Wrapping Finance - Advice sourght Pls

Hi All;

I thank everyone for the feedback on "Wrapping" - I have found it most useful and benifical - as well as very informative.

Now I would like some information on "Where others get their Finance from to do their Wraps". It sounds like that is limited re: sources for Wrap friendly financing.

Can anyone help me out by letting me know "Who" is used for Finance or "Where" to get Finance from please? - in Victoria.

Any assistance would be very much appreciated?

Also, can anyone let me know "Why" it is so hard to find Lenders who are willing to support "Wrapping".

Thankyou in advance

Regards

Lesley
:confused:
 
Also, can anyone let me know "Why" it is so hard to find Lenders who are willing to support "Wrapping". - Lesley
The short answer is Due-on-sale. Wrapping is all about on-selling the property to a second buyer which triggers the Due-on-sale clause that most Australian mortgage agreements contain. The same applies to Lease Options. An Option to Purchase will trigger that clause as well. When you know why lenders have such a clause then you will understand why they don't support wrapping.

Also remember, that you were given the loan in the first place because you had good credit. Now you want to bring a credit impaired person into the picture.

Another issue is the fact that you're running a business and most lenders would consider that you should be getting your loans at commercial rates which are higher than a one-off home loan. Trouble is, you wouldn't get a wrap buyer to pay you 2% above commercial rates.

Finally, there is the issue of how many loans you expect a lender to give you. This issue has been discussed many time before. Lenders will only loan so much to you and then say you are too 'rent reliant' as an excuse to stop lending to you. You may continue getting loans provided you put down 20% deposits on each property but your business will soon stop when you can no longer find the deposits.

Regards, Mike
 
Posted by Mike:

B]When you know why lenders have such a clause then you will understand why they don't support wrapping.[/B]

Can you please explain this to me a little more please - I am still new to all of this.

Does 'Due on Sale' mean that the whole of the mortgage becomes due to be paid out, if the property is on-sold? And if so, how is this over come when doing a Wrap deal?

Sorry if I sound ignorant - that is because I am when it comes to Wrapping - still learning!!

Regards

Lesley
 
Lease Option finance

Hi Mike

Was interested in your comments about the "Due on Sale" clause which seems to frustrate Wrappers. Like Lesley, I would like to understand this a little more in the Australian context.

Re: Lease Options - the same is not necessarily true in Australia!

This is greatly dependent upon the contract content and structure. Infact, a Lease Option of the variety I refer to, meets little resistance at all from Lending institutions.

Cheers,

Andrew:)
 
Does 'Due on Sale' mean that the whole of the mortgage becomes due to be paid out, if the property is on-sold? - Lesley
Yes. When a home is financed, the borrower agrees to make regular monthly payments. However, if those payments are not made, if they are late, or if the lender's security is reduced (by not making payments, damaging the property, not maintaining insurance, not paying property taxes, selling the property, selling a part of the property by placing someone else on the title, etc.), then the lender has the right to call for the complete and immediate (say within 30 days) repayment of the loan. The mortgage language outlining the lender's rights is generally called a "due-on-sale" or "acceleration" clause.

One effect of a due-on-sale clause is that it effectively prevents a loan from being assumed. In Australia, mortgage loans are not assumable. Apparently, in the UK, mortgage provisions have no Due on Sale clause, same applies to certain types of loans in the U.S. These loans, therefore, are assumable.

In your mortgage documents you won't see a heading that says "Due on Sale". This is a general description of a bunch of statements that you agree to comply with. For example:

I have, or am entitled to, an absolute and unchallengeable title to the interest in the property which I am mortgaging to XYZ Lender; and

as far as I know, nobody else has, or claims, any rights in or affecting the property.

I will not do (or agree to do) any of the following, unless XYZ Lender agrees first in writing:

(a) sell or dispose of the property, or any interest in it;

(b) lease, mortgage, subdivide or consolidate the property; or

(c) grant any other rights of any kind over the property or do or fail to do anything where this might allow another person to hold any such rights.

I will be in default if:

(a) I do not pay any part of the contract debt when it is due to be paid by me; or

(b) I breach any other part of this mortgage.


If the XYZ Lender wasn't informed of your intention to wrap the property when taking out the first mortgage loan and they find out later when you change the Title on the Deed, they will say you defaulted and may call in the loan prior to beginning foreclosure proceedings to take possession of your property.

