $70,000 in new debt. The seller or lender effectively receives 2 percent interest on the first $30,000 and 8 percent on the remaining $70,000. Since the seller or lender did not provide the first $30,000, the rate of return for the $70,000 they did provide is substantially higher than 8 percent. Is the first trust assumable? If no, can the lender use a due-on-sale clause to call the loan? Who has title to the property? What happens if the seller/lender has title and does not make a payment on the first trust? What can the buyer/borrower deduct if title remains in the name of the seller? What happens if the seller/lender has title and does not pay tax payments? What happens if the seller/lender has title and the place burns down? Who gets the insurance money? Are there local rent control regulations? If yes and the buyer/resident does not have title, is this individual a renter under local rent control rules? Etc. Because wrap-around financing raises a number of complex issues, both buyers and sellers should individually consult with attorneys and tax professionals prior to accepting such arrangements.
Written by Peter G. Miller.
© 1997 Peter G. Miller. All Rights Reserved. Rules, Disclaimers & Notices.
Copyright © 2012 Realty Times. All Rights Reserved.
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