Wraps. For the beginners out there.

Hi Everyone,

Hope your all well.

I found this information on another website.

I wont link to the site, ill just past as below. Enjoy.


Wraps (a.k.a. Vendor Finance/Installment Sales Contracts)
The way that most property is sold is on the basis of a 10% deposit with the balance due in about 60 days. In 60 days time the purchaser's solicitor will have completed the conveyancing process and the purchaser's lender will have approved finance, culminating with the purchaser finally settling at which time the property title will pass into his/her name.

However there is another way to sell property called "vendor's terms" or an "instalment sales contract". This is where instead of having the balance due in 60 days it is split into a series of periodic payments that the purchaser must repay over a specified period of time.

When the purchaser makes his/her final repayment the title transfers into his/her name.

Wrapping is a great low or no-money-down strategy that enables an investor to earn significant returns for a relatively small and managable risk.

Wraps are legal everywhere in Australia except South Australia.


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An example...
Alister is a property investor. He has sourced a property for $80,000 in Goulburn, New South Wales.

He has also found Judy who was previously renting the property but is very interested in buying it from him.

However Judy only has $3,500 saved up and she would not qualify for normal bank finance which is why she was excited to learn about the possibility of vendor terms. She is eligible for the First Home Owner's Grant and can comfortably afford repayments of $170 per week.

Alister offers his "vendor terms" on the basis that the sale price is $100,000 and that interest would accrue on the repayments at the rate of his finance plus one and a half percent. The term would be twenty-five years although Judy can pay out the balance owing at any time.

Alister organises 90% finance on a variable interest rate of 6.9%.

The numbers would be something like this:

Alister Judy
Purchase price $80,000 $100,000

Deposit (Note 1) $16,000 $10,000
Closing costs (Note 2) $2,500 $500
Cash needed $18,500 $10,500

Loan $64,000 $90,000
Interest rate 6.9% 8.4%
Weekly repayment $103.22 $165.44

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What are the critical success factors?
The critical success factors in a wrap are:

1. It's all about people

The essence of a wrap is that the investor becomes more like a financier and less like a traditional landlord.

In fact, all the property expenses in a wrap (such as rates, maintenance etc.) become the responsibility of the person accepting the vendor's terms (in the example above that would be Judy).

This really highlights the need to focus on the person rather than the property because if you have an unreliable purchaser then your cashflow will suffer and your investing headaches will increase dramatically.

2. Build win-win outcomes

The are lots of people who don't qualify for traditional finance and will be interested in your wrap services, your job is to pre-qualify your clients to ensure that you create win-win outcomes.

A large component in prequalifying a potential purchaser is to ensure that s/he can afford the repayments. If s/he can't meet the repayments then you won't be doing anyone, most of all yourself, any favours as the eviction process is stressful for all.

3. Play by the rules

The wrap laws in each State are slightly different which means that you are going to have to complete some research before launching into your wrapping career. Fortunately there are resources/tools available today that will make this process easy.

In particular, some rules to be aware of are:

Privacy Laws

You need to be careful about privacy laws when seeking information about potential wrap clients, particularly when doing a formal credit check.

Consumer Credit Laws

Whether wrapping falls under consumer credit laws is open to debate, but why risk being caught in an argument that's easily avoidable?

In most States it's a matter of procedure (which means form filling) to comply with the consumer protection laws. Be sure to complete your due diligence before launching in.
 
I am sure Steve McKnight wont mind if you link to the site.

Is there a reason why you posted the information..... there is nothing knew in VF.
 
Whether wrapping falls under consumer credit laws is open to debate, but why risk being caught in an argument that's easily avoidable?

[/B]

A few thoughts on this....

1. The above comment is a worry!

2. One would have to ask why are wraps illegal in South Australia?

3. What would the bank's attitude be towards the fact that their funds are being used to finance a wrap deal?

4. The banks will not lend to these people because they are deemed high risk. Banks are experts at risk management. Look at it as free advice on who not to lend money too.

5. There are always exceptions to the rules.

Boods:)
 
Is there a reason why you posted the information..... there is nothing knew in VF.




Yep. The reason is that I think some beginners out there are shy or afraid to ask simple questions. This will answer some questions without questions having to be asked. As you can see, a few people have viewd the thread. :)
 

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So you buy a house for 100K with borrowed money 10%.
Then you sell the house to someone else for 120K, but lend them the money at 12%.
You pay your bank, expenses, and the rest is profit.
The BIG question is:
Q. Why would they pay more from you?
A. The bank wont loan them the money, and neither will the alternative lenders. So your stuck with the highest credit risk in the market place that nobody else will touch.
 
