DAVID J. WILLIS ATTORNEY
Copyright © 2013. All rights reserved worldwide.
Wraparound Transactions in Texas
Including Sample Wrap Contract Addendum and Checklist for Document Preparation
By David J. Willis, J.D., LL.M.
What is a wraparound transaction?
A wraparound transaction or a "wrap" is a form of creative seller-financing that leaves the original loan and lien in place when a property is sold. The buyer usually makes a down payment, gets a warranty deed (title), and signs a new note to the seller (the "wraparound note") for the balance of the sales price. This wraparound note, secured by a new deed of trust (the "wraparound deed of trust"), becomes a junior lien on the property behind the existing first lien. The buyer makes monthly payments to the seller on the wraparound note and the seller in turn makes payments to the first-lien lender. The original lender's note is referred to as the "wrapped note" and it remains secured by the "wrapped deed of trust." Note that is possible to wrap more than one prior note (e.g., an "80/20").
Often the principal of the wraparound note to the seller exceeds the amount of the payoff on the wrapped note – this is the seller´s profit. Alternatively, the buyer may make a cash payment to the seller for the seller´s equity, and the wraparound note payment will then be structured to correspond closely to the amount of the payment on the wrapped note (occasionally referred to as a "mirror wrap").
Specific wrap terms can vary from transaction to transaction, but the wraparound principle remains the same. Wrap paperwork begins with the earnest money contract which, in the case of the TREC 1-4 Family Contract, should include an addendum setting forth the terms of the wrap. A suggested form of the addendum is attached this article. At closing, details of the wrap should be contained in a comprehensive wraparound agreement.
Alternatively, if the parties are clear on terms and ready to move forward now, they can skip the contract phase and request that the attorney prepare wrap documents for immediate signature.
If and when the buyer gets a refinance loan, the wrapped loan is paid and released, and the seller keeps any cash that exceeds the payoff amount of this first lien. The main difference between a wrap and a conventional sale is that the seller must wait until the wraparound note matures or is paid in order to receive the full sales proceeds.
Wraparound financing is sometimes referred to as subordinate lien financing.
Wraparound documents should include (at minimum) the following:
(1) a wrap note signed by the buyer;
(2) a wrap deed of trust securing payment of the wrap note;
(3) a warranty deed with vendor´s lien conveying title to the buyer; and
(4) a wraparound agreement covering miscellaneous details of the wrap.
The interest rate on the wrap note is often higher than that on the wrapped note, since seller financing usually carries a rate that is slightly higher than market. The wrap note is usually amortized over 15 or 30 years. In the past, wrap notes often ballooned in 3 to 7 years (i.e., the buyer had that 3 to 7 year period in which to refinance and pay off the wrap note); however, the Dodd-Frank law now prohibits such balloons in owner-financed transactions.
Other Forms of Seller Financing
Wraps are a form of seller financing. Seller financing, always popular in Texas, is a legitimate and effective way to sell real estate in an economy where conventional financing may be scarce.
Residential lease-options exceeding 6 months (formerly the favorite of investors) and contracts for deed were both restricted by changes to the Texas Property Code made in 2005. Because these Code changes impose severe penalties on sellers if strict, burdensome rules are not followed, liability-averse sellers have moved away from lease-options and contracts for deed. Thus only a few types of residential owner financing remain practicable:
(1) the traditional owner finance, used when residential property is paid for;
(2) the wraparound, which is addressed in this article; and
(3) the land trust, which involves deeding the property into a trust as a "parking place" until a credit-impaired buyer can obtain financing.
Those interested in traditional owner finance or land trusts should read the articles on these subjects at LoneStarLandLaw.com.
How is a wrap different from a contract for deed?
A wraparound is an "executed" (complete) transaction as opposed to an "executory" (incomplete or unfinished) transaction. The buyer gets a deed (title) to the property at closing – not at some future time. His indebtedness to the seller is evidenced by the wraparound note and is secured by the wraparound deed of trust. Therefore, the executory contract rules contained in Texas Property Code Sec. 5.061 et seq. do not apply. In the event of default by the buyer, the seller must foreclose in order to get the property back. This is usually not an undue hardship since Texas has one of the fastest non-judicial foreclosure statutes in the country (41 day minimum).
What about doing a wrap but delaying delivery of the deed to the buyer?
Some wraparound arrangements provide that the deed to the buyer will be held "in escrow" (often by a lawyer) as "security" for a period of time – for example until the buyer pays in the full down payment. The wrap paperwork usually states that the buyer is only leasing until the deed is delivered out of escrow. This is a bad idea. A material item of the transaction – the most material item, in fact, the warranty deed – is undelivered. Since the deal is unfinished, it qualifies as an executory contract and is therefore subject to the requirements and severe penalties of Prop. Code Sec. 5.061 et seq. Incidentally, this statute has a nasty "tie in" provision that makes violations of Sec. 5.061 also violations of the Deceptive Trade Practices – Consumer Protection Act (DTPA).
