Wrap Finance

[malpass]

Hi All,

Just want to get members thoughts on wrap finance. How does it work, is it legal in most states.

I have read a little bit about it but still don't see the benefit of this investment strategy, if you can call it a strategy either short or long term.

The names Rick Otton and Steve McKnight are mentioned as 2 who specialise in this type of property investment. Are this guys legit or is it some sort of scam.

Malpass

 

[geoffw]

Malpass

The strategy has been mentioned many times in the past. A search of "wrap", "Otton", "McKnight" or similar wil give you a lot of reading.

It is not a real estate strategy really- it is a finance strategy uswing reqal estate.

The idea is something like (not in particular order):

. Find a property
. Finance the property
. Buy it through bank finance
. "Sell" the property to the tenant (though you might have done this before financing). Sell it on terms. But you still hold the main finance for the property.

Hypothetical:
. Find property for $250K
. Property has an occupant who hates renting, and would like to buy. Tenant may have a problem buying- perhaps for income problems, or perhaps because of other problems (eg, non documented income; new arrival in Australia)
. The owner allows tenant to buy the property. The tenant enters into an agreement to buy the property on terms. The owner has the mortgage- but charges the tenant a higher rate (perhaps 2% higher than bank rates?) for the tenant to buy the property.
. The terms may well include a higher price than what the property is currently worth (many tenants will be quite happy with that, as if does mean that thay can buy where they could not have before).
. The owner earns the difference between the bank rate (s)he pays and what the tenant pays.

That difference provides the cashflow to the owner.

And the higher price provides a profitable exit strategy to the wrapper if the tenant discharges early.

I chose not to go into wraps, because:
1. It is a finance strategy, not a real estate one. I could have missed out on some great real estate price rises if I had followed that strategy.
2. There was a perception that the strategy was not ethical. I had satisfied myself that it was quite ethical, but others, especially media, had different perceptions.

 

[Lofty]

Hi Malpass

My wife and I run a Vendor Finance (Wrapping) business. So far we have helped 10 couples and one newly single lady into their own homes. We are currently doing transaction 12 and 13 together.

The perception of Wrapping generated by the media a couple a years ago was pretty poor because of the number of "cowboys" attracted to the new "million dollar makeing idea". These "cowboys" seem to have moved on to their next "great thing" and with the help of the Vendor Finance (Wraps) Association of Australia, the perception of Wrapping out there in the market place has definitley improved. We now have mortgage brokers and real estate agents referring clients to us as well as numerous investors now coming to us wanting to do Joint Ventures.

We tend to agree with Geoff though. We treat Wrapping as a cash flow producing business. We then use that cash flow for property investing. Rick Otton taught us the ropes and he always said to us that our real wealth would come from the equity we have in real estate and that Wrapping was just a cash flow business that helps you build that equity.

Good luck in whatever you choose.

Cheers, Paul

 

[lizzie]

i have several wrapped properties that, i must admit, bring me in a very nice income that finances my negatively geared, high cg properties ... but ... in hindsight i regret wrapping them. why? because i missed out on over 100% cg during the boom years, i have no control over when i recieve my now (relatively) small amount of equity back and i cannot refinance to release the large amount of actual equity (well, i could but then i would end up owing more on them than the purchaser owes me so that if they chose to payout i would have to scrabble for the difference).

for example - bought a house in 2002 for $76k, onsold for $199k but now worth $160k. i do recieve $343 net income from that property and will also have recieved a total of around $30k lump sums when they payout ... but i could have rented for $160/wk that would have covered all expenses and had my hands on $90k of equity under my control.

i have 5 wrpas - so for the sake of income of $21k per year plus around $200k of lump sum payout at the end of the day, i have forsaken around $350-400k of equity over 5 years and the ability to unlock that equity to buy more.

i know others do not agree with what i say - but i can't wait until my last wrap pays me out as i now do small developments and can multiply my money much quicker.

 

[Qlds007]

We have done 1 or two over the last 10 years and i assure you it is very much legit and certainly no scam.

Can't think of a better way of building a cash flow business that enabled me to retire at 39

 

[Rolf Latham]

Hiya Richard

So the broking business produces no cash flow :O)

ta
rolf

 

[malpass]

Thanks for the information guys, I just realised I should have clicked onto the 'Innovative Techniques' section as there are a few threads on wrap finance.

Cheers

Malpass

 

[Qlds007]

Hi Rolf

No but broking was something i took up again after my wife told me she didnt want me at home anymore cluttering up the house.

I now work hard and longer hours than ever before and love every minute of it.