WRAPPER Charging 15% interest

[hwd007]

They had a story on today tonight where a poor low income family did a WRAP deal and the husband lost his part time job and so the WRAP went sour. The wrapper was apparently charging 15% interest, variable.

The family is now behind in repayments and could loose their house and money invested thus far. Is this reality, representative of WRAPPING for low income families, or does this cast a poor reflection on good wrap deals out there ? I have been thinking of getting into WRAPS but not at the misery of those less fortunate than me.

I thought the idea was to charge 1.5% above the standard varaible rate and use the FHOG as a deposit and security.

 

[Les]

G'day hwd,

The way I heard it, 1.5% to 2% above the Bank rate is "the norm" for wrappers. If there was a need to cover extra risk, then maybe a little more, but 15% sounds pretty "over the top" to me.

From my understanding, anyone who tries to "rip people off" end up losing bigtime. If you do a GOOD deal for a family (who maybe couldn't get finance for themselves), then their testimonial to others will pay you back many times over. But, if charging 15% when the prevailing Bank rate is 6.5%, then ACA or TT was only a matter of time anyway !!!

The wrappers I know endeavour to keep repayments at, or less than, current rents - so, if going on ACA or TT, what "losses" would the buyer have (if they lost their job)? Same as if they were renting!! No more, could be less !!!

A newspaper article mentioned "price jacked up by 20%" - I can understand thereasoning for wrappers doing this. If someone is "wrapping" a property, and they enter a x year term for a wrappee to "buy them out", then the wrappee wins Lotto and buys the wrapper out, the wrapper has done a helluva lot of work for next to NOTHING !!! No cashflow for x years, just a property now "sold". So, the extra Capital Gain compensates them if a wrap is concluded prematurely.

If left to run its normal course, the property would recoup that extra CG over a period of years, so the wrappees are no worse off than they would have been if forced to continue renting !!! (And could be BETTER off).

But it's the one bad apple syndrome again, isn't it.....

Regards,

 

[D.T.]

Hi,

The interest rate was actually 14%, it said that on their contract if ya got a close enough look

Even still, they're the ones that signed it. If they didnt like it they shouldnt have signed it.

Of course Today Tonight had to turn it into a 'all wrappers are evil' story. Thats just the name of the media game tho, i guess.

-Cheers

Dave

 

[hwd007]

Les, et' all

Yes I do tend to think there could be a win win opportunity both for the WRAPPER and the WRAPEE without being too greedy and savage at eachothers expense. Also the capital growth thing also does seem to allow some consideration toward the WRAPPER and their price mark up justification. Also if it works out ok, then purchaser wins.

 

[geoffw]

The first time I had ever heard of rates over 10% being used was yesterday, in articles quoted in the thread http://www.somersoft.com/forums/showthread.php?s=&threadid=12508

Look out, here comes the bandwagon

 

[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

 

[Aceyducey]

Tony,

Appreciate your post. Here at the forum I think we're generally supportive of Wrapping....the trick is how do you get current affairs shows to tell the good side of the story!

Cheers,

Aceyducey

 

[geoffw]

Originally posted by Aceyducey
Tony,

Appreciate your post. Here at the forum I think we're generally supportive of Wrapping....the trick is how do you get current affairs shows to tell the good side of the story!

Cheers,

Aceyducey

They have shown the good side of the story- Steve McKnight has been covered favourably on several occassions.

It was only a matter of time before the "saviour of the battlers" became the "merciless landlord".

Of course, when a wrapper charges 15%, they deserve to get negative treatment.

 

[Peter_Tersteeg]

Given the number of lenders doing low docs, 100% finance and so fourth, how a wrapper could mark up the interest rate more than 2-3% is beyond me.

As a result wrappers have to also stay compeditive with their product. If they wrapper can charge them 15% interest and still get the wrappee to sign a contract, then the wrappee is either completly stupid (and being ripped off), or their finances are so bad that even other wrappers won't touch them and they're probably not going to complete the contract anyway.

Unfortunatly, it will be a very busy news day when a journalist says (to either party), "What were you completely out of your mind. Get lost, I've got better things to write about."

 

[paulzag]

sorry gang, I can consider a case for charging 15%. I haven't done it personally but for extremely high risk buyers it may be the only way to put enough in it to make it worthwhile.

