Wrap explanation

I am a "buy and hold" investor. I confess I know little about wraps and have not drummed up any enthusiasm about it until I ventured into this forum. Could someone explain to me (and a mate who is also interested) all about them, or lead me to a good site or sites.

Regards, Ray:confused:

Quick explaination of a wrap;

Basically it is vendow financing. You find an IP and then sell it to another party. You effectively become the bank for them. This is done by marking up the sale price (bought for 100k, sell to them for 120k (figures probably not realistic? but you get the idea) and also marking up the interest on the loan (your loan is at 6% so you charge them 8% interest).

The margins that these mark ups create is how you make your money. Your payments to the bank (on figures used above and IO loan) would be $115.38/week. The buyer will pay you $184.62/week leaving you $69.24 ahead each week.

The buyer may choose to buy you out of the loan at some stage but because you have inflated the price and also been receiving good returns you will still be ahead.

Hope it helps

Hi Chris,

That's a good explanation of what a wrap is. But, just to help Ray a little more, "Why" would anyone want to buy a property in this way? To buy a property at a higher price, and pay a higher interest rate?

My understanding is that it is because there are MANY people out there who are not in the position to buy a property. They might be new in Australia- but perhaps with a good income. They may be newly divorced. They might not have a deposit.

I know of two people who actively promote wraps, under a slightly different model.

One model (as I understand) provides lower cost property property to "battlers"- people who are renting, but who may be able to buy a property for about the same cost as they are paying for rent now. They just may have trouble with the deposit. The First Home Owners Grant may help with that- as long as there is someone who can hold the title and support them in the short term.

The other model I'm aware of is aimed at the higher income people. Many of these typically have a substantial deposit, and even a good credit history- but not for a long time. There are many reasons banks refuse people loans. I was refused a loan 8 years ago for a PPOR because, as an IT contractor, I could not show a five year contract. This was in a time when IT contracting meant something (and when I owned a house in the UK, which could not be used as security).

Under this model, people are happy to pay a higher price, and a higher rate of interest, just to get a foot in the door. They will typically try to discharge their loan, and refinance elsewhere, quickly. After maybe two years, they will have a credit history, and the banks will be happy to take them on.

My understanding is that wraps are a finance business- but a potentially lucrative one.

And at least some wrappers are not only wrapping- but using the proceeds of their wraps to provide the income for buying high growth properties (as well as for enjoying life).

go to wrappers meeting in your city hosted by wrappers association and talk to other wrappers. it's a very good source of information.
Does the vendor make a sale conditional upon being the financier for the purchase? What I mean is, let's say I own a property and I want to wrap it. I advertise it for sale, but will only sell to someone who agrees to loan the money from me. Someone comes along with normal bank finance and wants to buy my property. Can I just say "No, sorry, you can only buy using my finance."
And then what is to prevent this person agreeing to buy using my finance, but immediately after settlement they refinance and buy me out?
It's ok if they cash you out because it's better to make a profit and go on to your next house than to just let it sit vacant and costing you money. Sure you miss out on a little bit of interest, but i would just take the profit and move onto the next house.

The same thing happened to me and i also had a fixed interest rate on it, So i just sold it to the home buyer at the same price i was going to wrap it for and also asked them to pay my brake costs with the bank on top of it. they got the house they wanted and i got my profit, so i'm off to buy another house and maybe i'll wrap it this time.