In today’s real estate investing environment it’s important to have many ways to get a deal done. The focus of this article will be on a financing technique known as “All Inclusive Deed of Trust” (AIDT) also called a wrap-around Loan. In the weeks to come I’ll also spend some time with other options too, like credit unions.
To put it simply an AIDT takes a preexisting loan and absorbs it into a new loan. The new loan is made by the seller of the property to the new owner.
Here is an example: I’m selling a property for a total of $300,000, and there is an existing mortgage on the property that has a balance of $250,000, with an interest rate of 6.5 percent. I’ve found a buyer who wants the property and is willing to put $30,000 down, but the buyer had a short sale three years ago and is having a hard time qualifying for a loan with a conventional lender. The buyer now has a good job, have proven they are credit worthy and can afford the property. So as the seller I decide to sell to them and use an AIDT to facilitate the financing. I create the AIDT for $270,000, with an interest rate of 7.5 percent. This means that the AIDT is wrapped around the existing mortgage of $250,000. The buyer now gives me the $30,000 cash down payment and makes loan payments to me and I continue to make the payments to the bank on the $250,000 mortgage. I’m now making 7.5 percent on the $20,000 and one percent on the $250,000.
There are many benefits of an AIDT. It creates flexibility and the ability to negotiate all of the terms of the deal, including the payment, interest rate, maturity date, late charges, and prepayment penalty.
If the original mortgage includes a “due on sale clause” then the creation of an AIDT will require both legal and tax counsel in order to create a legal and practical AIDT.
Why not just offer to carry a second trust deed for $20,000 and have the buyer get a loan of $250,000. Well there are a couple of reasons:
1) I wouldn’t be able to sell the property to this buyer.
2) An AIDT allows me to hold the note in 1st position instead of 2nd position, that’s the upside. The downside with an AIDT I’m still responsible for the collection of the payments from the buyer as well as making the payments on the original loan. If the buyer doesn’t pay me I’ll still have to make the payments on the original loan, this protects my interest in the property and credit.
3) An AIDT allows me to spread the capital gains tax out over a period of time (the term of the note); the gains would otherwise be considered taxable in the year of the sale.
Here are some of the steps to follow when creating an All Inclusive Deed of Trust:
- Make sure you have all the relevant information regarding the existing loan, such as the payments, the interest rate, the date of maturity, the balance of the loan, and any other additional terms of the loan.
- Execute an all inclusive deed of trust in your favor with the same terms that are used by the original loan except for the interest rate.
- Manage the rest of the transaction as thought it was a standard loan, do a credit check, verify funds, have references and so forth.
- Use a servicing company to accept the payments from the buyer and pay the original loan. In this way you won’t be personally involved.
- Also consider having a note buyer review the terms of the note so that you’ll know the marketability of the note if you needed to sell it.
All inclusive deeds of trust allow for a great deal more flexibility and options when it comes to buying and selling properties.
An AITD can also be a very powerful tool when marketing the property. In today’s environment there will be more and more people who will be worthy to own property but who may have had been through a difficult time and will need a little help getting back into the market.
I predict that we are going to see more creative ways of financing properties in the next few years. One of my personal goals is to have all my properties paid off by retirement and sell them all with owner carried financing. Mail Box Money that is secured by real estate with no property management, that is a win win to me.