I take it you missed A Current Affair the other night then.
As far as I understand it, it's when you take out a loan for someone else, because they can't do it themselves - usually because they don't meet the bank's stringent lending criteria. For this privilege, you charge them an extra percent or two on top of the bank's rates. I think the idea is that you also source the property for them, so that you know it'll be less than what they're currently paying for rent.
The ACA report tried (dismally) to make this look like a bad thing to do...
I've got a better idea. How about you research the subject at the following forum site that talks and talks about wrappinng. Look in their old forum archive, as well. Then post a simple explanation of the concept for us.
I did indeed catch the ACA segment. Steve Mcknight (I think) sent a message to me about it. As you say, it appeared that they tried to discredit the process but I was still sitting there after and thinking that what he was doing sounded great. Not sure if I have the ability to do that for anyone at this stage. Thanks for the advice and I will try to get a lay mans explanation of the system via the web site mentioned by Mike. Thanks again.
Well, right or wrong, here is the simplified version of wrapping as I understand it.
Wrapping is buying a property, having a mortgage on it and selling the property to someone else at a higher price and higher interest rate on low deposit. The house would be bought at well below market price and sold back to the new purchaser around market price or slightly above.
Does this explanation match with everyone else's understanding?
Your definition seems to match this one by Steve McKnight:
A wrap is where you buy a house and then resell it on "vendor" terms. That resale wraps around your original acquisition.
As a result of a classified ad we ran six months ago, Dave received a phone call from a guy who wanted us to purchase a house for him for $20,000 and resell it to him for $45,000, making repayments at $100 per week over 16 years. This is a classic wrap deal where we'll purchase the house and then onsell it on our terms.
Me again: Or how about this simple(?) one:
II. Basics of the Wraparound Mortgage
A. Definition of Wraparound Mortgage
A wraparound mortgage is a financing arrangement in which the purchaser of real property makes an installment note (the "wraparound note"), the principal amount of which "wraps around" or includes the principal balance of an underlying indebtedness (the "underlying note").The unpaid principal balance of the underlying note is often referred to as the "included debt." The "true debt" (also referred to as "real debt") is the actual amount of money advanced or credit extended by the wraparound note holder ("holder") to the wraparound note maker ("maker") in connection with the execution of the wraparound note. Stated more simply, the "true debt" is the difference between the outstanding balance of the wraparound note and the outstanding balance of the underlying note. The purchaser of the real property is the maker, and the seller of the real property is the holder. The title to the real property is accepted by the purchaser subject to the lien(s) securing the underlying note, and the maker expressly does not assume the indebtedness evidenced by the underlying note. The lien(s) securing the payment of the wraparound note are subordinate and inferior to the lien(s) securing the payment of the underlying note. Generally, the wraparound note provides that the holder shall, subject to the performance of the maker under the wraparound note, pay to the underlying note holder the corresponding current installment of principal and interest due on the underlying note. In most instances, in the event of default by the holder on the underlying note, the maker is allowed to cure the default and to correspondingly reduce his obligation under the wraparound note.
B. Objectives of a Wraparound Mortgage
Sellers structure transactions using wraparound financing for a variety of reasons. The most significant reasons include: (1) increasing the effective rates of return on the seller's investment or equity, (2) avoiding acceleration of the underlying note upon sale of the property to the purchaser under a "due on sale" clause, and (3) being able to take an advantageous position for federal income tax purposes in reporting a seller's gain on the installment sale method. These objectives generally cannot be achieved by the purchaser's simply assuming or accepting title to real property subject to, an underlying note.
Me again: Nah, I think your definition is best, Grant.
You seem to be well educated in the idea of wrapping.....have you just cop pied that explanation from a solicitors hand-book or have you actually been involved in wrapping transactions.!!!!
I am studying the idea at the moment and cant quite grasp the legal/financial fragments involved in encumbering a title that the bank already has caviet over and then keeping their money...after the transaction it seems to me you are holding money partially unsecured(meaning you no longer have the property as security).Please forgive me if I sound dumb but I am getting there it'll just take me a few more books and the like.
If you have entered into a wrap transaction I would love to hear the nitty-gritty if you are willing.
I'm sorry if you were misled into thinking I am "well educated in the idea of wrapping". In fact the opposite is true. I inserted a portion of a long document, I found on the Web, relating to Texas case law into my post merely to illustrate how a simple concept can seem quite complicated depending on how you wish to describe it. I had no intention of pretending that I was an expert or that those words were mine. In hindsight, I should have prefaced that copy with its original source. I've attached the complete document to this post for you to see its context.
I would love to give you the "nitty-gritty", however, even if I had the nitty-gritty, giving it to you in a series of posts would be far too time-consuming. If you understand the simple principle of Wrapping and that it works because there are people out there doing it, then, any further study is what is termed "analysis paralysis". Any legal considerations will be accounted for in the CONTRACT and that is what you should start with. Get a contract and have the solicitor explain it to you thoroughly. Ask as many questions you like regarding the bank or the wrap purchaser. Scan the John Burley forum for issues you may not have thought of.
By the way, in the second attachment, there is a copy of a post found on the John Burley forum to illustrate the difference between a "formal" wrap, in which a contract is involved, and an "informal" wrap which creates the wrap "effect" but without a contract. The author is concerned that many newbies miss the big picture because they create a rigid definition of Wrapping. I believe many people here in Australia mistakenly believe that wrapping will only work if it is done the Steve McKnight way. That is a rigid definition. If First Home Owners Grants were not available, does that mean you couldn't do a wrap? Food for thought.
PS: James, the following URLs will provide more info:
This site is Lewis O'Brien's who is the solicitor of Steve McKnight. Click "Investors" option at Main page. You can also e-mail him with specific questions. I also believe audio tapes of his recent Melbourne seminars are available to purchase. http://www.lawyer4nix.com.au/mainpage.html