The practice outlined in the preceding paragraph is different from the "security deed" technique. A security deed is a deed back from the buyer to the seller that is intended to be filed by the seller only if the buyer defaults – i.e., in lieu of going through the foreclosure process. This firm will supply a security deed as part of the wrap doc package but makes no guarantees that a court will approve of this avoidance of foreclosure procedures if the security deed is challenged by the buyer.
Remember, real estate investors are not the most beloved of persons in a courtroom. The common perception is that investors are predators exploiting the unfortunate. Juries are often happy to award treble damages and attorney´s fees against investors, so caution is in order.
Isn’t a wrap the same thing as an assumption?
No. In an assumption, the buyer formally assumes the legal responsibility for paying the existing first-lien note. Sometimes this is done with the approval of the seller's lender and by paying an assumption fee; sometimes the promise to assume the existing debt is made directly (and only) to the seller by means of an assumption deed. Either way, it is expressly stated that the buyer is taking on the legal obligation of paying the first-lien note. This is not the case in a wrap transaction, which is a form of "subject to" transaction. The first-lien note remains the exclusive responsibility of the seller.
In a wrap, therefore, the first-lien note and the deed of trust securing it remain undisturbed. A new wrap note secured by a new wrap deed of trust is created. In other words, there are two separate and independent sets of payment obligations – the seller remains obligated on the first-lien note (which is "wrapped") until it is paid and released; and the buyer becomes obligated to the seller on a new wrap note and deed of trust. These obligations coexist.
How can I be sure a wrap is legitimate?
Wrap transactions are legitimate – primarily because there is nothing that says they are not. There are numerous Texas cases in which wraparound transactions have been upheld. Even the State Bar of Texas, in its Real Estate Manual, publishes suggested forms for wrap documents, although this office does not recommend use of these forms because of their very elementary nature.
People occasionally worry that a wrap transaction will cause the first-lien lender to accelerate the existing note pursuant to the "due-on-sale" clause contained in the wrapped deed of trust. More on that below.
Are there new laws affecting wraparounds?
There are new laws affecting all forms of owner-financed transactions. These laws are the Texas Secure and Fair Enforcement for Mortgage Licensing Act of 2009 (the S.A.F.E. Act or "T-S.A.F.E." as implemented in Texas) and the federal Mortgage Reform and Anti-Predatory Lending Act (the Dodd-Frank law). The S.A.F.E. Act and Dodd-Frank impose certain limits and conditions on owner finance, but such owner-financed transactions (including wraps) continue to be legal.
The S.A.F.E. Act
The S.A.F.E. Act places a licensing requirement (a residential mortgage loan origination license or "RMLO") on certain types of owner financing extended by persons who are regularly engaged in selling owner-financed residences. Since wraparounds are a form of owner finance, the S.A.F.E. Act applies; however, the seller is required to be licensed only if the property is not the seller´s homestead and/or the sale is not to a family member. So, if the subject property is an investment rental house being sold to a non-family member, then the seller is required to have an RMLO license from the Texas Department of Savings and Mortgage Lending (TDSML). Obtaining the license requires training, a background check, and an exam. Note that the licensing rule applies only to residential wraps.
There is relief for sellers who are not in the business of regularly selling owner-financed residential properties. The Commissioner of the TDSML has ruled that the S.A.F.E. Act will not be applied to persons who make five or fewer owner-financed loans in a year, thus preserving the so-called "de minimus exemption" of Finance Code Sec. 156.202(a)(3).
The Mortgage Reform and Anti-Predatory Lending Act (aka the Dodd-Frank Law)
Dodd-Frank overlaps the S.A.F.E Act in its regulatory intent and effect. It requires that a seller/lender in a residential owner-financed transaction (such as a wrap) determine at the time credit is extended that the buyer/borrower has the ability to repay the loan. The seller is obligated to investigate the buyer´s credit history, current and expected income, financial obligations, debt-to-income ratio, employment status, and the like in order to make this determination. Dodd-Frank provides for a de minimus exception for persons doing not more than three owner-financed transactions per year (so long as the seller/lender is not in the building business) – but (1) the loan must be fully amortizing (i.e., balloon notes are not permitted); (2) the seller must determine that the buyer has the ability to repay; and (3) the owner-financed note must have a fixed rate or, if adjustable, must adjust only after five or more years and be subject to reasonable annual and lifetime limitations on interest rate increases.
The intent of Dodd-Frank is essentially to put an end to the practice of making of loans to borrowers who cannot afford to pay them back.
What if there is more than one existing lien?
It is not uncommon to wrap more than one note and lien (e.g., a first and second lien). The prior liens may even be to different lenders. The principle is the same – the buyer pays the seller on the wraparound note, and the seller then pays both prior notes. The lien securing the wraparound note is subordinate to both of the prior liens.
Can you give an example of a wrap?
Consider the example of 123 Oak Street which has a market value of $100,000 but has been slow to move. There is a first lien in the amount of $50,000 to Apple Bank and a second lien in the amount of $25,000 to Orange Bank which, taken together, result in a $25,000 equity. In the usual case (conventional financing), a purchaser should be able to make a down payment and obtain third-party institutional financing so that the seller receives $25,000 at closing and goes merrily on his way. But what if the buyer is unable to get traditional financing? The solution is a seller-financed wrap note that may be in a premium amount – say $110,000 – which is subordinate to the notes due Apple and Orange Banks. As is customary with owner financing, the wrap note will bear a higher than market rate of interest. It is secured by a wrap deed of trust that enables the seller to conduct a traditional foreclosure if the buyer defaults on the wrap note.