Apart from the assumable issue the DoS clause is designed to protect the loan security (the property) from being devalued or transfered without their knowledge. The lender must be able to repossess the property as a last resort to sell and repay the loan.

Consequently, any lender in Australia should be informed of your prior intent to wrap a property whether by Lease Option or Instalment Contract. Some lenders will turn you down on that basis because they must comply with mortgage insurers codes or else they don't have the flexibility to allow it. If you put down 20% deposit, you stand a better chance of getting the funding. Some lenders may agree for 10% down and a slightly higher interest rate.

Andrew (Katalyst) appears to be wrapping using Lease Options. He has a downloadable PDF doc which explains his system using Lease Options http://www.katalystsolutions.com.au

In America, the due-on-sale clause is triggered by any lease longer than three years and is triggered by any lease that contains an option to purchase the property, regardless of the length of the lease. I don't know whether our Consumer Credit Codes specifically mention this but Aust lenders still expect to be informed if you intend using an Option to Purchase since, as Andrew says in his doc, that the Option holder will put a Caveat on the Title anyway. The Lender must agree to this, otherwise you may breach their mortgage provisions.

Regards, Mike
 
Mike's Answer

Hi Mike

Thanks for the information.

You certainly have a lot of expereince with different country's lending codes it would appear. At least enough to keep you alert.

Curious?

Did you find this out through trial and error?

You have prompted me to make a few enquiries.
I'll let you know how I got on.

Cheers,

Andrew

;)
 
Wrapping Finance

Mike;

Thankyou for all your information - I found it to be most insightful, educational and very informative.

I thankyou for the time you invested in replying - much appreciated.

I am starting to get a better understanding now.

Regards

Lesley;)
 
Re: Lease option

Mike

Hi again.

The Lease option agreement used in the Katalyst system doesn't require a changing of the title on the deed at a later date.

A caveat is placed on the title deed until the Buyer Tenant exercises their Option to buy or they walk away from the deal - which ever happens first.

The buyer Tenant has a 7 year Lease with a seperate Option to purchase the property. The Buyer Tenant buys the Option with their deposit - usually 2% of the agreed purchase price.

They are technically leasing the property but with the exclusive option to purchase at any time within the 7 year time frame.

When they exercise their option to purchase the property then they go through the normal channels to seek funding. Their rent credits and Option Fee (deposit) come off the purchase price. The contracts reflect this clearly. We have also sought confirmation from our finance broker regarding the banks position on this matter.

The transferance ot title would happen as per normal sale once the option is exercised with rent credits and option fee totaling approx 20% of the agreed purchase price.

N.B. Unlike Wrappers,

1. Katalyst DOES NOT take the First Home Owners Grant as part of the Lease Option.

2. Nor is the Buyer Tenant obliged to purchase the property.

3. We are not providing a 25 year loan with 2% loading

4. We are not providing Vendor Finance terms

Buyer Tenants apply for the FHOG when they approach the lender for a mortgage.

I will go away and clarify a few other points in the following days.

Again, thanks Mike for freely offering your knowledge and experience.

Regards,

Andrew
 
Hang on, I haven't finished!;)

...how is this over come when doing a Wrap deal? - Lesley
Some wrappers simply don't tell the lender what they are doing. In otherwords, they are ignoring the Due on Sale provisions. This is risky because if the lender finds out they may call the loan in. In a wrap using a Lease Option as long as the tenant-buyer doesn't put a Caveat on the title then the lender will never know that the mortgagor has contracted an Option to Purchase on the property being used as security for the primary loan. A Caveat is a notice filed at the Land Titles Office that the tenant-buyer has an interest in the property (the Option) thus preventing the vendor from selling the property. Since this document is on record it can potentailly be discovered by the Lender if they care to look.

In the U.S. many homeowners have fought the banks in court claiming that the enforcement of the due-on-sale was "unfair trade practice" and an "unreasonable restraint on the alienation of property." In state courts, many homeowners were winning the argument. But in the early eighties Congress passed an Act which enforced the DoS clause in most circumstances. There were a few exceptions. Today, in the U.S. it is possible to get around DoS by using Trusts and assigning beneficial rights to the tenant-buyer. So you can understand why some wrappers justify ignoring the Due on Sale provisions. However, I wouldn't advise doing this in Australia.

Many seasoned wrappers use investor money to fund deposits. I like this idea because it is creating competition for the banks. To obtain investor money, however, you need to show a track record of doing wraps successfully and competently. You don't have to be Rick Otton or Steve McKnight but as long as you have been doing it for a couple of years and have done a few wraps using lender finance then you should have no problem finding investors. As a wrapper you will be able to offer investors a return of 20% or more with wrap investments which is a darn sight more than an investor can get with a cashbond or bank interest.

