Hi,
For your reference, the following are responses to questions put forth by John Hoskings, the reporter of the SBS Insight segment on vendor financing. We would like to point out that this information was not quoted on air, nor reproduced on their website.
***
John here are some answers to your questions
What are the advantages to wrapping?
It offers an opportunity for Australian families to get a step up into and enjoy the benefits of home ownership which up to now have been locked out of by the traditional banking system
How does wrapping benefit homebuyers?
It enables them to move from the rental treadmill into home ownership without the restrictions which have prevented them from doing so previously. It also enables them to build a nest egg by building equity in their home, which in turn gives them more options down the road. It also enables investors another way to buy more investment properties without the restrictions placed on them by the traditional banking system.
How does wrapping benefit lenders?
Lenders get exposure to future potential banking clients without any immediate financial commitment and since defaults normally happen in the early years of a loan this is of great benefit to them. So a lender who refuses a loan to a family now may well change their mind down the road when they see their ability to make payments on time besides other things.
Industry observers say a significant proportion of the current real estate boom has been driven by wrapping ... Is this correct?
I'm not aware of this
...A significant proportion of purchasers often use 1st home loan grant as their deposit...is this ethical.........
The wrapper or finance provider is similar to other financial lenders in that the deposit has to come from somewhere. My students are taught not to provide housing to those who can't afford it which means the buyers need to have a deposit. It is the buyer who decides where the deposit comes from. We will not process transactions unless the buyer invests deposit which is partly his.
What is a reasonable margin for a wrapper to make on purchase and interest?
This is a question you need to ask the market place as they decide. The market place is intelligent enough to know what is the right amount. Any margins that they feel are unreasonable they will not pay, they will simply shop elsewhere.
Do you receive many complaints?
Virtually non existent but we do get lots of testimonials.....In close to 400 transactions We have only been to court once in order to remove a tenant buyer from one of our homes
What percentage of people buying real estate through your company have problems or default on their loans
We estimate that less than 4% do not complete transactions for one reason or another, The reasons are, divorce, job change or transfer, upgrading, don't like the responsibility of being an owner or they simply sell the property quickly for profit. We have had 3 people default on their loans of which one we took to court in America as mentioned above. One went back to staying as a tenant in the same house and we gave them back the purchase deposit they had paid (they are still with us today)and one that abandoned the property after not paying for nine months.
Critics of wrapping say the biggest problem is lack of protection for the buyer.
Both the wrapper and the wrap buyer are more exposed. The wrap buyer can lodge a caveat on the property preventing the wrapper from dealing with it....If the wrap buyer feels exposed then he should probably not conduct a wrap as a vehicle to home ownership
How are the interests of purchasers protected when they don't get title to the property?
The same as the answer above also in most cases the licensed real estate manager pays the underlying loan before the wrapper receives any funds so if the underlying loan is in jeopardy it is only because the wrap purchaser has not made their payment
What rights does the purchaser have?
He has the right to refinance or sell the house at any time and take his profit
How does a buyer ensure that the person financing the house maintains payments?
As what I mentioned above also the agent can send receipts to the wrap buyer similar to how statements get sent to property investors also see copies of the underlying loan balance statement.
Is it correct that people have been removed from the house they are buying for relatively minor matters such as defaulting on one or two payments? It would appear to be silly for any successful business to tarnish its name in the market as a result of minor matters. Good word of mouth is a lot less expensive than the cost of promoting how good you are. Also the recent articles on this subject refer to people who are not members of the Vendor finance Wraps Association.
If people are not considered to be good financial risks by banks and other institutional lenders, why should they be considered good risk prospects by wrappers?
Good question, one has to understand how risk is measured by the traditional banking system. A person with no banking history may be rejected but may well be a good person, or a self employed person who has not been self employed for at least three years, or a divorcee who's partner didn't pay the utility bills, or a person whose previous medical condition wiped out their savings, or a part time contractor, many of these people fall through the cracks of the banking system.
Banks and other financial institutions have been criticised for their involvement in wrap financing. Is this criticism valid?
With all the bashing the banks get these days makes me glad I'm in the wrapping business. 99% of Australian families who are now able to enjoying home ownership have probably got to thank the banking system for directly or indirectly helping them.These 99% are the silent majority
Real estate institutes and agents have also been criticised, is this valid or fair?
Same answer as above
As one of the pioneers of this form of financing in Australia, how many people would you estimate have financed real estate purchases in Australia in this way? Can you estimate a dollar value?
Sorry no good on this one
The practice is banned in several states, what is your opinion of this legislation?
Not so, only South Australia. The day that Australians are no longer granted their democratic right to sell houses to one another will prove will be a dark day for Australia and will send a message to foreign investors that Australia really has become a less positive place in which to invest
Queensland is one of the states that currently approve wrapping. Is this a good thing?
Depends on who you ask, my clients think it is. Wrapping offers consumers choice and I believe consumers should be able to choose and also decide, what is, and what is not good for them....
Should wrapping be banned? If not why not?
People only wish to ban things from which they fear and fear is only brought about by ignorance and lack of knowledge. What we should be doing is educating all the parties involved so people become more comfortable with the concept which is why the Vendor finance wraps association was established. They meet quarterly and invite members of the legal, accounting and consumer protection agencies to address the members. With a maturing market wrapping concerns will disappear
What do you predict is the future of wrapping in Australia?
If we look at the U.S.A. wrapping has become mainstream and another common option for people I believe that the market place will become more involved in wrapping because of consumer driven demand. The way the business is run may change.