Is this a device to get sub-prime buyers into homes?
Perhaps, but prudent investors will require the buyer/borrower to have a substantial down payment. The seller/lender should evaluate and approve the buyer´s qualifications just as any other lender would – in fact, Dodd-Frank requires this. The wraparound should be viewed as a legitimate device to sell property to reasonably qualified buyers who have money to put down and can afford the monthly payments. For less qualified buyers, a land trust may be the better option (see our article Land Trusts in Texas).
Can wraps be used in conjunction with land trusts?
Yes. There may be circumstances where it may be a good idea to first transfer the property into a land trust and then do a wrap – but this is a more complicated version of the traditional wrap since a trust agreement will also have to be prepared.
Are wraps just for homes?
No. Both residential and commercial wraps are possible. Commercial liens are more likely, however, to contain provisions that may expressly prohibit a wrap or any transfer without of title without prior lender consent. In all cases, but especially in commercial cases, one should carefully review the deed of trust securing the existing lien(s) before proceeding with a wrap.
Why would a seller do a wrap?
The wrap seller can unload property at full market price – property which would otherwise have to be discounted or sit idly on the market. The seller gets at least some cash today (the buyer´s down payment) which either goes into the seller´s pocket or is used to reduce principal on the wrapped note (or a combination of both – this is negotiable). The seller is then out from under the payment burden, although the seller must continue to remain involved by forwarding payments to the first lienholder. The seller also gets the benefit of any spread between the interest rate on the wrapped note and wraparound note.
Why would a buyer do a wrap?
That is an easy question. The buyer does not have to apply and qualify for a new loan, at least not immediately. The buyer gets title to the property and immediate possession, without lengthy delays, expensive loan fees, and closing costs.
Why would a broker encourage a wrap transaction?
Aside from meeting objectives of the broker´s client, the buyer´s down payment supplies cash for the broker´s commission to be fully paid at closing, just as with any other transaction.
Is title insurance available?
Yes, but availability is limited. Some title companies are more inclined to insure wraps than others. Certain underwriters are not comfortable with the wraparound process, for reasons of their own. It may be necessary to "shop" title companies until a wrap-friendly title company is found.
If a title company is issuing insurance, then closing will be held at the title company. However, most wraparounds are closed without title insurance, on the basis of an informal title search or a title report, in a lawyer´s office. After all, while title insurance is customary in Texas, it is not required.
Note that this office is not a "fee office" for a title company and does not offer title insurance. With all due respect to other attorneys who do this, we consider it a conflict of interest and confine ourselves to aggressively representing either the buyer or seller.
Isn´t a wrap a breach of contract with the lender? What about the due-on-sale clause?
A wrap transaction is neither a breach of contract nor a "violation" of the due-on-sale clause. The due-on-sale clause merely gives the lender an option to take action if it chooses.
If you look carefully at the typical lender´s residential loan documents, you will see that there is no express prohibition against a transfer of property without the lender´s consent. Such documents generally state that if the borrower transfers the property without the lender´s permission then the lender may, if it so chooses, declare the loan due. Look at paragraph 18 of the Fannie Mae/Freddie Mac Uniform Deed of Trust:
If all or any part of the Property or any interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.
This is not prohibitory language. It says the lender may accelerate the note if it wants to. When an investor transfers the property without consent from the lender, the investor makes it possible for the lender, if the lender so chooses, to accelerate; however, it is not a breach or violation of the deed of trust. It is not fraud. As attorney Bill Bronchick puts it, "There is no due-on-sale jail."
How often does a lender declare an otherwise performing loan due? Not often. The lender may not like the fact that the property has been sold to someone else and may even write a nasty letter about it, but – so long as payments continue on a timely basis – the risk that the lender will actually do anything about it is small. Note that this office issues no guarantees about what a lender will do in any particular situation, but we will tell you what the odds are.
Isn´t there some kind of notice requirement before doing a wrap transaction?
Yes. Property Code Sec. 5.016 (effective January 1, 2008) requires that the seller (1) give 7 days notice to the buyer before closing that an existing loan is and will remain in place; (2) inform the buyer that buyer has this same 7 day period in which to rescind the earnest money contract without penalty; and also (3) provide a 7 day notice to the lender. These notices are all the obligation of the seller and must be in the form prescribed by the statute. Actual lender consent, however, is not required, which makes this a rather strange law. Lender notices, most often sent to the loan servicer, generally produce no response.
Note that the buyer´s opportunity to cancel is an exclusively pre-closing remedy. There is no right of recision after closing has occurred.
Prop. Code Sec. 5.016(c)10 provides an exception to the notice requirement when "the purchaser obtains a title insurance policy insuring the transfer of title to the real property." Thus if you are able to get a title company to insure your wrap, you can dispense with the 7 day notices.
