WRAPPER Charging 15% interest

[michaelg]

Hi,

Actually you can't compare wraps with rentals, the reason is that wrapping is a business and rentals are an investment.

The idea of vendor financing is to develop a skill set to sell. You don't measure your return on investment based on the return you get for your money, you measure it based on the return you get on your time.

But who would want to invest money in someone with little experience? exactly! which is why you need to do a few deals (with your own money) to develop your business system. Once you have established results and a system, you can then sell your skills. And thus leverage your time.

Alternatively if your business model has a good regular turnover then you would be able to measure the return on your own investment.

Once you have the business earning cashflow, your use this to invest in buy & holds, or shares or other businesses if you prefer.

There are two styles of wrapping that I know of, short term turnover and long term income stream.

The short term system can be built with your own funds, but a long term system would more than likely use outside funds to produce ideal business results.

That's the trick, its not about leveraging your money, its about leveraging your time (as with any business) and every business needs to have a good system.

Regards
Michael Gruber

For a great tool to help your wrapping business check out LoanAlert at www.loanalert.com.au

 

[Peter_Tersteeg]

Originally posted by Caroline
Which banks are you finding are ok. I'm experiencing cold feet from St George and NAB.

To be totally honist I don't wrap at this point. I have looked into it quite extensivly and I beleive it has a lot of merit, but I don't feel I have the time to be able to do it well enough for me to feel comfortable with the process.

When I did look closely at it I talked to Mortgage House quite a lot. They do charge a small premium on their loans but they have people quite familiar with wrapping and are happy to finance it. Most lenders and brokers I talked to also were very cold to the concept.

 

[brains]

Thats fine in a rising market (as in the last few years) but the next, say, 5 years will be a lot different for wrappees - especially in regional areas. Could be hello to negative equity time.....hmmmm...what fun

As for defending the high interest rates by the wrapper, thats just bunk. Interest rates on loans usually reflect the security for the loan.

Thats why in Sims case for a business loan they want 15% which is fair, if he used a LOC for his business loan (which a lot of people do) he'd be paying say 6.5% reflecting the property the LOC is secured against.

Getting back to the wrapper , hes charging 14% AND has the property (deed) in his name, hardly high risk if the wrapee defaults and its just plain greed to have those high rates and minimal risk. If the banks did that theyd be crucified by the government (and the public) in no time so analogies made between banks and wrapers are bunk as well.

This is the gist of the media complaints in my opinion and with some justification.

Originally posted by Tony
Hi Guys,
Just to highlight a good outcome for a wrapee, i wrapped a property in country Victoria about 2 yrs ago.
The deal went something like this.
Orginal house was purchased for $80,000, after i negotiated very heavily, asked for & got over 10% discount.
Wrapped to client for $107,000
House now valued at $150,000, just 2 yrs later.
Customer paying 2% above current interest rate - variable.

This customer is & was a bankrupt & unable to source finance from any other source.

The customer (wrapee) have been fantastic clients & yes they are happy with the deal.

They have made extra payments & have been able to drop the amount owed, so when they refiance or sell, they will have a healthy capital gain.

While i agree that there are some cowboys out there ripping people off, not sure this is representative of all the wrappers out there.

Tony

 

[Les]

G'day Brains,

Getting back to the wrapper , he's charging 14% AND has the property (deed) in his name, hardly high risk if the wrapee defaults and its just plain greed to have those high rates and minimal risk.
If the banks did that theyd be crucified by the government (and the public) in no time

Nice words - but I can think of a couple of lending institutions - major ones (where people go when no-one else will lend) that are still trading today.

I went for a loan with one of them (around 15+ years back) - I wanted to build a carport.... They said "Yes, we'll loan you the money at 23%" - I said "Great" (we're talking mid to late 80's here, when home loans were around 15%) - but then, they rang back and wanted a caveat on our PPOR !!!!

Oh yeah? High risk interest AND a caveat? Thankfully, even then, I was not that desperate (and not THAT naive) - so told them to take a running jump !!! The carport waited a few more months ......

This kind of institution is still "out there", still peddling their wares to those that have no other hope.

