12% home loans - only the brain dead need apply

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From: Colin Mills


Was at an OFI on the w/end. Bumped into some guy.I do not believe everything I'm told but....
Guy starts telling me he is a "professional" investor. He makes his money trading shares and IPs. Earlier this year he attended a course (run by a certain American gentleman) and is now firmly on the fast track. Tells me he has just started wrapping. He claims he is making a net positive cash flow of $500 per month from his first deal. I give him a funny look indicating he is talking BS. His reply was astounding. He claimed the tenant/owner was paying (wait for it) 12%!!!!!!!
I said who would be so dumb as to pay nearly twice the going rate and his reply was most illuminating. Oh he said, they teach you to find people who are desperate.
Desperate! More like brain dead! He borrows from the big-4 and relends it at nearly double the rate. There should be a law against it. Hang on, there is! Its breaking the law to borrow and subsequently relend money without a banking licence!!! This may shock some sheltered souls out there but if you wish to play the role of Shylock in this country you are required to be officially accredited as a bank. I suggest you give the Reserve Bank of Australia a quick call before your next wrap. Good luck in obtaining your banking licence.
PS I will throttle the first wrapper that comes back with that old line about helping people who cannot normally obtain finance. With friends like you lot who needs an enemy.
 
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Reply: 1
From: Robert Forward


Hi Collin

Firstly let me say I haven't wrapped YET. But let me jump in here and point out that I think you may need to seek professional advise from qualified people regarding the legalities lending of monies.

What you have stated is incorrect. Forget the 12% interest rate, that I'm not talking about. Though, I do think that is an extremely excessive interest rate to be charging (one not to be bragging about as far as I'm concerned), what I'm talking about is the "Bank Licence...

Please post the names of the accountants/solicitors that you have received this information from, if any, as I would be very interested in talking with them.

Cause I can provide names of qualified people that have spent a large amount of time investigating wraps (vendor finance) to see which way it can legally be done without the need for such licensing.

Looking forward to your reply.

Cheers
Robert

The South Sydney "Freestylers" Group Leader.
 
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Reply: 2
From: The Wife


12 % ???...thats just plain nasty....why was he charging this?

Ps: cute email address Colin :eek:)

TW
~Life is a daring adventure, or nothing at all~
 
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Sim

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Reply: 1.1
From: Sim' Hampel


I believe that under the consumer credit code, you can legally charge interest up to 30% per annum. Whether that is moral or ethical is another matter entirely.

Professional advice is definately required to sort out the details of course.

 
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Reply: 2.1
From: Rick Otton


gentlemen what right does any individual or government have to say what i can and cannot borrow money for, with regards the interest rate i'm prepared to pay. i buy a number of houses and happily pay 16%interest if it suits my purpose.
if i took away from people the houses they took away from me over the last couple of years and said i'm sorry the interest was too high, therefore you are not allowed to own or capture the increased value in your home like other people i think my buyers would revolt.the reason the dollar is down is because capital simply gets treated better in other countries. at least in other countries they allow people to have a choice.rick otton-the little aussie wrapper
 
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Reply: 2.1.1
From: Dale Gatherum-Goss


Hi

In Victoria it is not illegal to lend money to someone else. However, I understand that there are specific rules on how you do it to comply with the laws.

For just how much is an ethical or moral dilemma and since I'm an accountant, I can't comment on something that i don't understand . . . ;)

Perhaps Lewis will be kind enough to elaborate for us. I know that he is a solicitor and has drawn up contracts for people to use with wraps.

Lewis, are you there?

Have fun and please keep an open mind.

Dale
 
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Reply: 3
From: Yuch .



Hi Collin,

12% is a bit unreasonable but then again depends on the customer's risk
profile.

I am wrapping in NSW and VIC, and I am making a $60/wk net profit from my
first deal. I am charging an interest spread of 2 -4%, ie the max interest
rate my customers get will be 11%. I haven't have to charge 11% interest
rate so far, the max I have to charge so far is 10%.

In regard to the ethic issue.....
I don't think there is anything unethical about wraps, and you will be
surprised that there are a lot of people out there who just simply don't
have a choice!!! And they are the people the major lenders wil never ever
touch!! Actually I think I've heard some rumours a while ago that the big
4s are going to start doing home loans for 'high risk' customers, and to
cover their risks they want to charge 15% interest rate. Do you think this
is ethical?

BTW, Sim is right about the max 30% per annum under the comsumer credit
code, that why you hear some car loan companies are charging pensioners 27%
interest rate on a $5000 car!! And you think this is ethical?

Besides, people have to live somewhere anyway. If their repayment is not
much higher than the rent they are paying, then 25 years down the track
people bought their house this way will be laughing, coz the people paying
rent for 25 years will still be paying rent!!!


