Tips on recent WRAP

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From: Roderick Aguilar


Hello everyone,

I have just finished the preliminaries of another WRAP and I thought that this time around I'd document what I did. Below is the order I did things in:

DEFINITION
What is a Wrap? A person (purchaser) falls in love with a house but for one reason or another the banks won't lend them the required money. I on the other hand, have a a lot of equity and a high income and can easily get a loan. In short, I take out a loan for the "purchaser" and they pay off my loan with my bank plus give me between $500-$800 per month income for taking the trouble of helping them out. You sort of like become a banker for them. You borrow money from the bank at 6.5% and sell it back to them at 9% for example. There are many other details but that's about the gist of it in a nutshell.

1) Three of us from the same investment course went to see a "WRAP" solicitor. In this meeting we understood what each line in the WRAP contract meant. At least we know what the legal "potholes" are before we start off doing WRAPS.
2) 4 weeks later, a purchaser who has fallen in love with a house but cannot get finance approaches someone in my group for help (Wrapper).
3) My friend rings me and asks if I wish to help. I do the numbers and I accept.
4) My friend (Wrapper) signs in my company's name and leaves a deposit for me which I will later re-imburse. This is where most of the Wrapper's work is done (they get a wrapper's fee for their troubles) and I take over.
5) I ring the real estate agent involved and introduce myself. I ask for nine things:
(i) A copy of the WHOLE contract of sale (not just the front page!) to be sent to my solicitor by express courier.
(ii) Fax me a letter from their property manager stating what they think the property will rent for after I have carried out some improvements (Rental Appraisal document).
(iii) Fax me a letter from the real estate agency stating what they think the value of the property will (Real Estate Agent's Valuation) after I have carried out some improvements.
(iv) Fax me the first page of the contract of sale document.
(v) ask for his mobile number.
(vi) ask for address of Real Estate agency.
(vii) Confirm purchase price over the phone.
(viii) Find out if accept 5% or 10% deposit.
(ix) Give instructions on what name I wish to appear on the contract (ie. Company as trustee for Trust).

The Real Estate agent then asked for the address and ACN number of my company. And that's it.

6) I then must lock in the purchaser to a contract as I do not wish to purchase the property and then the purchaser pulls out and I am left with a house I do not want. I fill in a contract of sale with my details and the purchaser's and fax this over to the Wrapper (my friend).

7) It took the real estate agent about 40 minutes to do all of what I asked. After receiving all the faxes from the real estate agent and after receiving the signed contract from the purchaser as well as a $10 cheque to make the contract binding, I then proceeded to get the loan.

8) Now that I have sold the house, it's time to buy it for them. I then rang my Mortgage Broker and asked for a P+I loan with minimal breakout fee after two years. Since most Wraps only last 2-5 years then I did not want to get hit with a large exit fee from the loan. It has to be P+I as I am offerring a P+I loan to the purchaser. I fax over to my mortgage broker the following documents:
(i) the rental appraisal
(ii) the real estate valuation
(iii) the front page of the contract of sale.

Mortgage Broker proceeds to get me the loan.

9) Next I needed to give my solicitor my instructions. My solicitor does WRAPs quite frequently and I don't even have to ring him. I merely fill in one of his forms with all the details and fax it over to him. On the form it tells him about the address of the property, the purchaser's name and address, the details of the purchaser's solicitors and the details of the interest rates and monthly installments. I have placed a special condition that my loan to the purchaser does not allow for accelerated payments.

I fax the form over to my solicitor who then waits for the contract from the real estate agent and he does the rest.

10) The following day, I ring the solicitor, he says he has looked over the contract and gives me the go-ahead to sign and purchase the property.

11) I ring the real estate agent and make an appointment that afternoon to sign and give him the 10% deposit. This 10% I am getting from my revolving line of credit.

12) I now just have to wait for the cooling off period of 5 days and there you have it! From this deal I will earn between $700-$800 per month without having to actually work for it. And I feel good about the deal because I've helped someone get into their dream home. Everyone wins! The owner of the home sells their house, the purchaser gets their dream home, the real estate agent gets their commission, the wrapper gets their fee and I get a passive income! Not bad for three days work on my part.

Cheers,

Rod Aguilar
 
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Reply: 1
From: Owen .