I haven't seen a crucifixion recently ....... Sure, they're not "a Bank" - but the one I have in mind has been around FOREVER, and are to this day !!! With the competition present in the loans industry, I often wonder "How!!" do they stay in business? Maybe it is because there are SO MANY people out there that need to rely on these dubious lenders !!

If so, maybe there are also SO MANY that will accept a wrapper who cranks up the Interest Rate to do a deal. They just want "to own" their own house, even if it takes 50 years !! (And perhaps don't know better ways to do it - perhaps because they have "stuffed up" their past, doomed their CRAA, or whatever...)

Is there, perhaps, a "need" for those "high risk" (and high charging) institutions, including wrappers ? What is the alternative if they all closed their doors ???

Interested to hear all thoughts....

Regards,

 

[brains]

Les,

One isolated case by a non bank lender 15+ years back does not make a compelling argument in this case.

Either the forum members who posted here ignored the finance fundamentals as described in my previous post in a lame attempt to support wrapping or they just dont understand them, more likely the latter.

The silence is deafening .

 

[michaelg]

Hi,

One isolated case by a non bank lender 15+ years back does not make a compelling argument in this case.

I agree, it is the same as two newspapers and three t.v. shows all using 1 case to try and describe the practice of a whole market.

charging 14% is NOT the norm, usually the markup is around 2-3% above the first mortgage rate.

As for 20% markup on the property, that is fixed for the term of the contract. Another way of looking at this, is a 25yr retainer fee to secure a "wrapper" as a guarantor for a mortgage. And if we are to consider financial fundamentals we have to factor how the value of a dollar diminishes with time, which I don't think anyone has considered yet? The value of that 20% markup spread over 25years is very different to getting 20% now.

A landlord, certainly does much better, the benefits to vendor financing is that it can be implemented as a business model where time is leveraged (not such much the money).

I think one of the fundamental misconceptions is that the average 20% markup is (a) "instant profit" and (b) "net profit"

First it is not instant profit, a contract can last for the full term, in that case, the "profit" is spread over 25years, and as mentioned before, the diminishing value of the dollar due to inflation reduces this further (and becomes a bonus for the borrower as the value of the property appreciates).

The other point is that the 20% markup is fixed, if compared with potential capital gain, it may not seem that much, then when you factor the time spent, looking for property, looking for clients, advertising, administration of the contract (issuing statements, notices, checking accounts) then the charges start to become more realistic in terms of fair compensation.

Now negative equity is possible, and its just as real for any home owner who buys and the market moves. My parents suffered with negative equity when they purchased through the Government scheme Homefund, but in the end they now have a house with double value.

I don't believe you can compare home owners with investors, each have different priorities. Consider this, imagine a couple who buy a house in a neighbourhood they like, next to schools and shops they like and they have a nice little house. Then one day someone comes up to them and says "you better sell up and leave, the value of your house is now much less than you paid for it" does the value they place on their house change? not really. If their repayments haven't changed significantly and they are still financially ok in terms of cashflow, why would they move? Home owners buy a house to LIVE in not, INVEST in.

And finally, can I just add that I know the Vendor Finance Association is proactively working with the Government and will be discussing issues with the Victorian Minister of Consumer Affairs and the Chairman of the Consumer Credit Code early in the new year. Now if people wish to participate and have any suggestions or comments they would like raised at this meeting they are welcome to send them to the association via [email protected]

Regards
Michael Gruber

 

[Rolf Latham]

Hi MG

A sigincant upside.............

Many of my clients that have done these things have helped the wrappee get huge cash on cash profits if they were to sell the property at market rates.

Hows them apples ?

ta

rolf

 

[Rolf Latham]

Hi Brains

Most wrap loans are very close to unsecured, that is the amount of deposit is close to zip, the wrapper holds the title, BUT its primarily his or their investors monet thats providing the security NOT the wrappees.

Im not saying 15 % is or is not acceptable, not for me to judge. The borrower needs to make their own decision, I just know that 15 % the going rate for an usecured business loan (actually as high as 20 % now).

Try a buyers Edge card at 27 % compounded monthly and thats GE - a government approved organisation - caveat emptor I suppose.

ta

rolf

 

[Les]

G'day Brains, and others,

Brains, I think you may have missed my point.....