Regards,

Yuchun Chen
Market Management Systems
NEMMCO Ltd
(02) 8838 5042

I am the Master of my FATE, the Captain of my SOUL, but a Slave of my
STOMACH






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Reply: 4
From: Brad Chapman


Colin

Firstly, with regard to the legality of providing credit in this country - have you ever purchased any item on credit from a person or institution that doesn't hold a banking license? probably so. Authorised Deposit-Taking Institutions (ADI's) are supervised by the Australian Prudential Regulating Authority (APRA), the RBA has nothing to do with it anymore.

Under the banking act it is necessary to be licensed in order to accept deposits i.e. operate as a financial institution. This is for the protection of consumers, to make sure you are pretty much guaranteed of getting back the money you have in your bank account. It is also illegal for anyone except a registered bank to call themselves, or represent themselves as a bank.

As far as lending money goes on the other hand, the risk lies with the lender, not the consumer. The lender must charge an interest rate margin to compensate for their risk and effort. Whether 12% is an acceptable interest rate is not for me to judge (although I would hope there were extreme circumstances), so long as both parties freely and happily enter a transaction fully knowing the consequences and risks - that, in my book, is a fair transaction.

Australia has a Universal Consumer Credit Code which could well apply in this circumstance, but forget banking licenses. Credit is one of the greatest tools towards economic progress (while it can be equally lethal on the flip side) - The effective interest rate is a product of a free market and the purchaser’s freedom of choice. Obviously there will be some wrappers who offer a fairer deal than others, they will be the ones who prosper in the long term and enjoy trouble free purchaser relationships.

Just my 2 cents - Brad
 
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Reply: 4.1
From: The Wife


What good replies everyone, very informative!

Thankyou.


PS: GO YUCH!
TW
~Life is a daring adventure, or nothing at all~
 
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Reply: 4.1.1
From: Paul Zagoridis


Colin's post ticked me off, it's a good thing my work connection killed my first reply.

Colin at what rate would you lend money UNSECURED to a bad credit risk?

That is effectively what wrappers do. They own the underlying property to start with, they lend the money to the occupant. The % of cash a normal wrap buyer has in the deal is insignificant. Plus if the deal goes sour you potentially have to fund a lawsuit to regain possession.

Do the numbers on it. What could you borrow $80K unsecured for?

Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Reply: 4.1.1.1
From: Tom Cleary


Hi Colin
Lemme see
credit cards 16.5%
equipment loans 14%
2nd mortgages up to 20%
factoring 12%
etc
etc
So 12% could be quiet reasonable,depending on the circumstances.
Oh I forgot Pay Day lending,Alan Bonds et al
latest scam up to 1200% per annum.
Regards
Tom
 
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Reply: 3.1
From: John P


Not meant to be a rude question. Hi Yuch you made the following comment in your post... if I may quote you..

"Actually I think I've heard some rumours a while ago that the big
4s are going to start doing home loans for 'high risk' customers, and to
cover their risks they want to charge 15% interest rate. Do you think this
is ethical?"

I am assuming that your last sentence is implying that a potential 15% by the banks for high risk customers is unethical. If that is the case my question is this..

At what rate must a "wrapper" not go beyond in order to ensure that the situation remains ethical at all times?
 
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Reply: 3.1.1
From: Yuch .



Hi John,

A lot of people are not comfortable with wrapping because they think it is
unethical to sell the property at a higher price to 'desparate' people and
also charge them high interest rate. What I am trying to point out here is,
if banks charge these 'desparate' people 15% interest rate, then what's so
unethical that wrappers charge 12%? Mind you, banks are not charity
organisations and they do make A HELL LOT of money!!

I think this ethics issue is very personal too. As far as I am concerned,
there is nothing wrong with making money this way, as long as your wrappees
understand what they are getting themselves into at the first place and are
happy to buy their houses this way!! Under the consumer credit code, the
max interest rate you are allowed to charge is 30%, as long as you don't go
over that limit your safe. To what extend is unethical is up to you to
decide. I guess you just have to make sure that your wrappees are happy
with the terms and conditions and can afford to make the repayment. And
most importantly, you feel comfortable with it and can sleep well at night!
;)

PS. You can do whatever you like as long as your wrappees are happy with
the terms and conditions you set out, but REMEMBER always have to have an
exit strategy just in case the deal goes sour!!

Regards,

Yuchun Chen
Market Management Systems
NEMMCO Ltd
(02) 8838 5042

I am the Master of my FATE, the Captain of my SOUL, but a Slave of my
STOMACH






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Subject: Re: 12% home loans - only the brain dead need apply
26/09/2001 22:33
Please respond to "Property
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From: "John P" <jpoulos@ozemail.com.au>

Not meant to be a rude question. Hi Yuch you made the following comment in
your post... if I may quote you..

"Actually I think I've heard some rumours a while ago that the big
4s are going to start doing home loans for 'high risk' customers, and to
cover their risks they want to charge 15% interest rate. Do you think this
is ethical?"