Thanks Rod. This is a really good step by step process you have outlined here. As always though, there are questions.

You Wrote:
**** 6) I then must lock in the purchaser to a contract as I do not wish to purchase the property and then the purchaser pulls out and I am left with a house I do not want. I fill in a contract of sale with my details and the purchaser's and fax this over to the Wrapper (my friend).

7) It took the real estate agent about 40 minutes to do all of what I asked. After receiving all the faxes from the real estate agent and after receiving the signed contract from the purchaser as well as a $10 cheque to make the contract binding, I then proceeded to get the loan. *****

I understand the need to do this but I don't understand how you can. If you don't have title in your name, how can you sell the property to the purchaser? Is this contract based on faith that you will actually complete the purchase of the property yourself? Is the fact that only $10 is in the deal so far make it a worthwhile risk for the new purchaser to take? How does this bit work?

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 1.1
From: Michael Ho


Good info Rob. I'm wondering if you can expand on the sort of risk factors and how you account for these when you take on a wrap. Eg, how much deposit do you expect the buyer to have, what LVR will you are prepared to take etc.

Obviously if the banks won't lend to these buyers, then they would be at a higher risk of not being able to pay, an if you foreclose on the mortgage, you'd need some reasonable level of padding to be safe.

Thanks in advance for more of your thoughts.
 
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Reply: 1.1.1
From: Roderick Aguilar


Hi Owen,

Your question - selling something I don't own yet.
Answer: There is a clause in my WRAP contract that allows me to buy and sell at the same time. For a WRAP to work you must do both at the same time.

Your question - $10 not enough of a risk to lose on. What's stopping me from walking away? What's stopping the new purchaser from walking away?
Answer: There are three things that make a contract binding and after that neither party can walk away:
(i) An Offer - I'm offering the house of her dreams
(ii) An Acceptance - purchaser signs my contract
(iii) Consideration - to make a contract binding there has to be some sort of exchange of money. Any amount, it does not matter. In other words, even $1 would make this contract binding to us both.

If either of us pulls out of the deal after the contract becomes binding then they can be taken to court on that contract and any court of law will uphold that contract.

There is one thing that you have to remember though, the purchaser came to me for help. They are just happy that someone is providing the money. In their eyes, they just want their dream house at any cost.

Michael,

Your question - need some reasonable level of padding to be safe
Answer: There are four essential things that you must get right in order for a WRAP deal to work:

(i) Need a price premium – should be 20% eg buy at $135K sell at $150K eg say on a 100K property, make 20K then about 6K should go to “Buy and Sell” costs and $14K is profit. This is your padding. If they reneg after one month then you put it back on the market and take your profit. Say house is worth $200K. Wrapper must negotiate it down enough to include the 20% mark up. This $200K house I bought at $164K and sold to purchaser at $196,800 (20% padding). If they reneg then I put it back on the market for $200K.

(ii) Need an interest rate premium – should be 2 to 2.5% eg. If loan is set at 6.5% then charge them 9% (this is important so as to give them an incentive not to drag loan out any longer than necessary).
(iii) PURCHASER pays for “Operating” Costs - Council rates, water rates, insurance, repairs and maintenance costs works out to be fairly constant at $30 to $35pw (with the exception of insurance which can fluctuate). I DIRECT DEBIT two things from their account: their monthly repayments and about $35 per week to cover council rates and water rates.

(iv) Title of property passes from me to purchaser ON COMPLETION. So I can still claim on the house as it is officially mine but someone else is paying off the loan for me. This is also an excellent way of getting quality tenants. These tenants will never be late with their rent for the next two years (as they need a perfect record to show the banks at the end of two years in order to get a loan) and they will not trash the place and will improve it as it is essentially their dream home.

The one real risk is that the new purchasers could have over-committed themselves and fall behind in their repayments. There are penalty clauses for late payments in the WRAP contract. If they simply can't afford it then simply put the house back on the market and take your profit now rather than in two years time.

Your question - what LVR am I prepared to take?
Answer: The purchaser does not have any deposit but have a source of income...eg self employed perhaps? Who knows? But they are willing to take on the premium I place on the property. I help them with the loan and they help me with the cashflow. I borrow 100% of the loan and they pay it off for me as well as pay me a premium every month.

Cheers,

Roderick Aguilar
 
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Reply: 2
From: Alan Hill


Great post Rod......