One isolated case by a non bank lender 15+ years back does not make a compelling argument in this case.

I hope you don't think I should've tried them AGAIN???

After THAT kind of deal, this was ALWAYS going to be an "isolated case" as far as I was concerned!!! But, my point is, they ARE still in business - so someone (or THOUSANDS of someones) ARE still using them today !!!

QED :- NOT so isolated, my friend. They are out there, and they haven't been crucified yet - so, maybe they really are "fulfilling a need", no matter how terrible/stupid/un-Australian this is !!!

Anyway, let me repost what I was leading up to:-
Is there, perhaps, a "need" for those "high risk" (and high charging) institutions, including wrappers ? What is the alternative if they all closed their doors ???

And STILL interested to hear all thoughts re this....

Regards,

 

[Aceyducey]

Originally posted by Les
Is there, perhaps, a "need" for those "high risk" (and high charging) institutions, including wrappers ? What is the alternative if they all closed their doors ???

I'd say there is definitely a 'want' for finance...and people who are not in a position to take other types of loans still want finance - so this type of finance definitely fills a need (otherwise it would disappear)

People using these forms of finance aren't necessarily poor - they may simply be ignorant and desperate....like addicted gamblers or uneducated people who don't know what is available & cannot present themselves in a way that banks accept.

Even single parents, seasonal workers, poor english speakers & others can have trouble accessing 'mainstream' finance alternatives.

Cheers,

Aceyducey

 

[michaelg]

Hi,

I have been told of deals done with $600k properties for professionals who had a problematic credit record.

Vendor finance works at all levels, the problem is only the base cases make the news.

I don't think the Government has yet to receive a call or letter telling them how well their purchase went?

Governments are their to protect the public, and the public will only contact the Government when they have a problem, I don't think anyone yet can quote the ratio of successful and failed contracts yet.

Its unfortunate the media have to focus on the negative, but then again, that is all that have to work with. But let's not assume its a reflection of the whole picture, where there are no facts to support that its the whole picture.

But in the case of Keogh, 14% does seem excessive, the large percentage of defaults in their operation does make one wonder what their selection criteria was. And personally if it was just to churn people to obtain the FHOG I believe the State Revenue Office should just ask for their money back. I believe this would quickly fix such operators who think they can churn to get a quick buck.

Just a thought
Michael

 

[brains]

This is exactly my point with Sims example of a buisness loan. If he uses a LOC the loan is secured against his property not his business. An unsecured business loan is 15-20%.

And there is no risk to the wrapper, he/she is basically an intermediary between the bank and the wrappee and picks up a few points on the way through.

As for your other eg of selling at a profit at market rates. In a flat or negative growth period, after costs, thats gonna be pretty difficult. Thats IF the property was bought below market to start with.

Originally posted by Rolf Latham
Hi Brains

Most wrap loans are very close to unsecured, that is the amount of deposit is close to zip, the wrapper holds the title, BUT its primarily his or their investors monet thats providing the security NOT the wrappees.

Im not saying 15 % is or is not acceptable, not for me to judge. The borrower needs to make their own decision, I just know that 15 % the going rate for an usecured business loan (actually as high as 20 % now).

Try a buyers Edge card at 27 % compounded monthly and thats GE - a government approved organisation - caveat emptor I suppose.

ta

rolf

 

[alaninbrisbane]

ok so you are correct they did sign a contract..they 'possibly' understoosd what they were doing .. While the wrappees do go into this \willingly ( i guess), i object to non liscenced people ( read not liscenced real estate agents ) soliciting and selling to people who may or may not be 'savvy/ enough to make correct decisions. liscenced agents do have a level of training and experience , and are also covered by peroffessional indemity insurance . Wrappers who are neither unliscenced to sell real estate nor not accrediated financial brokers are not only risking their own position but that of the wrappee. Certainly in queenslanda wrapper would need to make certain declarations .. my experience is that all of the wrappers i have come across are snake oil salespeople who are unliscenced and take advantage of gullible people ( read those with out the smarts ' or those who are just targeted as suckers") the idea itself is fine , those in the commercial world (read developers ) pay over the odds for $$ when they cant get it else where . the differenc is that these people understand the risks and the outcomes they also employ legal advice to protect thier interests and to follow the precedents ofstatue law. Sp wrappers generally take advantage of wrappees. I mean if the banks sos no , there is really a good reason in this country as by definition those who follow the basic rules of society can get a housing loan.. like paying on time , saving money etc etc ...

