How do I structure a Seller Finance/Wrap?

Question

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 · Answer

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.

Adam Haman · Answer

Nonetheless, Wayne, it is good to see confirmation of similar ideas among people much more versed in such a transaction than I am. Thankfully there will be no O/O issues as they will be straight investment properties. Thanks for your time and affirmation!

Wayne Brooks · Answer

First off, if he owns them outright, there is no current underlying mortgage to "wrap", so this is straight seller financing.  Typically the buyer will make a down payment, the seller carries the balance/mortgage at whatever terms, title transfers to the buyer with seller carrying a mortgage/trust deed.  No reason to delay recording, this could add risk to seller and/or buyer.  Interest paid would be treated just as if buyer were using traditional financing.  If it could be owner occupied, there is a host of additional issues to be addressed.  Use a servicer for the loan, an attorney, and perhaps a RMLO.

Jon beat me to it, with a more complete answer of course.

Adam Haman · Answer

Thank you Jon, this was the perfect answer to clear my head a bit on what is taking place. We will definitely enlist the help of a CPA and subsequently a title company before this is all said and done. I don't know why I was thinking this was a wrap, and that clouded my line of questioning even further! Many thanks and well wishes.