What if the house was sold at cost? The buyer ineligible for FHOG (like most of my wrap buyers)? What if they were currently undischarged bankrupt with a string of consumer credit defaults? What if they are self-employed and no deposit?

I didn't see the show or the deal. But I'm pretty sure the media wouldn't have spelled it all out.

Saying 15% is asking for it, is doing exactly what the media does.

At the very least it is poor PR. But automatic badness on behalf of the wrapper? I wouldn't rush to judge.

 

[Sim]

We were recently quoted 15% interest rates from a major bank for business finance ?

Are you trying to say the bank was ripping us off at those rates ?

It's all about risk management - does not matter what the security is or what the loan is for.

 

[Lissy]

Personally, I add around 2% margin on my interest rates, so my wrappees are paying somewhere around 8-9%. I like to keep it at that level, because it compares very favourably to a non-conforming lender at 90% LVR charging 10%+ for credit impaired borrowers. So I think that my wrappees are getting a good deal, 100% finance at 8-9%.
Paulzag, to be honest, I wouldn't wrap to someone in that situation!
One thing that did concern me about the wrapper being profiled in the media this week is that he has an extraordinarily high level of defaulters. This suggests some lack of due diligence in choosing the wrappees in the first place. I have one guy who's had some job issues, I've been patient, he's now back in full time work and starting to repay the backlog. Yes, he was on 11.49% default interest rate, but as each missed payment is made up, I change the interest rate for that period back to normal rate. I want to help him, not stuff him up completely.
In the end, the main thing that concerns me about the current enthusiasm for wrapping, is that people are going to get into it for the money. Whereas I believe that to be successful, you need to have a big heart for the people. I just wish someone would interview some of my clients, who all think I'm an angel sent from heaven (and no, I'm not making that up, at least 2 have said that) when nobody else would help them. They are not ignorant victims, they are all quite happy that I make a profit out of the transaction, and they pay on time and send me Christmas cards. To me that's what it's all about - we both win.
Sorry for the rant, it's early, and this is something I'm very passionate about!!!!

 

[Jacque]

Hey I'm with Sim on this one! In fact, we were paying near to 15% on one of our IP's way back in the 80's........
Bloody banks!

Seriously, though, I have very little time for these media beat up stories. Yeah, yeah...poor buyers. They only SIGNED A CONTRACT and HAD INDEPENDENT LEGAL ADVICE. When it all goes sour, who do they run to? TT or ACA- the classy ethical TV programmes that you can rely on to present the whole story and the truth. (not)

OK- so 15% is over the top. Even I'll agree with that. But let's not put all wrappers in the bad boat together. As Lissy has pointed out, there are many genuine ones (such as herself) who do wrap ethically and fairly. After all, its a business but you've got to live with yourself at the same time.

 

[michaelg]

Lizzy,

Ask and ye shall receive, the focus of the next round of meetings for the Australian Vendor Finance Association will to hear the success stories of "wrapping".

I've put a call out to the Members, but this is open to any vendor financier, if you have a story where the buyer has refinanced and moved on I would like to hear about it.

In fact, I am looking for 3-4 such stories to be told in about 5-10mins each at our next meetings.

I plan to invite those Government officials who are involved in consumer protection and Credit Code legislation to attend the next meeting.

We had a representative of the Consumer and Employee Protection Department of Western Australia present a 90 min presentation on Credit Code licensing at our last meeting in W.A. and Ian Clyde, the Chairperson of the Australian Uniform Consumer Credit Code was unable to attend our last meeting in Melbourne but is expected to attend the next one. So we have, are, and continue to, work with the Government at all levels to help them improve the awareness of Consumer's rights in regards to Vendor Financing in Australia.

We need speakers from NSW, QLD, VIC, S.A. and W.A.

If you have such a story please contact me at [email protected]

Regards
Michael Gruber
President
Vendor Finance Association of Australia

 

[Tibor]

Hi everyone,

I think, there is a bit of organised 'talk down wrapping' hysteria in the media. TT with the 15% interest rate, various news channels about that all goverments must do something about it, ABA opposes it (surprise, surprise, someone else got their little hands into the honey jar, so it must not be good), last night SBS (or ABC) Insight or similar was again pulling it down wrapping
when they had a segment on the subject.

I also put this together with the Reserve's (and other economic cesars) negative comments, interest rate increase, restrict negative gearing outcry, etc, etc. and getting slowly to the conclusion that maybe good times will come sooner than I hoped for, if the goverment (current or future) is going to jump on the bandwagon.

