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Copyright 2013. All rights reserved worldwide.

Wraparound Transactions in Texas

Including Sample Wrap Contract Addendum

By David J. Willis, J.D., LL.M.

What is a wraparound transaction?

A wraparound transaction 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 wrap 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 wrap 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 existing "wrapped deed of trust." It is possible to wrap more than one prior note (e.g., an "80/20").

Often the principal of the wrap 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 wrap note payment will then be structured to correspond closely to the amount of the payment on the wrapped note (referred to as a "mirror wrap").

Specific wrap terms can vary, but the wraparound principle remains the same. Wraps may be done on both residential and commercial properties. Wrap paperwork begins with the earnest money contract which should include an addendum setting forth the terms of the wrap. A suggested form of the addendum is included in the Appendix. 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 immediately, they can skip the contract phase and request that the attorney prepare wrap documents for immediate closing.

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 Documentation

Wrap 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.

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, giving the investor a reasonably short time horizon for realizing a profit; however, the Dodd-Frank law now prohibits balloons in owner-financing.

Other Forms of Seller Financing

Wraps are a form of seller financing. There is no disputing it. Dodd-Frank and the S.A.F.E. Act apply.

Residential lease-options exceeding six months and contracts for deed were both restricted by changes to the Texas Property Code made in 2005. Because the Code now imposes severe penalties on sellers if strict, burdensome rules are not followed, investors have moved away from lease-options and contracts for deed. Only a few types of residential owner financing remain practicable:

(1) traditional owner finance, used when residential property is paid for;
(2) the wraparounds; and
(3) land trusts, which involve temporarily deeding the property into a trust until a credit-impaired buyer can obtain financing.
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 to the property at closing, not at some future time. Therefore, the executory contract rules contained in Prop. 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.

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 then 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 subject to the requirements and penalties of Prop. Code Sec. 5.061 et seq. Note that 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 foreclosure. This is risky since it is possible that a future court may disapprove of this avoidance of foreclosure procedures.

Remember, real estate investors are not the most beloved of persons in a courtroom. The common perception is that investors are greedy 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, paying an assumption fee, and signing onto the debt; 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, which is a kind 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 note (the 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 wrapped first-lien note until it is paid and released; and the buyer becomes obligated to the seller on a new wrap note and wrap 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 Forms Manual, publishes suggested forms for wrap documents, although they are elementary in nature.

People occasionally worry that a wrap transaction may cause the first-lien lender to accelerate the wrapped note pursuant to the due-on-sale clause contained in the wrapped deed of trust. It is possible but unlikely.

Are there recent laws affecting wraparounds?

There are recent 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). Even though the S.A.F.E. Act and Dodd-Frank impose limits and conditions on owner finance, such transactions (including wraps) continue to be legal.

The S.A.F.E. Act

The S.A.F.E. Act imposes 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. A seller is required to be licensed if the property is not the seller´s homestead and/or if the sale is not to a family member. So, if the property is a 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 (including wraps) 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 (balloon notes are not permitted); (2) the seller must determine that the buyer has the ability to repay; and (3) the note must have a fixed rate or, if adjustable, may 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 is valued at $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 $25,000 equity. In the usual case, 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. The wrap note will likely bear a higher than market rate of interest. It will 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 wrap 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 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 requires more complex documentation 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 expressly prohibit any transfer of title without prior lender consent. In all cases, but especially in commercial cases, one should carefully review the deed of trust securing existing loans before proceeding with a wrap.

Why would a seller do a wrap?

The wrap seller can unload property at full market price (or even higher) – property which might 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 wraps are closed without title insurance in a lawyer´s office based on an informal title search or a title report. After all, while title insurance is customary in Texas, it is not required.

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 due-on-sale. The due-on-sale clause merely gives the lender an option to take action if it chooses. Look closely at paragraph 18 of the FNMA deed of trust: it says that a lender may (not must) accelerate. This is not prohibitory language.

Isn´t there some kind of notice requirement before doing a wrap transaction?

Yes. Prop. Code Sec. 5.016 requires that the seller (1) give seven days notice to the buyer before closing that an existing loan that will remain in place; (2) inform the buyer that buyer has this same seven days in which to rescind the earnest money contract without penalty; and also (3) provide a seven-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 odd 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 rescission 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 seven-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?

Down payments are 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 requires such due diligence. It is likely that a 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 should be addressed in the wraparound agreement. It is a good idea to schedule payments on the wrap note seven to ten 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, which 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 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.

There is also an issue relating to insurable interest. What happens if there is a loss? Collecting on the seller´s insurance policy can be problematic after a wrap 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, but there may be no reliable way around it. Insurance issues should be thoroughly addressed in the wraparound agreement.

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.

What about "double wraps?"

So long as the wrap 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 wrap notes that allows the property to be freed from the wrap 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.

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.

What if the seller defaults by not paying the wrapped lender?

The wrap 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 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 seller bankruptcy, the seller should agree in the wrap agreement to execute a reaffirmation agreement on the wrapped debt (i.e., rather than surrendering the property to the lender seeking or otherwise seeking to avoid the debt). 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 wrap note, interest received by the seller must be reported as income, and interest paid by the buyer is deductible.

What are the disadvantages of a wrap?

Obviously, the seller has to wait until the wrap 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 ongoing involvement. If the wrap borrower defaults, the seller must foreclose. In the unlikely event a loan is accelerated, the buyer may have to secure traditional financing, so 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 State Bar, that are adequate to the task. Also, because there is no TREC or TAR wrap addendum, the TREC earnest money contract should include an attorney-prepared addendum. Attorney's fees may accordingly be expensive.



DISCLAIMER

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

Included with this article is a sample wrap addendum to be attached to the sales contract (see below). When requesting wrap documents from the attorney, request the latest Wrap Checklist to be filled out.




WRAPAROUND ADDENDUM
TO RESIDENTIAL SALES CONTRACT



PROPERTY: ______________________________________________________________

SELLER:__________________________________________________________________

BUYER:___________________________________________________________________



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.


Wraparound Transaction:

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 avaii lable, a copy of the Wrapped Deed of Trust is attached.


If available, a copy of the last loan 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).


Payments on the Wraparound Note will be as follows:

Principal and Interest$ _____________

Escrow for taxes and insurance (optional) + $ _____________

TOTAL PAYMENT $ _____________

Representations and Disclosures of Seller:

  1. 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.

  2. 2. 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.

  3. 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 the 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:

________________________________________________________________

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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.


BUYER:

_______________________________            _________________
SIGNATURE                                                             Date Signed

_______________________________            _________________
SIGNATURE                                                             Date Signed


SELLER:

_______________________________            _________________
SIGNATURE                                                             Date Signed

_______________________________            _________________
SIGNATURE                                                             Date Signed


THE FORMAT OF THIS
ADDENDUM WAS DESIGNED
(BUT NOT FILLED IN) BY:

DAVID J. WILLIS ATTORNEY
LoneStarLandLaw@aol.com
Copyright 2013. All rights reserved worldwide.