Yep. Thats right Pistonbroke. But, in the end its a win win situation.

People get bad credit all the time for very inocent reasons.

I know a young guy who is 22 with a huge phone bill that he never received, does this make him a bad credit risk or just have a bit of bad luck?

Does this mean he doesnt deserve to own a home of his own?

Does this mean that he should be shoved to the side and left behind?

Ofourse not.

The point of Vendor finance is to tap into a market that big lenders dont need to tap into. If a vendor finance deal is set up properly, everyone wins, even if the purchaser defualts on the payments. :)

Cheers

Mick
 
Q. Why would they pay more from you?
A. The bank wont loan them the money, and neither will the alternative lenders. So your stuck with the highest credit risk in the market place that nobody else will touch.

Why?

If your asking this question and can only see negative answers, I think you need to use google and read up on VF a bit more :D

Appreciate your view and opinion and this is great to see. The beginners (myself included) find this site very usefull and a great resource for information to help them make informed decisions to create wealth through property investing. :D

Cheers

Mick
 
People get bad credit all the time for very inocent reasons.

I know a young guy who is 22 with a huge phone bill that he never received, does this make him a bad credit risk or just have a bit of bad luck?

I would be very careful taking such a story at face value. "The system" caters for these problems:

Note that even when the overdue account has been paid in full, it will remain on record. All overdue account listings remain on file for five years. The fact that an account has become overdue and then been paid, becomes part of your credit history.

from: http://www.ocba.sa.gov.au/consumeradvice/matters/credit/credit.html

So your friend should have a debt recorded, and a repayment recorded. How lenders judge their risk will not hang on one unpaid phone bill as long as he's done the right thing - paid it, and let everyone move on.

Personally I wouldn't extend vendor finance to most of my family, let along strangers. Let alone strangers with bad credit histories!
 
Personally I wouldn't extend vendor finance to most of my family, let along strangers. Let alone strangers with bad credit histories!


Neither would I at first glance, even on second glance. :D

However, I have heard of a lot of people who have made a decent amount of coin doing this.

"Big Risk = Big Reward"...

Cheers

Mick
 
"Big Risk = Big Reward"...

No it's Big Risk = Big Risk! Possibility of big reward perhaps... There are stages of a market cycle where I would consider doing this ie prices in established upswing so the fallback position was reasonably safe and I could always offload the property or keep it myself if / when it hits the fan. The current market is not an obvious candidate but it may turn in the next few years.

I have no problem with taking risks for appropriate reward but you need to be clear on which part of the value chain you can target better than others. Are you really better at risk management of borrowers than the banks? If so then back your abilities by all means... and be prepared for the worst while hoping for the best.

And "hearing" of people doing well from it is different to "knowing" people are actually still doing well from it in today's market.
 
I've looked very seriously at wraps in the past, and have decided not to proceed.

When I looked, there were two models:

1. The market for people who could not afford the low cost houses under normal affordability rules.

This was the low cost market, where possibly S McK fitted in. The target buying was low cost houses, the target buyer was low income but someone who might not otherwise get a foot up

2. The market for people who weren better off, but, for whatever reason, could not buy something for themselves. (The usual reasons were self employed, a "one off" credit problem, not long in Australia).

I didn't like market #1, market #2 was attractive to me.

But, at a stage where growth was good, I felt that I was better with growth than income. And, at that stage, I had a good income.

Ironically, now that growth is perhaps not so good, "Plan B" for someone who cannot keep up payments is not so good.

I also felt that wrappers were all being tarred with the same brush- that they were all evil profit takers. No matter how good or fair I might have been, I felt there was that risk of being taken to some legal place because of an unfair way I may have treated a "wrappee" who could not keep up a payment.

That's unfair to the people who are doing it- because, AFAIK, the biggest problems have occurred from wrappers who have not kept up their payments to the bank.
 
No it's Big Risk = Big Risk! Possibility of big reward perhaps...

And "hearing" of people doing well from it is different to "knowing" people are actually still doing well from it in today's market.

I hear ya HiEquity. :D

I dont know anyone personally (Yet;)) who has made a decent amount of money through VF. I am willing to learn and if I come out the other end with no IP but more wisdom, im still winning in a way.

