Posted by WA on October 09, 2002 at 21:31:24:
John,
I was contemplaiting the feasibility of the wrap-resale technique in your article on foreclosure stategies. This technique seems very similar to the sale leaseback. In fact, you commented that the technique can be used with a lease option instead. We know that we have to be careful with distressed owners because sale-lease backs may be re-characterized as a usurous financing vehicle if we purchased the property (from the owner) at a discount and sold it back to them at a market value.
The wrap-resale, as you described it, seems that it can be done several ways. In the first scenario, you can actually purchase the property from the seller (deed transfer) subject to the underlying loan and pay whatever monies are needed to reinstate the defaulted loan. You would then simply sell the property back to the seller at market value on a wrap and earn a yield on the money it took to re-instate and the underlying financing.
In the second scenario, it is quite similar. The only difference is that you never actually purchase the property from the seller. You simply loan the money for reinstatement to the distressed seller and wrap the entire transaction as above.
In either example, the "wrap is important for control" as you stated in your article. However, in the first example the wrap is important for controling legal ownership (the seller has equitable rights in a land contract or AFD of course) as well as controlling the payment on the underlying loan. In the second scenario, the owner maintains ownership, so the wrap is important for maintaing control over the underlying payment only.
It is not uncommon for distressed sellers to cry foul if they find themselves behind again on the new wrap-financing that you created.
Are you in a stronger position legally as a lein-holder(scenario 2) or in the sale "wrap-back" position (scenario 1)?
Please give us suggestions as to how to properly structure this type of transaction to avoid problems with distressed sellers. (considering you're making a yield off of financing they qualified for.)
- Re: Legal pitfalls of John's wrap resale strategy John Behle 14:38:56 10/12/2002 (0)