How do I structure a Seller Finance/Wrap?

[Adam Haman]

Good day!

I have a family member who is interested in selling another family member a portion of their holdings in a wrap scenario with what I perceive to be fair terms on properties the Seller owns outright. The seller gets predictable cash flow with no hassle, the buyer gets a nice addition to their portfolio at terms they could not otherwise access.

1) Does anyone have any advice on how to structure these? 

2) What should/must we record? 

3) What are the benefits/drawbacks of not recording these transactions until a later date?

4) Is there a way to get a mortgage interest write off for the buyers in this scenario?

5) What are the tax implications (in very general terms) of such deals? Who owns the homes?

Thanks to everyone for your insight and help. I imagine we may be enlisting the help of an RE attorney to make this happen, but I think BP members will have more insight into the situation than the average RE attorney.

Have a great day!

[Jon Holdman]

You say the seller owns it free and clear.  This is just an owner carried mortgage, not a warp.  There's no underlying mortgage to wrap.

1) Sorry, no.

2) Record the deed showing the transfer and the deed of trust/mortgage showing the security interest in the property.  Really no different than a ordinary transaction with a mortgage.

3) If you don't record the transfer the seller could sell it to someone else.  If you don't record the deed of trust the encumbrance won't show up.  I see no advantage to not recording this.  Do the transaction at a title company and do all the proper paperwork.

4) Mortgage interest paid by the buyer is deductible.  Mortgage interest received by the seller is income.  SEE A CPA!!  Payments received by the seller are a mix of principal (partially taxable) and interest (taxable).  The part of the principal that's the basis isn't taxable but the part that's gains are.

5) Buyer owns the home on a seller carried mortgage.  If you're using the term "wrap" generically then you may be thinking of a land contract where ownership is retained by the seller until the contract is satisfied.

You will need an attorney and will probably need a RMLO (registered mortgage loan originator) if the buyer is going to occupy the house.  Be aware of SAFE act and Dodd-Frank requirements.  This is NOT a DIY process.