......how do you find a good "WRAP" solicitor and do they generally have 'standard' WRAP contracts themselves or do you source these from elsewhere?

;)
 
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Reply: 2.1
From: Roderick Aguilar


Hi Alan,

The person I use, was actually recommended on this forum. His name is Anthony Cordato.
Details are:

Company: Cordato Partners
Address: Level 10, 16-20 Barrack Street, Sydney NSW 2000 (near where the Christmas tree in Martin Place usually goes).
ph: 9290 2773
fax: 9290 2784

Best to go as a group of say 3 people. He charged us $330 for the meeting. This worked out to be $110 each. If you went on your own then you'd have to pay the $330 all by yourself.

What he does in the meeting is explain his standard WRAP contract. I used this contract to do my recent WRAP. Once you've been with him once, there is no need to keep coming back for a meeting every time you do a WRAP. He allows you to photocopy his standard contract to do your next WRAP. And you merely fax him your instructions. Which is why he includes a few standard forms such as the "Instructions Instalment Sales Contract" form that gives him your instructions via fax should you find a Wrap opportunity.

It helped that all three of us had just finished The Investment Institute's course a few days before the meeting (No, this is not Henry Kaye. Due to the potential confusion they have since changed the name to Topline Property Solutions). This course taught me about WRAPS, FLIPS and LEASE with an OPTION to BUY which I had not heard of any prior to the course.

Anthony (WRAP specialist) points out the legal pitfalls and what's in his contract that protects all the parties involved.

Cheers,

Roderick Aguilar
 
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Reply: 2.1.1
From: Eric Snow


Reality check.

So, in short, for wrapping to work, you have to find someone who will gladly pay 20% above market price and an extra 2-2.5% interest. Where are these people? If you found someone so stupid, I am sure there would be numerous easier ways to get their money than going through the whole wrapping rigmarole.

I am God.

Eric.
 
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Reply: 2.1.1.1
From: Rolf Latham


Hi Eric

Reality check yes - not everyone is as well heeled as you, and may not be able to get normal bank finance, nor buy their residence with cash. Fact is 1 in 6 people can not qualify for a normal home loan, but are still reasonable credit risks.

Ta

Rolf
 
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Reply: 2.1.1.2
From: J Parker


Eric,
You are forgetting about a whole group of people in society who would buy a house via a wrap process, mainly because the banks won't lend them money. Therefore, they are cut out of the loop and have very few options open to them. Banks have very stringent rules and regulations, which not everyone adheres to.
These people have some options. They can:
1. Borrow from a private lender or other source, who can charge anything they like, basically because they can. ( in some cases as high as 30%)
2. Wait and continue to save for a deposit, all the while watching house prices soar past their limit. Even doing this doesn't guarantee them a loan at the end of it.
3. Rent for the rest of their lives (which is what most of them end up doing).
4. Buy a house via a wrap.

Of course, I expect other people to chip in with all the other options here. I'm just outlining a few.
The point is there is a market out there for people who REALLY want to buy a house, but can't do it the conventional way.
If you are willing to put in the work, take on their risk (that the banks knocked back) and be committed for the possibility of a long term relationship then wraps are it. You are helping people who otherwise could never get the opportunity to have a mortgage.
The title may be in your name until they've paid it off, but they are the ones with the equity, building it up over time.
If you get your act together, and are able to get your clients refinanced a few years down the track, then you are cutting short that commitment and can collect a lump sum, rather than stringing it out over 25 yrs.
20% over market value may seem pricy, and a 2% increase in interest rate excessive, but when you count all the hours of work and the risk you have taken on with these people, I think it's a small price indeed. If you can work it so that the clients are paying not much more than they were previously in rent (as many wrappers do) the clients don't care about the increased price, or the interest rate. They just want to get into their own home, and if they can afford it, then they're happy.
Eric, these people are not stupid. They are just in a situation where they want their own home but no lender will give them the time of day. Wraps are filling a niche. Don't be fooled into thinking, however, that they are an easy way to make money. They require many hours of your time, the ability to communicate effectively with people (sales background would help!) and your willingness to take on risk, that others wouldn't.
Just my thoughts all.
Have a terrific Christmas everyone!
cheers, Jacque :)
 
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Reply: 2.1.1.2.1
From: Roderick Aguilar


Well put Jacque. Couldn't have said it better myself!