I understand heaps of people have been asking the same questions I have that are in my head, I just like to think out loud and discuss. :D

As for the "Big Risk = Big Reward", I see what ou mean and I guess I over simplyfied it a little didnt I.....:D

Cheers

Mick

I also felt that wrappers were all being tarred with the same brush- that they were all evil profit takers. No matter how good or fair I might have been, I felt there was that risk of being taken to some legal place because of an unfair way I may have treated a "wrappee" who could not keep up a payment.

That's unfair to the people who are doing it- because, AFAIK, the biggest problems have occurred from wrappers who have not kept up their payments to the bank.

I agree geoffw. Everyone I have mentioned VF to, who do not understand or appreciate its postive's, always remark "It sounds dodgey" or "Is that even legal?".

This is the very reason I stay up all hours of the night studying and making sure I understand how they work and how it will help me with my Investment strategy if at all. :D

Cheers

Mick
 
1. The above comment is a worry!

That is a bit of a generalization. If the purpose of the wrap is for investment purposes. i.e. I want to buy a take-away shop and the vendor agrees to wrap the property to me, then as an investment loan - it is out of scope of the consumer credit code.

In VIC, if you operate a business that provides consumer credit, you have to be registered.

In W.A, if you do the same, you have to be registered and pay a fee (The Dept of Fair Trading once published a notice with the title "Wrapping is Illegal", however the article was meant to explain it's illegal without a license. It was the same as "Driving is Illegal (without a license)"

In S.A. terms contracts are banned - however lease-options are not - however they aren't technically a wrap anyway.

2. One would have to ask why are wraps illegal in South Australia?

Maybe it was because a developer sold an estate to many people on terms contracts before it was subdivided then collapsed and a lot of people got hurt and demanded the Government do something. However since the event only occurred in S.A. only S.A. changed their laws.

3. What would the bank's attitude be towards the fact that their funds are being used to finance a wrap deal?

Good question, I wonder what bond seller's attitude to be to banks who lend their money to sub-prime mortgages?

The reality is, banks borrow money via securities at a low interest rate, and then wrap those funds at a higher interest rate as mortgages and take the deed as collateral.

The key to the attitude question is "disclosure". The lenders I've disclosed to have accepted my proposal - so I guess the answer to your question is, banks are ok with wraps - its not like they don't do it themselves anyway.

4. The banks will not lend to these people because they are deemed high risk. Banks are experts at risk management. Look at it as free advice on who not to lend money too.

Ah, would this be a good time to mention "sub-prime mortgage crisis"?

I do not think your comment is valid in todays financial climate.

Also I recommend you read the book titled "The Bank that broke the Bank". It documents the story of Westpac during the 80s where it almost went bust lending money to developers.

Yes banks are good at risk, but they don't always get it right.

5. There are always exceptions to the rules.

Absolutely! The secret is to know the rules and exceptions. Did you know FHOG applicants can apply for grants under terms contracts and they can nominate any bank account on their form? That's one way of receiving multiple grants.

But to know it means reading the FHOG Act, Privacy Act, Consumer Credit Code, etc, etc

Read the act, know the rules.

Regards
Michael Gruber
 
Hi All

Karen, my wife and I did our first Wrap in March 2004. We have now done quite a number of vendor finance transactions using wraps and all the other vendor finance techniques out there.

Our vendor finance business has made us good money with Karen working full time in the business and me working in it 50% of the time.

It has been very rewarding, seeing even client's with past bankruptcy history, be with us for two to three years and then more onto traditional lenders and get the title in their names.

We have also received houses back but that's just it; when a traditional lender's clients go bad, the traditional lenders have to go through the whole mortgagee in possession and mortgagee aution procedure. We get the house back and sell it again.

It's been a very rewarding business for us and we're very glad we learnt as much as we could about the business and then stuck with it. Thanks.

Cheers, Paul
 
On the other side of the coin as being someone who went into a VF deal, it worked beautifully for us both times.

First deal was 100 acres in the middle of nowhere, cheap, and no bank would lend on that size of land.... Granted the interest was higher than what was offered at the time by the banks but we had a great weekend property.

Second deal was a house in need of renovating, at the time, I had only been in my current job for 4mths since relocating interstate, I put down the deposit, paid the weekly payments for 12mths then I was in the position to refinance through a bank and bought the place off the person... Was a win for me and I sold for a tidy sum 5yrs later and at the time when the seller was having issues finding a buyer for the place, he had someone in there paying it off for him and it was sold 12mths later...

I would love to get the same deal where we are now, through bad decisions and relationship breakups, I no longer have either properties...
 
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