There are a number of situations in which it might be better to control a property as a lender rather than as a title holder. When? Anytime you want to avoid liability associated with real estate ownership. Or when a lien might attach to the property held in your name. Or when a lender threatens foreclosure in the event a property were to be titled in the name of another party. Let's look at these one at a time.
Once upon a time a party wanted to sell an encumbered gas station replete with buried leaking fuel tanks and 25 years of accumulated oil drippings everywhere. An existing non-assumable loan was effectively blocking any sale because there was little long term mortgage money available to refinance this type property. All the seller wanted was to get someone else to pay his first mortgage note and for the lender to release him.
The gas station occupied a 'spoiler' lot right in the middle of much more valuable property. No doubt, it would one day be worth a lot more when the surrounding land was re-developed, but, in the interim, it posed more danger than anyone wanted to risk. The fear/greed ratio was certainly out of kilter.
Enter the intrepid entrepreneur, working with a fresh new out-of-state shell corporation that was the buyer. In the name of a Trust, he loaned the corporation funds to complete the purchase on a promissory Note calling for the highest interest rate allowed by law. The terms called for accruing interest for 5 years, then with a final balloon payment; however, payment could be demanded anytime after 90 days. This Note was secured by the corporate shares as well as a recorded mortgage. What's been achieved?
A, cursory inspection of the situation would reveal a gas station, which was almost 100% leveraged with a wrap around mortgage and note, owned by a shell corporation. Even if the corporate officers and directors soon disappeared, the loan not only gave the lender the usual rights of foreclosure, but also the rights to convert the debt into 100% equitable interest in the property without further ado. Look at what the owner has accomplished:
1. He's bought hazardous property with no connection between himself and the title to it. This has taken him completely out of the loop where EPA is concerned.
2. His property interests are now growing with the accumulating, unpaid interest.
3. He is able to control the property through his demand note.
4. He's able to sell de facto control over the property by selling his note.
5. He qualifies to be named as an additional named insured on any insurance policy.
The language of a single payment convertible demand wrap around note can be quite simple. Just write down what you want it to do. See the sample language below:
'Date:_____ For value received, the undersigned promises to pay to (Lender), or order, upon demand, the principal sum of
| Convertable, Demand, Wrap-Around note [Article] |
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Posted on Monday, December 15, 2008 (Archive on Monday, January 01, 0001) Posted by AaronMiller Contributed by |
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___________ with interest from date at the rate of ______________(highest allowed by law) per cent per annum compounded daily, on the balance from time to time remaining unpaid. The said principal and interest shall be payable in lawful money of the United States of America at _________________ (the lender's offices) or at such place as may hereafter be designated by written notification from the holder to the maker hereof, sent by first class mail to _____________(borrower's address). At the option of the holder hereof, all right title and interest in the mortgaged collateral securing this Note, and legally described as _____________________(here insert the legal description of the real estate) may be conveyed by an acceptable Deed of conveyance from the maker to the holder or designee in full payment of the entire principal balance together with all accrued and compounded interest owed hereunder, and acceptance by the holder or designee of such conveyance, shall be deemed to have fully satisfied this debt, and, thereafter, all obligations between the parties shall be terminated.
Use of a convertible, demand, wrap-around Note is ideal for getting around due-on-sale situations because, at your option, you can call the note and take title to the property anytime you want. In the meantime, the property can be sold, exchanged, leased, etc. by the original owners to anyone else, so long as all conveyances and agreements are subject to your Note and Mortgage.
Oddly enough, as mentioned elsewhere, there's a fine line between ownership and debt under the tax code, When someone has a preponderance of the 'badges of ownership' (rights, privileges such as occupancy, use, possession and income,- as well as duties and obligations like payment of taxes, insurance, maintenance and repair, and mortgage payments) such person is considered to be the owner for tax purposes. As such, the normal ownership tax write-downs are theirs to exploit as well as the benefits of long term capital gains tax rates when they sell.
Obviously, this is an ideal technique to use when you want to buy a, house on which there is a due-on-sale clause. All you do is to lend the owner an amount equal to his equity, get him to sign the note, use a standard FNMA mortgage with an assignment of rents clause, and name yourself on the insurance policy as an additionally named insured party. Get a lease signed by the owner, then move in or sub-lease the house for cash flow.