***
Regards
Michael Gruber
President
Vendor Finance Association
For your reference, the following are responses to questions put forth by John Hoskings, the reporter of the SBS Insight segment on vendor financing. We would like to point out that this information was not quoted on air, nor reproduced on their website.
***
John here are some answers to your questions
What are the advantages to wrapping?
It offers an opportunity for Australian families to get a step up into and enjoy the benefits of home ownership which up to now have been locked out of by the traditional banking system
How does wrapping benefit homebuyers?
It enables them to move from the rental treadmill into home ownership without the restrictions which have prevented them from doing so previously. It also enables them to build a nest egg by building equity in their home, which in turn gives them more options down the road. It also enables investors another way to buy more investment properties without the restrictions placed on them by the traditional banking system.
How does wrapping benefit lenders?
Lenders get exposure to future potential banking clients without any immediate financial commitment and since defaults normally happen in the early years of a loan this is of great benefit to them. So a lender who refuses a loan to a family now may well change their mind down the road when they see their ability to make payments on time besides other things.
Industry observers say a significant proportion of the current real estate boom has been driven by wrapping ... Is this correct?
I'm not aware of this
...A significant proportion of purchasers often use 1st home loan grant as their deposit...is this ethical.........
The wrapper or finance provider is similar to other financial lenders in that the deposit has to come from somewhere. My students are taught not to provide housing to those who can't afford it which means the buyers need to have a deposit. It is the buyer who decides where the deposit comes from. We will not process transactions unless the buyer invests deposit which is partly his.
What is a reasonable margin for a wrapper to make on purchase and interest?
This is a question you need to ask the market place as they decide. The market place is intelligent enough to know what is the right amount. Any margins that they feel are unreasonable they will not pay, they will simply shop elsewhere.
Do you receive many complaints?
Virtually non existent but we do get lots of testimonials.....In close to 400 transactions We have only been to court once in order to remove a tenant buyer from one of our homes
What percentage of people buying real estate through your company have problems or default on their loans
We estimate that less than 4% do not complete transactions for one reason or another, The reasons are, divorce, job change or transfer, upgrading, don't like the responsibility of being an owner or they simply sell the property quickly for profit. We have had 3 people default on their loans of which one we took to court in America as mentioned above. One went back to staying as a tenant in the same house and we gave them back the purchase deposit they had paid (they are still with us today)and one that abandoned the property after not paying for nine months.
Critics of wrapping say the biggest problem is lack of protection for the buyer.
Both the wrapper and the wrap buyer are more exposed. The wrap buyer can lodge a caveat on the property preventing the wrapper from dealing with it....If the wrap buyer feels exposed then he should probably not conduct a wrap as a vehicle to home ownership
How are the interests of purchasers protected when they don't get title to the property?
The same as the answer above also in most cases the licensed real estate manager pays the underlying loan before the wrapper receives any funds so if the underlying loan is in jeopardy it is only because the wrap purchaser has not made their payment
What rights does the purchaser have?
He has the right to refinance or sell the house at any time and take his profit
How does a buyer ensure that the person financing the house maintains payments?
As what I mentioned above also the agent can send receipts to the wrap buyer similar to how statements get sent to property investors also see copies of the underlying loan balance statement.
Is it correct that people have been removed from the house they are buying for relatively minor matters such as defaulting on one or two payments? It would appear to be silly for any successful business to tarnish its name in the market as a result of minor matters. Good word of mouth is a lot less expensive than the cost of promoting how good you are. Also the recent articles on this subject refer to people who are not members of the Vendor finance Wraps Association.
If people are not considered to be good financial risks by banks and other institutional lenders, why should they be considered good risk prospects by wrappers?
Good question, one has to understand how risk is measured by the traditional banking system. A person with no banking history may be rejected but may well be a good person, or a self employed person who has not been self employed for at least three years, or a divorcee who's partner didn't pay the utility bills, or a person whose previous medical condition wiped out their savings, or a part time contractor, many of these people fall through the cracks of the banking system.
Banks and other financial institutions have been criticised for their involvement in wrap financing. Is this criticism valid?
With all the bashing the banks get these days makes me glad I'm in the wrapping business. 99% of Australian families who are now able to enjoying home ownership have probably got to thank the banking system for directly or indirectly helping them.These 99% are the silent majority
Real estate institutes and agents have also been criticised, is this valid or fair?
Same answer as above
As one of the pioneers of this form of financing in Australia, how many people would you estimate have financed real estate purchases in Australia in this way? Can you estimate a dollar value?
Sorry no good on this one
The practice is banned in several states, what is your opinion of this legislation?
Not so, only South Australia. The day that Australians are no longer granted their democratic right to sell houses to one another will prove will be a dark day for Australia and will send a message to foreign investors that Australia really has become a less positive place in which to invest
Queensland is one of the states that currently approve wrapping. Is this a good thing?
Depends on who you ask, my clients think it is. Wrapping offers consumers choice and I believe consumers should be able to choose and also decide, what is, and what is not good for them....
Should wrapping be banned? If not why not?
People only wish to ban things from which they fear and fear is only brought about by ignorance and lack of knowledge. What we should be doing is educating all the parties involved so people become more comfortable with the concept which is why the Vendor finance wraps association was established. They meet quarterly and invite members of the legal, accounting and consumer protection agencies to address the members. With a maturing market wrapping concerns will disappear
What do you predict is the future of wrapping in Australia?
If we look at the U.S.A. wrapping has become mainstream and another common option for people I believe that the market place will become more involved in wrapping because of consumer driven demand. The way the business is run may change.
***
Regards
Michael Gruber
President
Vendor Finance Association