 

[Rolf Latham]

Hi Allen


Independent legal and financial advice is foisted on most wrappees - difficult to claim to be uniformed., and to be gullible.

To legislate against a legitimate wrap transaction would be immoral since it would deny a basic right of a sane, adult person - to make a decision.

The risk is almost always mainly carried by the wrapper...........since the "over and above rent " input by most wrap deals I have worked with are usually limited to the FHOG, and often not even that.

ta

rolf

 

[Aceyducey]

alaninbrisbane,

Welcome to the forum!

my experience is that all of the wrappers i have come across are snake oil salespeople who are unliscenced and take advantage of gullible people

And you'll meet a number of forumites who are wrappers but not snake oil salespeople

How much research have you conducted on wrapping? Either the process or the people doing it?

And where did you get the idea that wrappers were functioning as Real Estate Agents - or that Real Estate Agents, because of their license, were not necessarily snake oil salespeople themselves?

Cheers,

Aceyducey

 

[alaninbrisbane]

Rolf to legislate aginst legitimite wrap transactions would be intrusive and constrictive I agree. The 'challenge' is that both parties at potentially at risk.Everything in every agreement ( contract) is fine and ok provided that
1. all parties agree in spirit as well as by the letter of the contract
2. both parties perform as per the agreement
3. nothing occurs which hasnt been predicted as a possibility
4. that unconscionable conduct is not paret of the 'sales pitch'
5. the agreement is 'tested' and easily interpreted by the legal proffession

let me raise some questions ( by the way i am not anti wrapping just the lack of formalisating of the process)

1 .what happens if the wrapper dies, goes into liquidation or becomes bankrupt,..is the wrappess positiion secure? if so how ?

2. who insures the property , what mechanism is in place to enforce such an obligation should it exist


3. what happens in the event the the wrappee fails to pay the 'rent' are they seen as a 'partner' ihn the property or as a tenant? Does the wrapper instigate a tenancy agreement to enable enforcabilty of access, dispute resolution ( using the statutary authorities) etc ..

4. What happens if the wrapper misrepresents the property or the agreement etc , what qualifications / proffessinal insurance do they need. ?

5. all disputes can be resolved (ultimately) through court. The wrappee ( most proobaly) is least financially ab\ble to depend themselves due to lack of funds , so their solicitor will encourage them to walk away and ' take it on the chin', this in itself is a disadvantage and does not equate to a 'fair and equitable ' position. Considerthough 'standard' industry agreemnts where precedents have been set and outcomes are fairly easily predetermined //

6 . my other concern is that while wrapers are really 'financiers' they are ascting as real estate agents when they make an offer to sell property ( often their own).. this is very very different from an independant financier offering to finance ( includinrg wrap0 as property in which they have no persoanl ownership

( certainly in qld to offer property commercially one needs a liscence and need to make wrtitten declarations. so on the basis that disclosures are made , transparancy is assured) Further a serious breach occurs if the correct paperwork is not used and ultimately the office of fair trading will prosucute heavily any guilty parties..) The industry ( i believe ) has an inplicit obligation to monitor itself and report any one who blanantly disregards the law. the qld industry ( read real estate ) underwent major government interference due to the small number of 'snake oil ' operators. These people were well known and yet the industry itself did nothing until for political reasons the government policed what the industry ignored , the result wasthat the guilty parties included / agents ) liscenced and unliscenced), financiers , valuers, major banks, developers , solicitors and builders..the per\revious act was sufficeint to cover this non compliance . yet was unenforced, ( sorry this is an answer to a question you did not ask ..but I think u get the idea)..One last point this was occuring in an enviroment where established practice had been set thousands and thousands of times , so how can all parties be protested for 'fair' condust ( on boih sides )
when the wrappers are largely one of traders and the wrappees are one off ( not commercially savvy) buyers ...thanks