I am assuming that your last sentence is implying that a potential 15% by
the banks for high risk customers is unethical. If that is the case my
question is this..

At what rate must a "wrapper" not go beyond in order to ensure that the
situation becomes unethical?




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Reply: 3.1.1.1
From: Paul Zagoridis


One point I'd make as well Yuch, is I do not try to be cheaper than banks. I'm not John Symmonds trying to save you, I don't have access to securitised mortgage funds at NBFI rates.

I provide a service at a premium. I don't charge paycheque advance rates. I do charge what I can get for the property, that wont give me headaches. e.g. I can lease option for more money to drug dealers, but it's not worth the headaches.

The deal either stacks up or it doesn't. Now if I had a hundred wraps, then I'd probably have a standard system with a marketing brochure justifying our prices (selling the sizzle).

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Reply: 6
From: Michael G


Hi,

I thought, since I too wrap I best put my 2c into it.

12% .... hmmm, the question here, to ask, is what their "margin" is. That is, what is there spread on the interest rate. For example if they were getting finance at 10% and their spread was 2%. Then would this not be reasonable?? I mean if we compare this with bank saving accounts that earn 1-2% interest and mortgages charging 6-7% interest, would that not make a bank's margin a tad more than 2%?, basically that's what's banks are doing, their are "wrapping" your savings deposits (your term accounts, your direct salary deposits, etc) and wrapping them out as mortgages.

"Oh he said, they teach you to find people who are desperate."

As with everything, a good and bad spin can be placed on anything. And with everything, skill and experience filters how well people can present a concept or view. Imagine comparing a newbie salesperson with one with 20 years experience. As with ANY industry their is a board range of experienced and skilled people. Same with "wrappers" there are those with great people skills and others with no people skills. I'd say your friends is very close to the later category.

"There should be a law against it. Hang on, there is! Its breaking the law to borrow and subsequently relend money without a banking licence!!! This may shock some sheltered souls out there but if you wish to play the role of Shylock in this country you are required to be officially accredited as a
bank."

So I can safely assume you've Sherlocked your way through the credit code and read all the regs and the Trade Practices Act?

Actually, done properly, an installment contract complies with the Credit Code. And you will see many conditions that must be complied with. Not only that but a client may approach the Tribunal to have a contract adjusted, if it is deemed unfair. Nothing like consumer protection huh?

One other point, but this assumes the process is being done fair (again with any industry there are bad apples in every barrel), before the client signs anything, they would be instructed to seek independant legal advice, and their legal advisor would explain their obligations to them before proceeding, morally and ethically a "wrapper" can only do so much to provide fair service for their clients, by providing such means for independant advice. But then there are some out there that can be pushy. Sad but true.

"PS I will throttle the first wrapper that comes back with that old line about helping people who cannot normally obtain finance. With friends like you lot who needs an enemy."

Helping?, hmm don't know about that, I see a demand out there for what I can do. I like what I do. And its a business I feel adequately skilled in developing.

You know what the big stigma is about this?, its because wraps deal with property, ie the "family home". Because the "Great Australian Dream" is owning your own home, owner occupied property is kind of "sacred" in Australia.

So when anything comes along that may be view as tainting the "Great Australian Dream" is generates an uproar.

So the question is, why the emotion?, is it because of the "margins" or because of the product?

I ask this because if one we're to go to a Business Enterprise Centre (a NSW government small business service) and checked out the standard margins on products, then 2% and 20% doesnt look like that much anymore.

What about the 100-200% markup on clothes, or food, or entertainment? In every business or enterprise the margins were developed to cover costs and compensation of time. So to with wraps, the difference being the commodity is property.

Hmmm just one more point before I leave, one last thing I would like to make clear. With an "normal" IP you buy the property now and sell it "later" after a period of time. With a wrap, you actually sell the property now. That means for forfeit any capital gains above and beyond what has been factored into the contract.

I guess the point I want to make here is when we sell our traditional buy/holds we usually are selling them at a profit, to someone who wasn't in a position to benefit like we did when we bought originally. I don't know many property investors who would say to a purchaser, "I know I'm selling this 20% more than I bought it, and I'm sorry you weren't as lucky to buy it when I did, how about I reduce my selling price to help you out"

I know, very sarcastic, but, property is a "commodity" nothing more, is a vehicle of wealth, and just happens to be a very flexible one. I am very against cheats, liars and decievers, but if someone agrees to something that they are FULLY AWARE of in regards to their obligations, then I am happy to provide to satisfy their needs.

Gee, one can sure get personal defending their operations can't they? hehe oh well, I guess it all comes down to each to their own.

I guess people have some specific objections to the way a wrap works, I'd be very interested in discussing them. Personally I think it would be a great way to fine tune my system and possibly source any bugs that I havent discovered yet.

Regards
Michael G.
 
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