What to tell the wrapee

[carswell]

Hi all,

I was talking with this couple today that are looking to buy a wrap property off me and a struggled to answer one of his questions.

The question was what if he makes the payments to me but I am not paying my payments on my mortgage, can the bank come in and sell the property from underneath him. I know the bank can do this, so is there anyways around this to give him a little more security??

Your comments would be much appreciated.

Regards,
Matt

 

[michaelg]

Hi,

A couple of questions...

Q1: Did you inform the bank that you were doing a wrap (ie disclose that a third party is involved?)

Q2: If their repayments are more than the 1st mortgage, why aren't you paying the mortgage?

Q3: Have you consider a way where you can't touch part of their part of the repayments which cover the first mortgage?, ie only have access to the margin/profit component?

These a "business systems" questions, what systems do you in place?, basically risk management thinking.

Michael G

 

[carswell]

Hi Michaelg,

I have inform the bank that I am doing a wrap.

What these people are afraid of, is they are paying this money into my account and I am drawing this money back out and spending it instead of puting it towards my mortgage then the bank can sell the house on them.

Someone mention to me about a caveat, do you recommend having a caveat?

Regards,
Matt

 

[Kristine..]

Carswell

Suggest to your purchasers that as they are buying on a 'Terms Contract of Sale' they have the right to request a 'Mortgage Back' from you.

The Sale of Land Act, Victoria, covers situations like this. Whichever State you are in will have similar legislation.

The Mortgage Back arrangement means that the title is transferred into their name, they pay all stamp duties etc, and you are registered as Mortgagee on the Title.

No, you don't have to advance them any funds, but if you are already mortgaged you would have to clear the mortgage at transfer.

Your conveyancer or solicitor should have already advised you, or your purchasers, on this.

Yes, at the very least their solicitor should have lodged a caveat. It only costs a small fee at the Titles Office, but all it means is that you can't have further dealings with the title without reference to them.

If you default on your mortgage the way things are currently organised, they are indeed up the creek without any paddles! Your bank would not necessarily recognise their interest in the property and you would be off their Christmas Card list forever!!

Rereading your post, it seems the sale has not yet been finalised. See your conveyancer / solicitor before you go any further.

Cheers

Kristine

 

[michaelg]

Hi,

The purpose of the caveat is to protect the wrappee's interests, to prevent the wrapper from reselling the property out from under them without their permission.

A mortgage back situation is not pretty, this means that the wrapper is now the mortgagee, so what happens to the wrapper's own lender who they borrowed the 1st mortgage from? Essentially they are bumped off the title, this would mean they would need to be paid out in full.

So we now have a situation where the wrappee is hit with extra costs they may or may not have budgeted for (stamp duties, etc) and the wrapper now has to pay out the balance in full, and the lender has now had the title changed against their better interests (they will no longer received income from this title). In my opinion no one wins.

Keep it simple, all your wrappee wants is a system where they can pay money into an account, that you cannot touch. All you want is a system where the balance (payment less mortgage) is paid to you. A system where you can't touch money allocated to the mortgage, but one you can take control over if they breach their contract.

Go to a bank or whatever and ask if such things exist.

Also put into the contract your obligations to the wrappee, "I xxxx, agree to accept payments made on time, and therefore pay our obligations to the mortgagee"

Or something, discuss this with your solicitor.

Regards
Michael Gruber

 

[kylie500]

Just an idea...

What about a joint bank account, in both your name and your wrapee's name, requiring both signatures to withdraw from. Also, a direct debit would be set up from this account to your underlying mortgage, and a direct debit for the balance of the payment to your personal bank account. So each fortnight, the wrapee would know that your mortgage payments are made, you would get your "spread" money, and there would be no money left in the account. Safe all round.

(my wrappee's must have trusted me because they didn't query me on this!)

Also, I believe that it is law in Victoria for the underlying mortgage payments to be made each time the wrappee makes a payment to you. If you are registered as a credit provider you should make sure this happens.

 

[michaelg]

Hi,

That's what I had in mind, but before you execute, you need to work out what your system will be for rate changes (notification, lead time to change details, time to send paperwork, time to recieve it, and what happens if they default, how do you regain control of the account, in case you resell the property?)

Michael G

 

[kylie500]

In our case, if my bank (who holds the underlying mortgage) changes interest rates, then my loan to the wrappee also changes, on the same date and by the same amount. This is written into our contract.

Regaining control of the account in the case of default may be more difficult! Probably something that needs to be discussed with a solicitor and written into the contract as well.

 

[carswell]

If a caveat protects the wrapee from the wraper selling the house, does this mean if they default it makes it harder for me to move in and sell the house and does it make it harder to evict the wrapee if they default?


Matt

 

[michaelg]

Hi,

Then ask your solicitor what mechanism you can place in the contract that can have these restrictions lifted in the contract is in breach.

Just a thought
Michael G