Tough times bring the scammers out of the woodwork. No where is that statement more true than in aquisition and finance. Of late we are seeing an influx of deals where one or both of the principals wants to do an AITD or Wrap. Don't misunderstand me, there may be instances where this type of vehicle can be utilized for the benefits of the parties, but in general, this type of financing can be dangerous.
Candidly, in any transaction where the buyer takes title to the property subject to the existing loan or loans without consent of the lender is fraught with danger and potentially fraud. Any measure designed to "trick" the lender could be construed as fraud. There are all kinds of financing "tricks" that surface in a market like this. When you have excess inventory... sellers become desperate to look at any deal, coupled with many home buyers fresh off a short sale or foreclosure wanting to buy the "creative juices" start flowing. Caution to sellers... if the bank won't loan them the money, maybe you should consider putting yourself at risk to do what the banks won't.
In a AITD (all inclusive trust deed) or wrap, the principle is the same. The buyer essentially takes over the existing sellers mortgage without the lender knowing about it. The usual method is for the buyer to make a payment to the seller then the seller makes the payment to the bank and pockets the rest. Usually in the agreement, the buyer promises to get a loan at some point in the future, which sometimes happens but often does not. Here are a couple of the many things that buyers and sellers need to think about when entering into an agreement like this.
- What if the buyer makes the payments to the seller and the seller never pays the bank?
- What if the buyer stops making payments? What is the sellers remedy?
- What will the lender do when they find out title has been transferred to another party without their consent?
- Who is protected in the event of catastrophic loss... fire, earthquake, flood etc.?
- Who gets the interest deduction?
Most loans contain a clause in the deed of trust that states that the seller can't let someone else take over the loan. The lender throught the acceleration clause can excercise it's right to ask the seller to correct the problem, or they have the power to initiate the foreclosure process.
Anyone who comes to me with a scenario utilizing out of the box or unconventional financing is advised that they need to seek advice from their chosen expert regarding the dangers and consequences of unconventional financing. We are not qualified to offer advice as to the legality and viability of this type of transaction. In this type of transaction there are many moving parts that any of which can create a problem down the road so make sure all parties understand the risks involved.