This is a law that "has no teeth" to speak of. As a consequence, it is widely disregarded. For now, it has not had a significant restraining effect on owner-financed transactions.
What kind of down payment should the seller get on a wrap?
This is an underwriting issue. In the case of a wrap, the seller is also the lender and (like any lender) should carefully consider the risks inherent in the transaction as well as the creditworthiness of the borrower before determining the amount of the down payment and what interest rate to charge. Dodd-Frank now requires this sort of seller due diligence. It is our view that any down payment less than 10% likely falls within the risky category.
Can part of the down payment be financed? Yes. There is no prohibition against it. Typically, the buyer would pay part of the down payment at closing and then promise to pay the balance within a short period – say 90 to 180 days – utilizing a second wrap note. Again, this is an underwriting issue for the seller, but it is a common enough practice.
What if both notes are due on the first of the month?
The timing of payments is an issue, and it should be addressed in the wraparound agreement. It is a good idea to schedule payments on the wraparound note 7 to 10 days before payments are due on the wrapped note, so as to allow time for the seller to collect payments from the buyer and then forward them on to the wrapped lender in a timely manner.
What about casualty insurance on the property?
Sellers in wrap transactions want to cancel their casualty insurance policy. This is inadvisable. The wrapped lender, who usually collects an escrow for taxes and insurance or at the very least is named as an additional insured, will be notified of the cancellation. The seller will then get a default letter from the wrapped lender who will "force place" another policy (usually much more expensive) at the seller´s expense. The existing policy should therefore be left in place and the buyer should obtain his own policy. This is an inherent imperfection in the wrap process.
What happens if there is a loss? Collecting on the seller´s insurance policy can be problematic after a wrap transaction since title to the property has changed hands. Even if the seller agrees to make a claim on behalf of the buyer, the insurer may refuse to pay it, asserting that the seller no longer owns it. Worse, this could potentially be construed as insurance fraud. Therefore the buyer should procure his own casualty and contents insurance and claims should be made pursuant to the buyer´s policy. It is unfortunate that this results in two policies being in place, but we are unaware of any reliable way around it.
If there is no escrow being collected by the wrapped lender, then it is in the seller´s best interest to collect one from the buyer.
Insurance issues should be thoroughly addressed in the wraparound agreement.
What about "double wraps?"
So long as the wraparound deed of trust permits it, a wrapped loan can be wrapped and wrapped again – although the documentation can become prolific. This permits an investor to purchase property on a wrap and then sell it the same way (at a higher price and interest rate, of course), collecting a down payment (the investor´s "front end" profit) from the new buyer in the process. Usually, this new buyer commits to go through credit repair with the goal (not the requirement) of paying off the wrap note early. The investor then gets his "back end" profit.
An additional, advanced trick: some investor/buyers include a "substitution of collateral" clause in their wraparound notes that allows the property to be freed from the wraparound lien so long as property of reasonably equivalent value is substituted in its place. If the buyer is an investor with multiple properties, this could be a useful option.
What if the buyer defaults on the wrap note?
Let´s review: the seller receives a wrap deed of trust that enables the seller to foreclose if the buyer defaults in paying the wrap note. The seller can also seek and obtain a deficiency judgment if the sales price at foreclosure is insufficient to discharge the wrap note plus accrued interest and fees. Accordingly, the seller has the same ability to enforce the wrap note and lien as does any other lender – and in Texas, that is generally a swift process.
As mentioned above, Texas is fortunate to have an expedited non-judicial foreclosure process. Prop. Code Sec. 51.002 requires that a homeowner be given at least a 20 day notice of default and intent to accelerate the note if the default is not timely cured. If the deed of trust is on a FNMA form (unusual for a wrap) then a 30 day notice and opportunity to cure is required.
The default notice must be followed by a second letter stating that since the default was not cured, the note is accelerated and the property is being posted for foreclosure. This second notice must be given at least 21 days before the first Tuesday of the month in which the foreclosure will be held. So, a Texas foreclosure takes a minimum of 41 days – 51 days if a FNMA deed of trust is involved – although one should avoid cutting it that close when it comes to the notices. It is prudent to allow a "cushion."
There are two distinct advantages of the Texas foreclosure process: first, foreclosure cuts off any other subordinate liens that may be have been placed against the property while the buyer owned it (e.g., home improvement liens, mechanic´s liens, and the like); and second, there are no effective defenses to the foreclosure process except for the borrower to file a lawsuit and seek to block the sale with a temporary restraining order. For that, the buyer needs money and an attorney. Buyers in default usually have neither. Our companion article Foreclosure in Texas is suggested reading.
After foreclosure, the former buyer/owner may still refuse to leave, making an eviction ("forcible detainer" or "FED") necessary. In order to accomplish this, the owner must give a 3 day notice to vacate, file an FED petition in the Justice Court precinct where the property is located, get it served, get it heard by the Justice of the Peace, and then wait 5 days for the judgment to become final – at which time a writ of possession becomes available. The owner must pay for the writ and then wait until the constable posts a 48 hour notice on the door and – if necessary – forcibly removes occupants who are unwilling to leave. Elapsed time? At least 3 weeks, although an appeal to county court can lengthen this process significantly. For more details, see our article Evictions in Texas.