 

[NigelW]

Originally posted by alaninbrisbane
Rolf to legislate aginst legitimite wrap transactions would be intrusive and constrictive I agree. The 'challenge' is that both parties at potentially at risk.Everything in every agreement ( contract) is fine and ok provided that
1. all parties agree in spirit as well as by the letter of the contract
2. both parties perform as per the agreement
3. nothing occurs which hasnt been predicted as a possibility
4. that unconscionable conduct is not paret of the 'sales pitch'
5. the agreement is 'tested' and easily interpreted by the legal proffession

let me raise some questions ( by the way i am not anti wrapping just the lack of formalisating of the process)

1 .what happens if the wrapper dies, goes into liquidation or becomes bankrupt,..is the wrappess positiion secure? if so how ?

2. who insures the property , what mechanism is in place to enforce such an obligation should it exist


3. what happens in the event the the wrappee fails to pay the 'rent' are they seen as a 'partner' ihn the property or as a tenant? Does the wrapper instigate a tenancy agreement to enable enforcabilty of access, dispute resolution ( using the statutary authorities) etc ..

4. What happens if the wrapper misrepresents the property or the agreement etc , what qualifications / proffessinal insurance do they need. ?

5. all disputes can be resolved (ultimately) through court. The wrappee ( most proobaly) is least financially ab\ble to depend themselves due to lack of funds , so their solicitor will encourage them to walk away and ' take it on the chin', this in itself is a disadvantage and does not equate to a 'fair and equitable ' position. Considerthough 'standard' industry agreemnts where precedents have been set and outcomes are fairly easily predetermined //

6 . my other concern is that while wrapers are really 'financiers' they are ascting as real estate agents when they make an offer to sell property ( often their own).. this is very very different from an independant financier offering to finance ( includinrg wrap0 as property in which they have no persoanl ownership

( certainly in qld to offer property commercially one needs a liscence and need to make wrtitten declarations. so on the basis that disclosures are made , transparancy is assured) Further a serious breach occurs if the correct paperwork is not used and ultimately the office of fair trading will prosucute heavily any guilty parties..) The industry ( i believe ) has an inplicit obligation to monitor itself and report any one who blanantly disregards the law. the qld industry ( read real estate ) underwent major government interference due to the small number of 'snake oil ' operators. These people were well known and yet the industry itself did nothing until for political reasons the government policed what the industry ignored , the result wasthat the guilty parties included / agents ) liscenced and unliscenced), financiers , valuers, major banks, developers , solicitors and builders..the per\revious act was sufficeint to cover this non compliance . yet was unenforced, ( sorry this is an answer to a question you did not ask ..but I think u get the idea)..One last point this was occuring in an enviroment where established practice had been set thousands and thousands of times , so how can all parties be protested for 'fair' condust ( on boih sides )
when the wrappers are largely one of traders and the wrappees are one off ( not commercially savvy) buyers ...thanks

Alan

Whilst your sentiments are admirable, I think you're taking an unrealistic and naive view of things. If people have been given FULL disclosure and independent advice and choose to proceed with a transaction then that's tough luck. We all have to take responsibility for our actions and it's patronising paternalism to think we can always protect people from their own stupidity.

Even at the big end of town, with the best advisers and months of negotiation, no contract can cope with every eventuality.

Licensing is not the answer, we're already an over-regulated society!

If I go into a store and buy a fridge for $1000, but could have gone to a store in the next suburb and got it for $800 have I been ripped off? No, I just haven't done my homework by shopping around, or if I have - I just can't be bothered and want the convenience NOW! Either can apply to people shopping for loans and houses...

Admirable sentiments mate, but you can't save the world from itself by anything other than trying to educate people.

N.

 

[Aceyducey]

Originally posted by alaninbrisbane
6 . my other concern is that while wrapers are really 'financiers' they are ascting as real estate agents when they make an offer to sell property ( often their own).. this is very very different from an independant financier offering to finance ( includinrg wrap0 as property in which they have no persoanl ownership

Alain,

Most of your comments seem to be fairly basic questions dealt with in standard wrap agreements.

