When wrapping, what happens if the buyer defaults on payment?
- Thread starter rodimus
- Start date
I'm not a wrapper, but I think so, however, it would be best to get legal advice on this.
I looked through information about wrapping a couple of years ago, and my understanding is that you retain ownership of your property until it is completely paid for. So, you would "evict" them and re-wrap it out to someone else, and they would lose the money they had put towards the house.
From the information I have read, they would generally try and have a 'win-win" situation... you give them moving money to help them move on and you get to re-sell it to someone else.
So, I don't think you would have a claim over any other assets.
Pen
From the information I have read, they would generally try and have a 'win-win" situation... you give them moving money to help them move on and you get to re-sell it to someone else.
So, I don't think you would have a claim over any other assets.
Pen
Hi Rodimus
We have been running a residential vendor finance business for 5 years now and we've had this happen a number of times, i.e. buyers getting into financial difficulties.
If you are selling a residential property to a buyer as their PPOR, then the transaction is bound by the Uniform Consumer Credit Code. In short, as soon as a purchaser is late for a payment we issue a Notice of Arrears. If they haven't caught up within 14 days, we issue a Notice of Default. If they then haven't caught up after another 28 days, we are able to issue a Notice of Termination.
As Penny mentioned, very rarely get to the Notice of Termination point. Based on the fact that most people don't want a default on a home mortgage to show up on their credit reference, people are usually satisfied to authorise a Deed of Termination and walk away. This Deed allows them to walk away, without us chasing them for outstanding money owed. Not a situation they would normally be able to get from a traditional lender.
Once the people have gone, we sometimes convert the property into a buy & hold and sometimes sell it with vendor finance again. And no, we don't go after any assets with a bankruptcy administrator.
I hope this helps.
Cheers, Paul
We have been running a residential vendor finance business for 5 years now and we've had this happen a number of times, i.e. buyers getting into financial difficulties.
If you are selling a residential property to a buyer as their PPOR, then the transaction is bound by the Uniform Consumer Credit Code. In short, as soon as a purchaser is late for a payment we issue a Notice of Arrears. If they haven't caught up within 14 days, we issue a Notice of Default. If they then haven't caught up after another 28 days, we are able to issue a Notice of Termination.
As Penny mentioned, very rarely get to the Notice of Termination point. Based on the fact that most people don't want a default on a home mortgage to show up on their credit reference, people are usually satisfied to authorise a Deed of Termination and walk away. This Deed allows them to walk away, without us chasing them for outstanding money owed. Not a situation they would normally be able to get from a traditional lender.
Once the people have gone, we sometimes convert the property into a buy & hold and sometimes sell it with vendor finance again. And no, we don't go after any assets with a bankruptcy administrator.
I hope this helps.
Cheers, Paul
Thanks for that Lofty.
I guess I'm uncomfortable with being the financier in a situation like that. But you must be able to be comfortable. You are financing people who cannot get finance in other ways- and you are more likely to get defaults than the bank gets.
I've heard of the opposite happening. An unscrupulous owner accepts payments from the buyer- but refuses to make payments to the bank.
Of course, this would not happen very much at all. But the very few times when it does happen add a black mark to the practice.
I guess I'm uncomfortable with being the financier in a situation like that. But you must be able to be comfortable. You are financing people who cannot get finance in other ways- and you are more likely to get defaults than the bank gets.
I've heard of the opposite happening. An unscrupulous owner accepts payments from the buyer- but refuses to make payments to the bank.
Of course, this would not happen very much at all. But the very few times when it does happen add a black mark to the practice.
Hi,
There's really two parts to the question here...
1) What happens to the property? - if its a lease/option or terms contract, then title remains with the vendor-financier. You go through the default process under the UCCC, and foreclose and remove any caveats etc.
2) Are you able to lay claim against other assets? - we'll the question here is, what is your liability?
If you claim is that you bought a house for $X and sold it for $Y and now you want to claim for the difference $Y less $X, then I'm not sure about that.
The wrapping business is about margins offsetting risk and time, while the house was in the possession of the buyer, it was an asset earning you an income (like a vehicle that has been leased out).
Once that house has been refinanced or bought out, your capital profit margins cover your buy/sell costs and profits (like a residual on a leased car).
But if the house is return through a default, then (in my view) it just trading stock which isn't being utilized which needs to be re-leased.
I spose you could claim loss of income and work out how to be a creditor - however if the price of the property has gone up during the time it was sold and foreclosed, then (in my view) you have had your "lost income" covered by the capital gain.
And then if you were to re-leased the property, the greater value will mean higher repayments and a greater margin between your sale price and underlying mortgage.
In my view, your time will probably be better spent finding a new buyer than chasing an old one.
Your business plan should include a section on risk mitigation - which includes the "what if" questions.
The scenario - "what if" they default, should list all the costs and time issues with defaulting, foreclosing, relisting, selling, etc and all the running expenses. And % chance it occurs.
Then you factor this as a cost to your business, you base your profits on top of this costs, so that in the worst case scenario your "profit" already factors in these costs - or minimum profit at least. Risk scenario should also factor capital gain - ie if you have to do a normal sale - will you still be ahead.
Otherwise, if the default/foreclosure scenario doesn't occur - you don't incur such costs and your profits are better - but at least if it does - you factor it in.
In other words, plan for the worst, and hope for the best.
Regards
Michael G
There's really two parts to the question here...
1) What happens to the property? - if its a lease/option or terms contract, then title remains with the vendor-financier. You go through the default process under the UCCC, and foreclose and remove any caveats etc.
2) Are you able to lay claim against other assets? - we'll the question here is, what is your liability?
If you claim is that you bought a house for $X and sold it for $Y and now you want to claim for the difference $Y less $X, then I'm not sure about that.
The wrapping business is about margins offsetting risk and time, while the house was in the possession of the buyer, it was an asset earning you an income (like a vehicle that has been leased out).
Once that house has been refinanced or bought out, your capital profit margins cover your buy/sell costs and profits (like a residual on a leased car).
But if the house is return through a default, then (in my view) it just trading stock which isn't being utilized which needs to be re-leased.
I spose you could claim loss of income and work out how to be a creditor - however if the price of the property has gone up during the time it was sold and foreclosed, then (in my view) you have had your "lost income" covered by the capital gain.
And then if you were to re-leased the property, the greater value will mean higher repayments and a greater margin between your sale price and underlying mortgage.
In my view, your time will probably be better spent finding a new buyer than chasing an old one.
Your business plan should include a section on risk mitigation - which includes the "what if" questions.
The scenario - "what if" they default, should list all the costs and time issues with defaulting, foreclosing, relisting, selling, etc and all the running expenses. And % chance it occurs.
Then you factor this as a cost to your business, you base your profits on top of this costs, so that in the worst case scenario your "profit" already factors in these costs - or minimum profit at least. Risk scenario should also factor capital gain - ie if you have to do a normal sale - will you still be ahead.
Otherwise, if the default/foreclosure scenario doesn't occur - you don't incur such costs and your profits are better - but at least if it does - you factor it in.
In other words, plan for the worst, and hope for the best.
Regards
Michael G
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