What if the seller defaults by not paying the wrapped lender?
The wraparound agreement provides that if the seller fails to make payments to the wrapped lender the buyer may do so and receive credit against the wrapped note. The buyer should have the power (granted in the wraparound agreement) to occasionally request documentary proof from the seller that the wrapped note is current.
Two related situations are of interest: What happens if the seller (1) files bankruptcy and seeks the discharge of the wrapped debt; or (2) dies leaving the wrapped debt unpaid? In either case, the buyer could be forced to refinance the debt on short notice, which may be challenging. In the case of bankruptcy, the seller should agree in the wraparound agreement to execute a reaffirmation agreement on the wrapped debt (i.e., rather than seeking to discharge it in the bankruptcy). As for the premature death of the seller, the buyer should check to see if the seller has or can add term life protection (payoff insurance). If not, the buyer should consider protecting himself by obtaining a term life insurance policy on the seller in the amount of the balance on the wrapped debt.
What about the interest deduction?
The seller continues to be able to deduct interest paid on the wrapped loan. Nothing has changed there. As to interest on the wraparound note, interest received by the seller must be reported as income, and interest paid by the buyer is deductible. More details should be obtained from your tax advisor. Beyond these basics, this office does not give tax advice. Consult your CPA.
What are the disadvantages of a wrap?
Obviously, the seller has to wait until the wraparound note matures in order to receive the full proceeds of the sale. Also, the wrapped loan is frozen in place and cannot be refinanced for the duration of the wrap. The seller has to collect and remit payments, which requires his or her ongoing involvement. If the wraparound borrower defaults, the seller must foreclose, which is not usually a problem with Texas´ expedited non-judicial foreclosure laws. In the unlikely event a loan is accelerated, the buyer may have to secure traditional financing (The wraparound agreement should specify the amount of time in which this must be done). The parties may also be carrying duplicate casualty insurance policies. Wraps are useful devices, but they are not perfect.
What about cost?
A properly drafted wraparound transaction will include a warranty deed, a wraparound deed of trust, a wrap note, and a wraparound agreement to address the details. These are sophisticated documents that are highly customized for the specific transaction. Only a qualified and experienced real estate attorney experienced in preparing wrap documents should be used to draft these papers. There are no "forms" available from any source, including the Texas State Bar, that are adequate to the task. Also, because there is no TREC or TAR standard wrap addendum, the TREC earnest money contract should include an attorney-prepared wrap addendum. A sample of such an addendum is attached to this article. Also attached is a client checklist that will provide the attorney with necessary basic information to begin drafting the wraparound documents.
Our office charges $750 for core residential wrap documents, $950 for commercial, not including recording fees which are usually about $90. A title report is not included.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright © 2013 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com
Attached to this article are (1) a sample wrap addendum to be attached to the sales contract; and (2) our Wrap Checklist which will need to be filled in before the attorney can begin preparing documents.
TO RESIDENTIAL SALES CONTRACT
This Wraparound Addendum modifies that certain residential sales contract (the "Contract) to which it is attached. The terms and conditions of this Addendum shall prevail over any conflicting terms and conditions contained in the Contract.
The transaction contemplated by the Contract is commonly called a "wraparound transaction." Buyer will take title subject to the existing indebtedness on the Property (the "Wrapped Indebtedness"). Buyer will not assume the Wrapped Indebtedness. Seller will continue to be obligated to pay the Wrapped Indebtedness according to its terms. Buyer will execute a new note to the Seller (the "Wraparound Note") and sign a deed of trust to secure payment of this new note (the "Wraparound Deed of Trust"). Buyer will make regular monthly payments to Seller on the Wraparound Note. Seller will continue to make regular monthly payments to the first-lien lender (the "Wrapped Lender") on the Wrapped Indebtedness. This arrangement will continue until the maturity date of the Wraparound Note.
Recourse on the Wraparound Note:
Any wraparound note executed by Buyer for purchase of the Property will be a (check one):
_____ note with full recourse against the Buyer individually in the event of default.
_____ a non-recourse note. Notwithstanding any other provision of the Contract or this Addendum, after closing Seller may satisfy the debt evidenced by any such note only by the enforcement of Seller´s rights in, to, and against the subject property (and no other property, real or personal) pursuant to the Wraparound Deed of Trust. Buyer will not be individually liable for a money judgment in the event of a default and/or foreclosure sale which yields less than the total indebtedness on the Wraparound Note.
Sales Price and Down Payment:
The Contract sales prices is $ _____________. Buyer will make a down payment to
Seller in the amount of $ _____________. Check the following as applicable:
_____ $ _____ has be made already and another $ _____ will be paid at closing.
_____ The down payment will be paid entirely at closing.
_____ No part of the down payment will be financed.
_____ Part of the down payment will be financed. It will consist of $ ______ paid at or before closing and the
balance within _____ days of closing. A “Down Payment Note” will be executed by buyer for this balance.