I feel good with a Wrap as I see it as helping someone out. You are correct in that I lock in 20% of capital growth right at the start as my padding but anything above that goes to the purchasers. For a house in Sydney to appreciate by 20%, it would take about 2-3 years. But by that time, with their good record of never being late with 9% interest rate for the last 2-3 years I'm sure I can get them finance at 6.5% through one of my contacts.

You are spot on again in saying that it is a relationship with regular communications in both directions to ensure that your "tenants" are happy and will not be defaulting on their repayments.

I see property investing as a business and is all about relationships, networking, communication skills and good customer service. I see everyone I am introduced to as a potential customer at any time in the future. If you run your business like this then you would minimise the number of headaches that are inevitable and your business will grow due to repeat business and referrals. Good business can be summarised in one word...TRUST. You need to be trusted by those around you and this is something that needs to be earned and cannot be bought.

Have a merry Christmas and stay safe!

Cheers,

Roderick Aguilar
 
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Reply: 2.1.1.2.1.1
From: Eric Snow


Rolf,

Sorry to say I'm not at all well-heeled. I do own a nice sports car, however, which the ladies love.

Jaqueline,

Thank you for your explanation. I can tell you are passionate about the subject.

May I ask where are all the people who have actually completed a wrap are? Seems like a lot of people here know 'friends' who have completed one, but have never done one themselves. Come on, don't be shy!

This whole wrap thing is starting to look like an urban myth.

"A wife is a luxury, a smart accountant a necessity."

Eric.
 
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Reply: 2.1.1.2.1.1.1
From: Michael G


Eric,

I've completed a few wraps. The idea is to develop a cookie-cutter system. Which requires a bit of time to set up. And there have been problems, but no really money losing ones.

At this stage I'm having my current documentation reviewed while investigating alternative sources of cash to proceed.

Wraps arent for everyone either, the idea sounds trendy, but there's a bit of work involved to get things smooth.

I tend to work outside the Sydney metro, mainly because I'm not interested in cost of deposits here in Sydney.

My intention is to use the same amount of outlay to secure more deals per dollar to obtain more grant money (FHOG) than I could in Sydney.

Doing JVs with others for wraps, just be careful that the paperwork is in place to outline everyone's responsibilities, Cordato also has available a JV contract for such purposes.

Regards
Michael G
 
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Reply: 2.1.1.3
From: Michael G


Eric,

Good question, thought I'd do some digging to give you a fair and complete answer. This is taken from the Australian Bureau of Statistics.

"Because the social and symbolic values of a house are subjective and hard to quantify, this review by necessity focuses more on the economic aspects of housing purchase. However, the importance of these social issues is critical. People do not struggle to own their home for purely financial reasons. In 1991, among purchasers of separate houses in Sydney, Melbourne, Adelaide and Canberra, the most important reasons given for purchasing a home were most commonly non-financial. About 60% of purchasers in each city stated that security of ownership or freedom were the most important reason they had bought a house. Among people who had bought their home during the previous five years, the most commonly given main disadvantage of buying a home was the high cost of paying their mortgage. However, over 90% of these owners judged that the advantages of ownership outweighed the disadvantages."

This is the link;

http://www.abs.gov.au/ausstats/abs@.nsf/0/CE58A550B5ED1379CA2569BB00164F75?Open&Highlight=0,home,save,deposit

And the following was taken was a table called "MOST IMPORTANT REASONS FOR PURCHASING A HOME(a), 1991"

Non-financial

- Security of ownership 46.5%
- Freedom to do your own thing 14.4%
- Pride in your achievement of home ownership 7.2%
- Having your privacy 6.1
- Feeling physically safe 2.4
- Having no intrusion by landlord or agent 1.0

Financial
- Cheaper than renting in the long term 4.6
- Having an asset in old age 4.9
- Having an investment for your children 3.4
- Expecting investment returns 2.9
- Having a hedge against inflation 1.0

Hope that answers your question.
Michael G.
 
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Reply: 2.1.1.2.1.1.2
From: Crystal .


Hi Eric,
What sort of sports car do you have? What colour and how old is it? Did you pay cash or is it leased?
I'm just curious as to what type of sports car is attractive to models and beautiful women.
Regards,
Crystal
 
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