SELLERS- Would you do a mortgage wrap in todays world??

Question

Hello,

I am looking for feedback from the sellers perspective on mortgage wraps. Is there anyone that has successfully done mortgage wraps being the seller? What would be your concerns, and in your eyes would the risk outweigh the reward?

Sellers, has your bank contacted you about the "due on sale" clause or anything else? Has your buyer been able to refinance the note without problems before the balloon?

Would you or would you not wrap a commercial mortgage right now?

Any insight, comments, experience appreciated and welcomed!!

Buyers, please feel free to chime in as well. What has the process been like for you after the wrap? Any problems with refinancing, insurance, original lenders, etc.?

Thanks

Account Closed · Answer

Wraps are easier with commercial properties compared to residential. The real issue is getting the lien holder to release the former owner from liability, which requires a very solid and well-qualified new owner to assume sole liability. I've heard of wraps on top of wraps on top of wraps to 16 levels deep on commercial property. I've heard of wraps with cross-collateral implying negative equity on the subject property. The only advantage you have right now with wraps on residential property is that lenders do not want to foreclose with little or no equity. In some states, there is also an implied limitation on the due on sale clause from the time of notice (constructive or actual) of the conveyance. The lien holder must act within a certain timeframe (in Colorado it's about 1 year but that's a bit tricky right now). If they do nothing, then they're implicitly allowing the conveyance and they cannot act later. So, get a signed authorization from the seller to communicate with the lien holder, then send to that lien holder a "matter of fact" letter with the loan number and the other details that you have taken title subject to their lien and their payments will now come from your XYZ LLC. If they don't complain within the time limit for your state, then you're good to go. If they complain, then you must start negotiating with them to keep the property or you'll be forced to sell it.

Steven Hamilton II · Answer

Kacey, That is largely dependent upon your basis in the property. I suggest you see "IRS Publication 537" and "Form 6252 Installment Sales". You will have to pay taxes on your down payment received. -Steven the Tax Guy

Kacey W · Answer

Thanks for all of your help Steven! I sure appreciate all of your knowledge you have passed along to me! So, would the down payment (lump sum) amount be deferred as well? Say you did the wrap and receive $100k as a downpayment on a $300k purchase amount. The original loan balance (my original loan) and also the new mortgage (buyers new loan from me) would both be around $200k- with the new loan being greater than the original. What taxes would be owed on this $100k down payment, that I will be using to buy other properties? Can this also be deferred? How would the IRS look at that income? Hopefully that makes sense.

Steven Hamilton II · Answer

A wrap would be an installment sale, so you are deferring gains over the years you are receiving payments. I don't have the time to look it up right now; however, I do not believe you can 1031 a wrap. If it were possible it would be expensive and complicated as well.

Kacey W · Answer

Anyone have any thoughts on the best way to lower a tax hit on a wrap like this? Trying to figure out if there is anything that might help with structuring a sale as a wrap? What is the tax on the profit from the sale for a wrap? Can you 1031 this?

Kacey W · Answer

So I would imagine you would be taxed on this like a standard sale of the property? And can 1031, etc. just like a regular sale?

Steve Babiak · Answer

A 1031 exchange requires use of a Qualified Intermediary to handle all proceeds from the relinquished property (the one you are "selling"), including any deposit money! You have to get the QI involved before you close on the "sale" of the relinquished property. There are specific time deadlines that come into play with a 1031 exchange as well.

Kacey W · Answer

Thank you both very much. Chris, do you have any worries your lender will call your mortgage due? Do you feel your buyer is going to be able to refi the property, without problems, at the balloon date? I agree, this is a very positive thing for both buyers and sellers if we can get over the few hurdles. I am hesitant because of my original lender calling my note due down the road. How do banks look at a wrap situation when the buyer goes to refinance the property at a later date? Are there any holdups there? Also, are there any tax breaks with a wrap? Can I 1031 the down payment proceeds, do I need to? How does the IRS look at the proceeds from a sale like this? Thanks again!

Chris Masons · Answer

Hi Kacey, I am just about to close on a contract for deed sale on one of my 2 family investment properties. I currently do have a mtg. on it and will continue to pay it while receiving mtg. payments from the buyer at our agreed upon terms. I received a fair amount of cash up front. Enough to make me comfortable to do this deal. The other postive is I am selling for much more then I can get if I put it on the market now traditionally. The person buying it is unable to secure a loan via a bank at this time. So there are positives from his point of view as well as mine. regards, chris