The down payment will be allocated and applied as follows:
$__________ to Seller for Seller's equity in the Property.
$__________ to the Wrapped Lender for reduction of principal on the Wrapped Note.
Wrapped Indebtedness (i.e., the existing note or notes on the Property):
The Wraparound Note to be executed by Buyer will be subordinate to the first-lien note on the Property (the “Wrapped Note”) which is in the original principal amount of $______________________, dated _______________________________, payable to _______________________________________________(the “Wrapped Lender”), having monthly payments currently in the amount of $_______________, and an unpaid balance as of this date in the approximate amount of $_______________ .
The current holder of the Wrapped Note (“Holder”) is _________________________ ___________________________________ . The loan number is _________________ . The address of Holder is _________________________________________________. Holder’s telephone number is ____________________ .
Payments are due on the Wrapped Note or before the __________ day of the month. The last payment on the Wrapped Note is due on or before _____________________ (the “Maturity Date”).
If Holder does not service the Wrapped Note, the servicing agent is __________________________________________________________________ located at _________________________________________ , telephone number _________________ .
The current holder of the Wrapped Note (“Holder”) is _________________________ ___________________________________ . The loan number is _________________ .
If available, a copy of the Wrapped Note is attached.
The Wrapped Lender [Check One] _____does [OR] _____does not collect an escrow for taxes and insurance. If there is an escrow held by the Wrapped Lender, the monthly escrow payment is $ ______________ and the approximate total amount in escrow as of this date is $_______________.
The Wrapped Note is secured by a deed of trust of even date (the “Wrapped Deed of Trust”) to ___________________________, Trustee, which is recorded under Clerk’s File No. ________________ in the real property records. If available, a copy of the Wrapped Deed of Trust is attached.
If available, a copy of the last statement on the Wrapped Indebtedness is attached.
Wraparound Note from Buyer to Seller:
Buyer will execute a Wraparound Note to Seller in the principal amount of $_____________ which will bear interest at ______________ % per annum and have a default rate of ________ %. The Wraparound Note will be amortized over _____________ years. Balloons not permitted. Payments will be due on the ________ day of the month. The first payment will be due on or before _______________________. The Wraparound Note will be secured by a Wraparound Deed of Trust to ____________________, Trustee or to David J. Willis, Trustee (add $25 for the latter).
Representations and Disclosures of Seller:
Payments on the Wraparound Note will be as follows:
Principal and Interest$ _____________
Escrow for taxes and insurance (optional) + $ _____________
TOTAL PAYMENT $ _____________
The Wrapped Indebtedness is (check one):
_________ paid current as of this date and is not otherwise in default. The next payment is due ________________________.
_________ not current, as payments for the months of _______________________ have not been made. The loan is therefore behind in the approximate total amount of $ ____________ including late fees.
There are no other liens, encumbrances, or other indebtedness against or affecting the Property, whether recorded or not, other than the Wrapped Indebtedness. Seller also warrants that there are no IRS liens, ad valorem tax liens, mechanic’s liens, or HOA liens (actual, pending, or threatened) that have attached or may attach to the Property.
The Property has the following defects and/ or needs the following repairs: ____________________________________________________________________________________
Obligations of Seller:
After closing, Seller shall continue to timely and regularly pay the Wrapped Indebtedness until same is fully discharged and a release of lien is obtained. Seller agrees to indemnify, defend, and hold Buyer harmless against any and all claims that may arise from Seller´s breach of or failure to perform Seller´s covenants and obligations under the Wrapped Indebtedness, so long as Buyer is not in default under the Note.
Seller acknowledges that Buyer has a legitimate interest in insuring that the Wrapped Indebtedness is timely paid and that same is not otherwise allowed to fall into default. Seller agrees to be responsive to requests from Buyer on this subject and from time to time provide documentary verification to Buyer that payments are current on the Wrapped Indebtedness.
Closing costs and Other Expenses:
This section addresses closing costs as well as certain other items that may be due and owing at closing including back payments, taxes, and HOA dues.
1. The following expenses will be paid by Seller at or before closing:
attorney’s fees & costs relating to this wrap in the amount of $ _______
______ Other: _____________________________________________________
______ Other: _____________________________________________________
2. The following expenses will be paid by Buyer at or before closing:
attorney’s fees & costs relating to this wrap in the amount of $ ________
______ Other: _____________________________________________________
______ Other: _____________________________________________________
Default after Closing:
In the event of Seller´s default upon any of Seller´s wraparound obligations, Buyer may intercede and cure Seller´s default in order to prevent actual or threatened foreclosure upon the Property as a result of Seller´s default under any Wrapped Note. If Seller cures a default under any Wrapped Note, Buyer shall receive credit on the Wraparound Note for all amounts so paid, as well as associated costs and attorney´s fees, if any, without necessity for written modification of the Wraparound Note.
In the event of Buyer´s default on the Wraparound Note, Seller may after notice accelerate the wraparound debt and foreclose upon the Property as provided in the Wraparound Deed of Trust.