As a beginner, however, you will probably use your own funds to provide the necessay deposits which can be clawed back when the tenant-buyer receives the $7,000 First Home Owners Grant. If you provide 20% deposits you should easily find a lender to provide a loan. It gets harder when you are asking for 90% finance. Ideally, you want 100% finance and no early repayment penalties but that aint gonna happen. BTW, if you are not aware, the tenant-buyer will receive the FHOG immediately if you use a Vendor Terms contract but the tenant-buyer using the Lease Option method will have to wait until the option is exercised and they complete the purchase before they receive the FHOG.

When you qualify your tenant-buyer candidates the issue of whether they qualify for the FHOG is really important. Even if they do, they must still have a little savings of their own to give you as "hurt" money to show how serious they are. They are less likely to do a "runner" in the middle of the night if they have already given you a couple of thousand dollars as downpayment or Option fee.

After a couple of years some of your tenant-buyers will be able to buy the property outright due to the extra equity built up in the property from capital growth. When this happens more money is released to you for further deposits.
Curious? Did you find this out through trial and error? - Andrew
Andrew, I've picked up snippets of info from various property forums in the last three years to keep me reasonably informed of the main issues.

Regards, Mike
 
Last edited:
Wrap with a Lease Option

Hi Mike

Can you please explain a Wrap with a Lease Option.
It sounds similar to what I am doing but I believe the strategy I use with Lease Options may well be very different.

I am just learning about wraps myself.
I have seen the term Wrap with a Lease Option and Synthetic Wrap with a Lease Option.
Sounds interesting.

I'm trying to ascertain what they are and how what I amdoing is different or the same.

Cheers,

Andrew:)
 
Hi Andrew,

A wrap can be used as a generic term that includes Lease Options to describe a form of vendor or seller finance whereby a first mortgage on the property exists. The vendor assumes responsibility for an existing mortgage while selling the property via instalments. The instalment or rent payment is calculated to cover the existing monthly mortgage payment plus an additional sum which is income to the vendor. Since the sale is delayed for a period of time the sale price is usually greater than the original purchase price. In wrap lingo the markup is called the premium. Any deposit the tenant-buyer provides will be credited to that premium.

Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note (Option to Purchase or Instalment Sales/Vendor Terms contract) and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.

Since your Lease Option system, Andrew, has all the characteristics I described above it can be regarded as a wrap or Synthetic Wrap.

Regards, Mike
 
Last edited:
Mike's Wrap Explanation

Hi Mike

Thanks for the explanation.

Are you based in Australia or the UK?
I'm amazed that anyone else would be up this late - 3:55 am

Cheers,

Andrew
:)
 
Hi Andrew,

I'm in London and have been since Nov 2001. It's 5pm here. Why the Dickens (not Charles) are you still up?

Regards, Mike
 
Getting sleepy

Mike

I can't sleep - its too bloody hot here tonight!

And my typing is getting worse and worsesdv.dkb dksdjksdhs... .

:D

Andrew
 
Andrew,

Just a question, with your lease option system, what happens to the buyer who has the exclusive right to buy if the property owner defaults on their mortgage? Is the option disolved?

For example, if there was a marriage breakup and the property was owned jointly, or is the owner had a business that fell through and cashflow cause missed payments etc?

Just curious
Michale G
 
caveat - QLD

Firstly I am a total Newbie in the IP arena and looking around for ideas methods etc before making the plunge. The Forum has cerainly provided those!

Following an investment in a development last year I found out that in QLD a cavaet can only be registered for 3 months before lapsing should "legal proceedings" not be instituted.

So my current understanding is a buyer with lease option in Qld cannot protect their interest with a cavaet. Yes/No?

Ian
 
Re: caveat - QLD

Originally posted by Ian D
Firstly I am a total Newbie in the IP arena and looking around for ideas methods etc before making the plunge. The Forum has cerainly provided those!

Following an investment in a development last year I found out that in QLD a cavaet can only be registered for 3 months before lapsing should "legal proceedings" not be instituted.

So my current understanding is a buyer with lease option in Qld cannot protect their interest with a cavaet. Yes/No?

Ian

there used to also be a beast called a "consent caveat" - which didn't lapse. check with your local lawyer.

Cheers
 
Back
Top