Why not forward your questions to the Vendor Finance Association (http://www.financewraps.asn.au). I'm sure Michael or Rick can address all of your concerns!

On the specific point you raised quoted above, wrappers generally operate in one of two ways:

a) They buy property then advertise to find clients to wrap it to.

In this case they OWN the property being wrapped. No state in Australia prevents people from selling property they own. Would you prefer to see RE Agents locked into a monopoly position by banning people from selling any property they own? Think of the type of people that would then be attracted to the RE profession!!!

b) They advertise for wrap clients, work with them to establish a loan amount (like a bank pre-approval process) then the CLIENT selects the property. The Wrapper then buys (and thus owns) the property then onsells it to the wrappee.

In this case the client deals with RE agents to locate the property that meets their needs and works with the wrapper to make sure that the property is affordable after the wrap margins (the reward for providing finance) are added. Then the wrapper buys the property and onsells it to the wrappee - again a process of the wrapper selling their own property.


I do not know of any situation whereby wrappers are acting as RE Agents and selling property owned by others.

If one existed, RE Agents would very quickly see that such a practice stopped as it is both illegal & a competitive threat to Agents. Also there are significant educational & administrative issues as the VENDOR not the WRAPPER in such a situation would be selling the property & therefore receiving the payments.....very few vendors understand vendor finance or are prepared to sell property in such a way and they would need extensive education & lots of admin would need to be in place to support it.

Why would anyone go to all this trouble for such a small return - particularly when it would be illegal!

Are you, perhaps, thinking of marketeers instead of wrappers? Marketeers do sell property not owned directly by them & are not registered real estate agents, but are legal. If so, this is an entirely different kettle of fish & operates VERY differently to wrapping!


Alain, tell us what direct experience you have had of wrappers and wrapping - I'm sure the Vendor Finance Association would like to investigate any wrappers behaving illegally.

Cheers,

Aceyducey

 

[alaninbrisbane]

aucdeyducey thanks for your reply you do raise some very valid points , and i agree with many of your points

) They buy property then advertise to find clients to wrap it to.

In this case they OWN the property being wrapped. No state in Australia prevents people from selling property they own. Would you prefer to see RE Agents locked into a monopoly position by banning people from selling any property they own? Think of the type of people that would then be attracted to the RE profession!!!


Well in response to your comment above , QLD does require that anyone selling more than 6 proepries per year ( read anyone , selling 6 or more of thier own properties per year, or anyone selling any property for any gain , which means selling for someone else in any shape or form, lets say a wrapper sells a property ( wrapped) requires some degree of liscencing.. A bt like car sales , in qld you can sell yor own car, no problem when u sell 6 of your own cars oer year you are deemed to be a commercial car dealer ( unliscenced t oboot) ..So our legislation does prevent one from selling thier own properities when 6 or more are sold. further every seller ( from sale no 1) must dosclose where rthe proceeds of the sale are going ,,so for example , i woiuld expect that the form 27 would need to disclose any association between a wrapper and a salesperson...this is the protection mechanism now in place to protect ( some do say caveat emptor, too bad) peopel from themselves .i disagree I think that anyone in the industry needs to protect the industry from illegal practices ,as in my experience the cowboys never last anyway, just cause havoc, and encourage big brother to step in an over regulate the ones who were not responsible forthe problem in the first place,, ironic isnt it ...thanks alan

 

[michaelg]

Hi Alan,

One of the hats I wear is that of President for the Vendor Finance Assocation, and as President, I've kick started a few projects to address the issues you raise during my term, they include;

- A Code of Conduct which all VFA members will be required to abide by, this includes the requirement to abide by all Government laws.

- A new website - which will allow the public to find information about vendor financing as well as do searches on members (for reference and operating history).

- A report comparing the Governments Equity share scheme with vendor finance.

And arranging for the Chairperson of the Consumer Credit Code to speak at our next meeting.

And soon to meet the Victorian Minister of Consumer Affairs to discuss vendor finance in Australia.

The Vendor Finance Association of Australia welcomes all feedback. We have a dedicate Consumer Relations Officer and Complaints Officer to receive such calls. They can be reached by email at [email protected] and [email protected] respectively.

Regards
Michael Gruber