Given the previous example, if you ever sold your $80,000 lien you may be required to pay off the senior $50,000 lien out of the proceeds of the sale. This would consequently move your $80,000 junior lien up one position into a senior position. If you sell your note and choose to keep the underlying financing in place, your note will be purchased as a second position lien. This means that you will most likely receive less money for your lien than you would if you paid off the underlying at closing. In most cases, but not all, it is to your advantage to have the underlying paid off at closing. It is not uncommon for lienholders to become disillusioned with the way they structured their wrap once they realize that their equity, or the difference between what they owe on the underlying and what is owed to them on the overlying, has decreased over time. You can avoid this potential problem by using the previous suggestions. However, an even greater benefit to structuring a wrap so that the underlying lien is paid off rapidly becomes apparent if you need to sell your note for cash. With a smaller underlying, you will walk away from closing with more money. In addition, since you have increased your protective equity, any discount incurred from selling your note will be softened. Your equity increase can minimize, often dramatically, any discount. Remember, even if you never intend to sell your lien, it is wise to structure your lien so that it will bring top market value should an emergency occur. If you choose to keep the underlying financing in place, make sure the new, inferior financing payment is at least 25 percent greater than the payment you will continue to make. Pay close attention to the payment or amortization schedule of the overlying financing in comparison to that of the underlying financing. You may find this difference to be decreasing. This can be prevented by carefully structuring the overlying financing as well as making prepayments to the underlying financing. If making prepayments, make sure the servicing company understands that this additional amount is to be applied directly to the principal balance of your underlying lien. Do not attempt to service the wrap on your own. Make sure the servicing company is given detailed instructions and that they will send you prompt notice if the purchaser makes a late payment. Always seek the counsel of a competent real estate attorney. Your equity increase can minimize, often dramatically, any discount resulting from the sale of a wrapped lien.

You may be required to file Internal Revenue Code forms 1098 and 1099 if the IRS thinks you are in the lending business. Always consult with an accountant if you have any questions regarding your tax responsibilities. You are required to report annually on form 1099 interest you pay in the course of your investments or trades or business activities, which includes property rentals. If payments are made to an individual, partnership, or unincorporated business, and these payments exceed a certain amount annually, you are required to report. You are required to file form 1098 if you or your company, corporation, partnership, or trust are in a trade or business and you receive mortgage interest from an individual during the course of your trade or business, and that interest exceeds $600 in a calendar year. You must provide Form 1098 to each individual who paid you at least $600 of mortgage interest in the last year. You also must send the IRS a copy of this form. If you or your entity are not in a trade or business or your receipt of mortgage interest is not related to your trade or business, you do not have to send in Form 1098 to the IRS or to your borrowers. You may be penalized if you file required forms in an untimely fashion. If you cannot determine whether you are or are not receiving mortgage interest related to a trade or business, it may be best to go ahead and file the reports to avoid any penalties. Then seek the counsel of a competent accountant. Since tax laws are constantly changing, it is always wise to consult a tax advisor.

You may be required to file Internal Revenue Code forms 1098 & 1099. Since tax laws are constantly changing, always consult with a tax advisor if you have any questions about reporting interest received. When you provide the financing for a property buyer, you need to choose whether or not to use a servicing company. Many note owners choose to use a servicing company (i.e. collection department of a financial institution or a private note servicing company) so that they 1) do not have to fill out 1098 and 1099 forms themselves and 2) can avoid having to track note payments and balances. Such firms will receive the payment, track the interest and principal, calculate the new balance, and issue the proper year-end reporting forms. Should you ever need to sell your note, using a servicing company can be a great asset. A servicing company will keep a record of the pay history, keep track of the current balance and any late charges, and may hold the original documents. All these are benefits that help you maintain your note. However, before you hire a servicing company you should carefully consider the following. First, clarify what the servicer will and will not do. Some servicers will issue late payment reminders, charge appropriate late charges, and hold the original documents. Others will only provide such services for an extra fee. Most are not willing to handle a foreclosure in the event it becomes necessary.

A common mistake note owners make is assuming the servicing company will notify them if a payment is late or missing. Never assume the service provider will notify you. Some companies charge extra for this service. Second, be aware that some of the servicing companies which hold your original documents will not release your documents without both your signature and the signature of the payer. (This is common in Alaska.) The following paragraph explains how this requirement could cause problems. Quite often the best way to get top dollar for your note is to place it into a pool that will be securitized. Release of servicing can be a requirement of such a program, and if this is the case, coercing the property owner to release servicing so that you can sell your note for top dollar may be difficult. If you do not succeed, then your note will not qualify for the pool and you may have to settle for less than top dollar. Proceed with caution before you hire a servicing company whose standard policy is to require the payer’s written consent before releasing servicing. One way to circumvent this requirement is to place a clause in your security instrument that states the payer must consent to the release of servicing upon request or risk being considered in default. Another creative way of handling this issue is to have the payer sign the required servicing release form in advance. It can then be used by the note owner at a later date if needed. Have the servicing company hold this original consent form and make sure they understand you intend to use it in the future. You want to make sure they will honor the form, even if it will be used twenty years later.

If you choose to service your lien on your own, carefully document every payment made. This can be accomplished by keeping bank statements, deposit slips, or copies of each check. This requires a commitment of time on your behalf. Do not assume that, if needed, you could obtain proof of every payment from the property owner. Why should you keep track of every payment? Your note is a valuable asset. Its value depends on many variables, one of which is the payment history. Do not minimize the importance of keeping accurate and upto- date records. If you sell your note you will need to provide proof of all payments made, including the current balance, late charges, and the date through which interest is paid. Sound like a nightmare? It can be. This is one reason why loan servicing is popular. Choosing to have your note serviced by the collec tion department of a financial institution or with a private note servicing company is a good idea, not only due to the IRS reporting requirements, but because you do not have to track note payments and balances. Should you ever need to sell your note, using a servicing company can be a great asset. Clarify what the servicer will and will not do. Never assume the service provider will notify you if a payment is late or missing. Proceed with caution before you hire a servicing company whose standard policy is to require the payer’s written consent before releasing servicing. This could cost you money. You can, however, avoid this situation in two creative ways:

1. Place a clause in your security instrument that states the payer must consent to the release of servicing upon request or risk being considered in default.

2. Have the payer sign the required servicing release form in advance. It can be used by the note owner at a later date if needed.

If you choose to service your lien on your own, carefully document every payment. Adjustable rate notes have an interest rate that varies according to an index. This means that as the interest rate adjusts from time to time, so will the monthly payment. We at Capital Solutions suggest you avoid creating adjustable rate notes. If you do attempt to structure an adjustable rate note, do so only with the help of a competent real estate attorney, since these loans may be regulated under Civil Code depending on state law. Federal regulations and usury laws may also come into play. In some cases, how and by whom a property is used will factor into how much a lien is worth. For example, properties that are occupied by someone other than the owner bring greater risk to the investor. In order to compensate for this risk, the investor will pay less for the lien than he or she would if the property were occupied by the owners. Properties used for commercial purposes provide another example. In general, investors will pay less for a commercial lien than they will for a lien secured by a single family home. Once again, risk is the determining factor. However, other factors associated with commercial liens can also influence a note’s value. Underground fuel storage tanks provide a wonderful example. The environmental risks and regulations associated with underground fuel tanks are enormous, as are the financial costs of cleaning up a spill site. Therefore most investors will not purchase a lien secured by a property that has underground fuel tanks. Many other property use variables can affect the value of a lien. A good rule of thumb is that anything which increases the note owner’s risk will decrease the market value of a note.