I really wish that they would bring in the US system. IT would be fantastic.

Positively geared properties, that are depreciating fully in 27 years and I can sell them without paying tax. This does not mention specific tax credit possibilities (none exist here as far as I know).

So, I am listening to the hysteria (pardon me, the news and current affairs) with great interest. Maybe we will see a bit less of renovations, locations, auctions, Blocks and other programs in the next year as well. Thanks God, it started to get to me.

Cheers,


Tibor

 

[Caroline]

I'm with Felicity on this one (and that has nothing to so with the fact that we know each other)

I charge around 2% - the 15% horrified me, and I dont accept that it is entirely the buyer beware situation. These people are often pretty vulnerable. I too have had a couple of people lose jobs, partner walked out etc etc and have patiently worked with them to get them back on line. I forgo the default interest in some situations, because it just works better in the long run.

Yes, talk to some of my wrapees too! They rave about the deals.

What ACA misses with the beauty of wrapping is the trick of keeping repayments as close to rent (a bit more) as possible. Then the bad wrapper arguement falls apart. It is what people would be paying anyway and they get to buy the house.

I'm over greedy people, but have to live with 'em

Cheers

Caroline
Caroline

 

[duncan_m]

Originally posted by Caroline
What ACA misses with the beauty of wrapping is the trick of keeping repayments as close to rent (a bit more) as possible. Then the bad wrapper arguement falls apart. It is what people would be paying anyway and they get to buy the house.

I've never quite got this bit..

If you're getting the equivalent of the Rent anyhow.. why not just rent the damn property out and keep all the equity for yourself?

I hear the likes of Burley, Otton, McKnight saying that you dont need to fix toilets, the Tenant/Buyers look after the property etc.. but heck.. Sure the Tenant/Buyer pays some of the outgoings.. but you could grin and bear these outgoings until the rent rose $5-10 a week to cover them and I dont mind fixing toilets and all of my Tenants seem very happy and contented in their homes, they're all kept clean and I dont seem to have trouble finding replacements if they do move..

I dont understand why you'd expose yourself to the legal complexities and issues that might arise when the various Residential Tenancies Acts in each state are really well established and straight-forward to use..

Please explain why you'd wrap a house when you could rent it for the same amount..

 

[Peter_Tersteeg]

A couple of reasons why you might wrap instead of buy and hold if the weekly cashflow is about the same:

Assuming you sell the house at a premium over what you bought if for, there is a guarenteed capital gain. If the wrappee refinances, the capital gain is realised. A buy and hold strategy does not guarentee a capitial gain.

This is a difinitive exit strategy. This helps demonstrate to the bank that wrapping is a business, not an investment. As a result many banks which allow wrapping will see the 100% of the repayment income as servicability, as opposed to around 60% - 70% for most rental incomes. As a result, a wrapping strategy can have far greater servicability potential than a regular buy and hold.

Most wrappers I know use wrapping as a stategy to provide cashflow to obtain buy and hold property. There are problably plenty of other advantages to wrapping. Weather or not these offset the associated risks would depend on the individual wrapper.

 

[duncan_m]

Originally posted by PT_Bear
A couple of reasons why you might wrap instead of buy and hold if the weekly cashflow is about the same:

Assuming you sell the house at a premium over what you bought if for, there is a guarenteed capital gain. If the wrappee refinances, the capital gain is realised. A buy and hold strategy does not guarentee a capitial gain.

This is a difinitive exit strategy. This helps demonstrate to the bank that wrapping is a business, not an investment. As a result many banks which allow wrapping will see the 100% of the repayment income as servicability, as opposed to around 60% - 70% for most rental incomes. As a result, a wrapping strategy can have far greater servicability potential than a regular buy and hold.

Most wrappers I know use wrapping as a stategy to provide cashflow to obtain buy and hold property. There are problably plenty of other advantages to wrapping. Weather or not these offset the associated risks would depend on the individual wrapper.

Thanks, very informative.

 

[Caroline]

Agree. Plus you get the deposit up front, so ideally you are in the deal for little or no money from your own pocket, regular cash flow pretty well guranteed for the life of the contract and no outgoings. I like the ROI (95% plus in first year) - which I have never got from rental properties. I only wrap.

Pt - which banks are you finding are ok. I'm experiencing cold feet from St George and NAB.