Notice Concerning Due on Sale Clause:
The transaction contemplated in this contract involves transferring title to the Property without consent of the lender. Firstly, transfer of title conveys an ownership interest only and does not relieve the Seller from liability to pay the note. Secondly, all parties declare they are aware that the Seller's deed of trust contains a "due-on-sale" clause which permits the lienholder to declare the Seller´s note due and payable in the event the property is transferred or sold. Closing this transaction creates a risk that the lienholder may exercise its election to declare the note due and payable. This may occur. It may not. No party is entitled to make any assumptions concerning the likelihood of acceleration. If the Wrapped Lender(s) calls the Wrapped Note(s) due, Buyer may have only a short time to pay it. If the Wrapped Indebtedness is not paid in full upon demand, the property may be foreclosed upon and Seller may suffer damage to Seller´s credit rating.
Notice Pursuant to Tex. Prop. Code Sec. 5.016:
WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY.
Special Provisions Relating to this Wrap:
Consult an Attorney:
If you have questions concerning this Addendum, consult your attorney before signing. This Addendum is not for use by TREC licensees unless prepared by an attorney.
EFFECTIVE on the Effective Date of the Contract, regardless of signature date.
SIGNATURE Date Signed
SIGNATURE Date Signed
SIGNATURE Date Signed
SIGNATURE Date Signed
THE FORMAT OF THIS
ADDENDUM WAS DESIGNED
(BUT NOT FILLED IN) BY:
DAVID J. WILLIS ATTORNEY
Copyright 2010. All rights reserved worldwide.
Use the following form when ordering wrap documents from the attorney:
DAVID J. WILLIS ATTORNEY
Tel: (713) 621-3100
Fax: (832) 201-5321
CHECKLIST FOR PREPARING WRAPAROUND DOCUMENTS
Document Preparations Instructions to the Attorney
Summary of Wraparound Transaction:
The transaction contemplated in this contract is commonly called a "wraparound transaction." The buyer takes title "subject to" the existing indebtedness on the Property (the "Wrapped Indebtedness"). Under a wraparound arrangement the buyer makes payments to the seller, who in turn makes payments to the existing lender.
The buyer does not formally assume the Wrapped Indebtedness; the seller continues to be obligated to pay the Wrapped Indebtedness every month and promises to do so. The buyer executes a new note to the seller (the "Wraparound Note") and signs a deed of trust to secure payment of this new note (the "Wraparound Deed of Trust"). The parties also executed a Wraparound Agreement.
This wraparound arrangement continues until the maturity date of the Wraparound Note. Further detail on wraps may be found at LoneStarLandLaw.com in the article entitled Wraparound Transactions in Texas.
Documents needed to draft wrap paperwork:
copy of the seller´s deed, note, and deed of trust
copy of the title commitment, if one is available
if available, attach a copy of the last loan and/or escrow statement from the lender
attach a copy of the signed earnest money contract, if any
Payment of $750 attorney´s fees must be received prior to preparation and delivery of legal documents. In other words, the attorney does not take the risk of doing the work and then having the transaction not close for some reason. Recording fees for the warranty deed and the wraparound deed of trust (usually about $90) are not included. Add $25 if the attorney is named as trustee in the wraparound deed of trust.
Summary of Wraparound Transaction:
This is recommended for many reasons. We recommend:
For Dallas/Ft. Worth:
1. Anticipated/desired closing date:
Documents are needed by ______________________________
2. Whom does the attorney represent? This question must be answered.
3. Who is paying attorney fees and recording fees?
What is the name and mailing address of the seller? (Note: the seller’s name should be exactly the same as shown on the deed into the seller).
Seller's name exactly as it will be signed: _________________________________________________
Seller's spouse's name exactly as it will be signed: _________________________________________
Mailing Address: ______________________________________________________________
5. What is the name of the buyer, exactly as it will be shown on the deed to the buyer?
Buyer's name exactly as it will be signed: _______________________________________________
Buyer's spouse's exactly as it will be signed: _________________________________________
If buyer will have an address other than the property address, supply same: _________________
6. Supply the following information on the property:
Street Address: _________________________________________________________________
Supply the exact legal description including county. Please refer to the existing deed of the title commitment for this, not the abbreviated description on a tax statement. If you have attached a deed or title policy/commitment, you do not need to fill in this section.
Example: Lot Sixty-Four (64), Block One (1), MERIDIAN ESTATES, SECTION ONE (1), an addition in Harris County, Texas according to the map or plat thereof filed in Vol. 22, Page 23 of the Map Records, Harris County, Texas
7. The property that is being sold is:
_____ the seller´s primary homestead
_____ the sale is being made to a family member
_____ neither of the above two choices apply
If the third option above is checked, and this is a residential transaction, then the seller is required by the S.A.F.E. Act to have a mortgage loan origination license.
8. Please supply the following information on the existing first-lien note that will be wrapped (the "Wrapped Indebtedness"):
Fill in this paragraph if you are not attaching a copy of the first-lien note: The first lien “Wrapped Note” is in the original principal amount of $_____________, dated _______________, payable to____________________________________________, The last payment on the Wrapped Note is due on or before __________________________ (the “Maturity Date”).
