What Is an All Inclusive Deed of Trust & Assignment of Rents?
Putting financing in place is a relatively complicated process when you get into the details and technicalities of how it is done. While most people talk and think about "getting a mortgage," the reality is that many mortgages are not even mortgages, since many states use deeds of trust as security instruments instead of mortgage deeds.
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All Inclusive Deed of Trust
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An all inclusive deed of trust (or trust deed), also referred to as an AITD or a wrap, is a document used to put multiple mortgages together. For instance, if you bought a $1,000,000 property with a $600,000 loan, but only wanted to put $250,000 down, the seller could create an all inclusive trust deed that would cover both the original debt as well as the second, seller-carried financing of $150,000. Typically, you would pay the seller payments on the $750,000 AITD, and he would keep a little bit of your payment and send the rest to the lender that made the larger, pre-existing loan.
Uses of the AITD
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The AITD is a convenient way to allow for the seller to carry back a second or third loan on the property. Because doing an AITD does not require payment of the original trust deed, it eliminates any lock-out provisions or prepayment penalties that could make that loan expensive or impossible to remove. It also has the benefit of saving the new borrower from paying the cost of obtaining a new loan.
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Assignment of Rents
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An assignment of rents document is frequently signed along with the AITD at the closing. It allows the lender to immediately collect any rent from the tenants of the property in the event that the borrower defaults on her obligations under the loan. That way, the lender has a way to, hopefully, make up for any missed payments.
Risks of the AITD
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The AITD carries a number of risks. As the borrower, you run the risk that the seller will not make the payment to the original lender, which could lead to your property getting foreclosed. As the lender on the AITD, you run the risk that the borrower will not pay you, leaving you on the hook. The largest risk, though, is that the original lender will learn about the AITD and call the original mortgage or trust deed due for repayment. Most real estate loans have a "due on sale" clause that allows the lender to accelerate the due date if the property gets sold. If you cannot find a replacement lender, you could lose the property.
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References
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