Subject To. A “subject to” transaction is where the seller simply deeds the property (warranty deed) to the buyer in exchange for cash or the buyer curing a loan that is in default. The note remains in the seller’s name, but the buyer owns the property. This type of transaction is risky for the seller because there’s no recourse if the buyer does not pay. However, if the seller is in foreclosure, it would be to his benefit to have the loan cured to save his credit.
Most underlying mortgages contain an acceleration or “due on sale” clause. This clause gives the lender the option, if they choose, to call in the balance of the loan. In today’s market, this is rare because lenders have enough problems with non-performing loans. Also, the main incentive for the lender to enforce the due on sale clause is money; if the market rates shot up to 11%, the lender would want to call in a loan at 5%. If market rates are similar to the existing loan, lenders have no incentive to call in a performing loan.
Wraparound AITD. A wraparound AITD (all-inclusive trust deed) is where the seller deeds the property subject to the existing loan and signs a note to the seller secured by a deed of trust on the property. The deed of trust is second (junior) to the existing deed of trust lien. It is called “all-inclusive” because the payment is for the ENTIRE amount. For example, if the sales price is $100,000 and the seller owes $80,000, the buyer may put $10,000 down and sign a note for $90,000. The seller collects on the $90,000 note (with principal and interest) and continues to pay his underlying loan, pocketing the monthly spread. Sometimes the wrap is a “mirror”, that is, the all-inclusive note is the same as the underlying note. In the above example, the seller pays $20,000 down and signs a note that mirrors the balance and terms of the seller’s underlying $80,000 loan.
Wraparound Land Contract. A wraparound installment land contract (aka “contract for deed”) is the same as a wraparound AITD except the title remains in the seller’s name until the debt is paid in full. Typically the seller signs a deed that is placed in escrow with a title company to ensure that the buyer will get a title if the seller disappears.
**Keep in mind that if the buyer is going to live in the property, you must comply with the Federal and SAFE Acts, as well as the new Dodd/Frank Act. This involves qualifying the buyer and doing a Good Faith Estimate. We have a relationship with a mortgage broker who can handle all of this for you.
Lease/Option. A lease/option (aka “lease purchase”) is simply a lease with the option to purchase. It is not a sale, like a wraparound land contract. Typically the seller signs a deed that is placed in escrow with a title company to ensure that the buyer will get a title if the seller disappears.
At Mile High Title & Escrow, we can help you with all of these transactions, and any variety thereof. Give us a call, and you’ll find out why we are known as the Title Company that “gets it done”.