Monthly payments are in the amount of $__________________, and there is an unpaid balance as of this date in the approximate amount of $___________________ . Payments are [CHECK ONE ] ______ current [OR] ______ not current. If not current, payments are ________ months behind. The next payment is due _______________________ .
The current owner/holder of the Wrapped Note is ___________________________ . The loan number is ________________________. The address of the holder is ______________________.
If the holder does not service the Wrapped Note, the servicing agent is ______________________________________________________________________ located at ________________________________________________________ .
If the Buyer will have the ability to access the first-lien loan account to verify the paid status of the wrapped indebtedness, supply online access information: ______________________________________________________
The Wrapped Note is secured by a deed of trust of even date to ___________________________, Trustee, which is recorded under Clerk’s File No. ________________ in the real property records.
Please supply the following information on any second-lien note that will also be wrapped (for example, if this is an 80/20 situation):
Fill in this paragraph if you are not attaching a copy of the second-lien note: The second-lien wrapped note is in the original principal amount of $_____________, dated ________________, payable to _______________________________________________, with monthly payments currently in the amount of $__________________, and an unpaid balance as of this date in the approximate amount of $___________________ .
Monthly payments on the second-lien wrapped note are in the amount of $__________________, and there is an unpaid balance as of this date in the approximate amount of $___________________ . Payments are [CHECK ONE ] ______ current [OR] ______ not current. If not current, payments are ________ months behind. The next payment is due _______________________ .
The current holder of the second-lien wrapped note is ___________________________ . The loan number is _____________________________ . The address of the holder is ______________________.
If the holder does not service the second-lien wrapped note, the servicing agent is ______________________________________________________________________ located at ________________________________________________________ .
The second-lien wrapped note is secured by a second-lien deed of trust of even date to ___________________________, Trustee, which is recorded under Clerk’s File No. ________________ in the real property records.
If the Buyer will have the ability to access the second-lien loan account to verify the paid status of the wrapped indebtedness, supply online access information: Access is available at _____________ . com. The username is _____________. The password is ____________ .
10. What is the sales price of the property?
11. What is the amount of the buyer's down payment?
12. Will the down payment be financed? Check one:
No. The down payment will be paid as follows:
____ $ __________ before closing and $ __________ at closing.
____ entirely at closing
_____ Yes. The down payment will consist of $ ______ paid at or before closing and the balance within _____ days of closing. A short-term “Down Payment Note” will be executed by buyer for this balance. Terms of the D/P Note are: ________________________________________________________
13. How will the down payment be allocated and applied?
$ ________ All of it will go to the Seller for Seller´s equity.
$ ________ It will be applied as follows:
$ ________ to Seller for Seller’s equity; and
$ ________ to reduction of principal on the wrapped note.
14. As to the "wraparound note" that the buyer will sign:
(Note: We are talking about the new note here, from the buyer to the seller, not the existing "wrapped note." Note that balloon notes are prohibited by Dodd Frank)
(a) What is the principal amount of the wraparound note?
(b) Over what period of time are payments amortized (i.e., 15 or 30 years)?
When does the wraparound note mature?
What is the interest rate on the wraparound note?
____________ % annual rate _____________% default rate
If you have calculated the amount of the monthly payment of principal and interest on the wraparound note, what is it?
(f) Payment due dates:
Payments are due on the ____________ day of every month.
The first payment is due on ____________
______ The Wrapped Lender DOES collect an escrow for taxes and insurance.
______ The Wrapped Lender DOES NOT collect an escrow for taxes and insurance.
______ The seller in this transaction WILL NOT collect an escrow.
______ The seller in this transaction WILL collect an escrow
$ _____________ is the monthly amount of this escrow (this should be the amount of estimated taxes and insurance for one year divided by twelve)?
$ _____________ will be the amount of the initial deposit into the escrow account (optional - may be zero).
(h) Will HOA dues be part of the escrow or will buyer pay these directly to the HOA?
_____ HOA dues are part of the escrow
_____ HOA dues are not part of the escrow and the buyer will pay these directly
Summary of monthly payment on Wraparound Note:
Principal and Interest $ _____________
Escrow for taxes and insurance (optional) + $ _____________
TOTAL PAYMENT $ _____________
If there will be a guarantor on the Wraparound Note, what is the guarantor´s name and address?
Will the buyer be allowed to lease out the property during the term of the wrap?
Who will be servicing (i.e., collecting) the monthly payments on the wrap note?
_______ Third-party servicer, who is: _________________________________________
As to the wraparound deed of trust that will secure payment of the wraparound note, who will be the seller’s trustee?
_______ David J. Willis Attorney (add $25 to legal fees)
_______ Other: ________________________________________________________
16. If there are real estate brokers involved in this transaction, give name(s), address, and commission payable:
$ __________to _______________________________________________________
$ __________to _______________________________________________________
17. Special Provisions (anything else the attorney should know?):
These instructions may be emailed to LoneStarLandLaw@aol.com or faxed to (832) 201-5321.
Name of person issuing these instructions:
Phone: __________________ Fax: __________________