who can use the equity in a wrap/lease option?

[bweed]

assuming the equity is accessible a wrap or lease option would suit my current situation nicely.

I still can't get my head around it though. I assume when you wrap a property you cannot use the equity built from capital growth to borrow against as the property is effectively owned by the wrappee? However if you bought at say 90k wrapped at a sale price of 110k does that contractual CG mean anything in the eyes of the banks?

A lease option looks more viable as the lessor retains ownership until the lessee exercises the option? again there seems to be the implied CG in the option contract but as far as the bnk is concerned if I go to them and ask to borrow against the equity in the optioned property do they even know it has an option on it?

and what happens when the buyer exercises the option and equity in the property which I've borrowed against suddenly dissapears (or at least reverts to the contractual CG)?

I suppose this question is relevant for any property that borrowings against it's equity that is sold for under bank valuation.

 

[Jacque]

Sorry bweed but the equity in a wrap is out of bounds. You have onsold that property to someone else, and signed a contract saying so. Though the title remains in your name, the wrappee has both possessory and equitable title. They can also lodge a caveat over the property, if they so wish.

If you want to access equity, you'll have to get from your own properties- the good old fashioned way

 

[bweed]

thought so... how about the lease option?

 

[Tony]

Hey Bweed,
Pretty much the same as well with lease options. It would be undesirable if your tenant (under a lease option) owed you less than what you owed the bank. If he decides to cash you out, you would have to find the missing balance.

I think you have a moral (& legal) obligation to do the correct thing for the wrapee/tenant buyer & not spend any equity.

Hope that helps.

Tony

 

[geoffw]

This comes down to the dilemma between cashflow and capital growth.

By wrapping, I accept a good cashflow. At the expense of any growth.

If I was going to wrap, I would be guessing that I'd be doing it where I expect there not to be a lot of growth. And I guess I'd also certainly be doing it in an area where rental returns are reasonable- so that the wrappee would not be paying much more to own a place than he is paying now to rent.

I can't forecast capital growth though. So I understand that there are many people who would rather lock in the cash flow from a wrap rather than try to guess growth.

Some people would have done substantially better in the last two years from growth than from wrapping. But a wrapper has taken a bet, and is committed to that bet (unless the wrappee defaults).

But even people like Rick Otton are using their excess wrap income to put into growth properties. So there is a place for growth as well.

 

[Bear924]

I view wrapping as a method of obtaining the capital growth of a property before the capital growth has eventuated. Wrapping in an area of reasonable capital growth is important as if you wish to get the wrappee to refinance the wrappee's bank must feel comfortable that the wrappee's purchase price is at market value. Also in an area of no growth I believe that the wrap market would be less willing to pay the extra capital amount you have placed onto the wrap to get the numbers 2 work 4 u.

 

[Jacque]

That's why it's extremely important to do your homework and snag a bargain where wraps are concerned. If you buy at full market value, then you are risking not being able to refinance your clients in a few years, if the market has not been kind to you growth wise.

Wraps can be done anywhere, the demographics don't really matter. It's how much money you have in the deal that is important, as you can have a higher priced property that is fully financed (via good loan and a private investor, say) and not costing you a cent to run.

Just some thoughts.....