Wrapping a Construction Loan

Even though it makes a ton of common sense, I was surprised to hear that the bank was going to work with this investor, who got stuck in the eye of the lending crisis.

Here’s what she sent me:

“I’m trying to find out how I can owner finance my property and still give my buyer the $8,000 tax credit.

I have a construction loan with a local bank.  I have already talked to them and they don’t have a problem with me offering owner financing, but they can’t help me with what kind of financing I need to put together for my buyer.

I cannot do a 1st deed of trust, so what kind of financing can I do to be able to give them title and not affect my loan, etc.?  I am selling for $80,000 and they are putting $5,000 down for now on a 15 year note.

I also need to know if I should continue carrying insurance or if they can get their own and what about taxes?

Thanks,
Gena ”

I responded with,

“Hi Gena,

I’m glad to hear that your bank is willing to work with you.  That’s great news!  Your particular strategy will depend on the terms of your note with the bank.  I’m assuming it’s long-term financing, (i.e., fixed interest rate due no sooner than 15 years from now).  If it’s not, then that needs to be negotiated before you offer seller financing to your buyer.

Your buyer will pay you, you will pay the bank, keeping the ‘spread’ or difference for yourself.  This is called ‘wrapping’ the underlying financing (or an AITD – All Inclusive Deed of Trust).

That’s why we have to be sure your underlying financing doesn’t run out before your owner financing. You don’t want to have a 2 year balloon on your construction note, and a 15 year balloon on your AITD note (unless you have the personal funds to pay the loan off when due).

If you can arrange or verify that you have long term fixed financing in place with the bank, then it sounds like they will be willing to waive their acceleration rights so they won’t ‘call’ the loan due when you transfer title to the buyer.  You can safely ‘wrap’ the bank note (AITD) when you have written agreement from the bank not to exercise the due-on-sale clause.

I’m not an expert on traditional financing, including the current  tax credit, but since you are transferring title to the buyer, they should be able to qualify for it.  Your buyer should verify with a mortgage broker (I recommend Steve Aranda 323.868.6242).) and/or their accountant, etc.

And, because the buyer will be on title, it’s just like a regular sale . . . the new owner is responsible for taxes and insurance.  You (and the bank you owe money to) will need to be added as Loss Payees on the insurance policy.  You will also likely want Title to issue you a Lender’s Policy.

If you would like the peace of mind a little extra hand-holding will give you, you can hire me to help you put your transaction together, and I’ll be in it with you every step of the way until it’s all put together.

Best wishes for your success!”

Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.

Dawn Rickabaugh is a RE broker with expertise in seller financing and RE notes (trust deeds).  www.NoteQueen.com  626.641.3931

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