The ethics of wrapping

[Muffin]

Please excuse the can of worms.

Over dinner last night, a good friend and I discussed one of my clients who has recently begun wrapping. My friend is a mortgage broker, owner of several properties but found the concept of wrapping abhorrant.

Reading through the loan agreement this morning I had to agree. The borrower is liable to pay a further six months of interest in the event they refinance in the first two years, three up to five years and then a month after that. The borrower pays an inflated price (which I understand and believe is reasonable) to cover the risk for the wrapper, but the other fees and charges are just draconian, also the borrower actually has no legal entitlement over the property other than a caveat (which in a recent court case I have found is about as useful as a promissory note). If the wrapper goes broke the borrower will lose their home as the bank has the first mortgage over the property (so the repayments could simply disappear).

I understand all the jazz about helping someone to own their own home, but I find this argument a little shallow as unless the property market starts to bound along rapidly there is not much chance of them refinancing at a lower rate as their equity will be insufficient to buy out the wrapper. With all the additional costs I just can't see how the borrower will ever get ahead.

To further qualify this the agreement was supplied by one of the larger firms in the area and appears to be a standard agreement.

Have I truly missed the point with wraps??? I just can't get my head around the ethics of it.

[Dean@Massiveaction]

That's why wraps aren't being done much here now. Lease options is a more ethical and less risky alternative. The biggest problem with wrapping was caused by an unscrupulous few who seriously inflated their properties values and then when the tenant buyer tried to refinance years down the track they still had paid too much for the property. Lease options alleviates all those issues. More transparent and fair to both parties.

[cube]

A good wrap is good for all sides, but they can be open to abuse, which is why most lenders won't touch them now.

Lease options are the current flavour of the month.

cube

[Cliffy]

Lease options is a more ethical and less risky alternative. The biggest problem with wrapping was caused by an unscrupulous few who seriously inflated their properties values and then when the tenant buyer tried to refinance years down the track they still had paid too much for the property. Lease options alleviates all those issues. More transparent and fair to both parties.

I agree with Dean, lease options are fairer the way we do them and were taught by GBI - sell to tenant\buyer at RV.

However, there is still nothing to stop the unscrupulous few from charging an inflated price. Seems to be common practice in the US to build expected capital growth into the price.

It's still down to the integrity of the operator.

[Muffin]

Thanks guys,

I am having a hard time finding anything positive about wraps (plenty of marketing spiels from providers and testimonals by John S of Smithville, but nothing I would consider valuing).

The difficult thing is that the client is the son of one of best clients and the father is asking for an honest opinion of my thoughts.

I am sure there are plenty of examples where there are winners in the process, but realistically I cannot fathom the win/win that has been propogated in the market.

[krispedersen]

wraps

Hi Muffin,

Have a look under www.mastermindforums.com and go to the John Burley forum. It provides a lot of information on wrapping. While those payout figures seem high they are not too far off some of the figures in the non conforming lending arena. Bluestone charges up to a 4% exit fee plus other discharge fees from memory and someone who is a wrap client is probably outside the scope of even this kind of lender.

John Burley's Money Secrets Of the Rich describes wraps reasonably well and he seems to be pretty reputable and aim for win/win solutions rather than just ripping people off.

If the property is in NZ tell friends son to keep away from them as they can be difficult to refinance

Cheers

[Richcrooks]

Hi Muffin,
We have 9 properties that are wrapped.
The Instalment Payment Schedule we use was provided (at no small cost I might add) by Kirt Girdler from Wellinton.
All the properties were brought at at least 20% under a registered valuation and onsold to our clients at that valuation.
You are right that the buyer has no legal rights to the property. If you buy on hire purchase you don't actually own the goods until the last payment is made.
We have no break fees in our contract, but the buyer does pay all our legal fees - transfer of title.discharge of mortgage etc.
Our clients all have better than 40% equity in the properties they occuppy thanks to recent revaluations and as a result 2 have cashed us out.
The rest, thanks to the boxes the banks have to have ticks in, are still unable to get conventional mortgage finance.
I am interested in who sipplied the Document you have. Could you pm that to me.Also if you want to look at my contract I'm happy to pm you a copy.
Richcrooks

[Muffin]

Richcrooks,

Can i ask what happens if you went under? I am assuming that the bank will have the first mortgage and then the customers are going to be essentially fighting with the bank over the equity.

This is where I can't get my head around it.

To qualify the statement I own two commercial lending firms and we have the same issue, if we went under our borrowers would lose their equipment and most likely be unable to recover anything from the mortgagee and the shareholders. It is something that we factor into our pricing (in that we have a side insurance policy to cover the borrowers).

Just digging the document back up.

Muffin

[Richcrooks]

Hi Muffin,
Good question.
I have just re read our contract and all I can see is "the Vendor (us) warrants to make all payments that become due under any mortgage or mortgages secured against the property ......"
Obviously if we die the trustees of the estate will be responsible to manage our affairs, but
You are right, if we went under there is no protection for the tennent/buyer.
However, having said that we can only go under as a result of criminal negligence, as the Tennent is paying us a higher interest rate on the mortgage than the interest rate we have taken the mortgage out on and, in addition the tennent is paying (as part of their rent) all rates and insurance.
Does that make sense.
Richcrooks

[Muffin]

Richcrooks,

Thanks for that, I am starting to get my head around it. Coming from a economist background I always work from the worst case scenario in any case so your answer makes it a lot easier to understand why and how, and makes it a little more easier for me to digest.

Can be as bold to ask what is your longest relationship with a client and do you have any problems with late payments and the like. I could imagine that the life expectancy on these is 2 - 5 years and given that the are buying to own that they are more likely to be better 'tenants'?

I had a meeting this afternoon but will dig up the contract, it is horrifying and actually depressing form memory.

[Richcrooks]

Hi Muffin
Longest relationship with Client will be three years in August.Like all property owners we have problems with late paters. We do explain to the buyer that we are not the tenancy tribunal ( and our contract states quite specifically and the buyer signs " I am aware that this agreement is not subject to th Residential Tenancies Act". We verbally advise them "3 strikes and you're out". We actually give them 4 strikes as on the first occassion we only give them a verbal. On the second occassion they are sent a letter pointing out that we can charge penalty interest payments and/or evict them.
We have never had to send a second written notice.
The Australian model suggests that most clients are in a possition to buy you out after 3-5 years.
Wrapping has been good for us as I believe we have done every-thing in an ethical manner. We count some of our clients amongst our best friends.
Yes they are better tennants as they look on the house as their own, and they are responsible for maintenance.
Richcrooks

[Muffin]

Thanks for this, it is much appreciated. I am still getting my head around and will no doubt have some other questions as they arise.

Thanks

[spaceman]

Never say never

Hi Richcrooks

I don't want to jinx you, but I reckon I could easily dream up a few examples where you could go bust.

Without knowing your personal situation, the examples would have to be pretty broad and therefore probably not that likely to occur .... but they could.

Given that I knew all about you and your situation I'd bet that I could come up with several very plausible examples where you could end up down the gurgler.


Here is an example that happened to me ... I escaped by the skin of my teeth.

Nov 2004 I'm off for a 10 day holiday in New York. I end up in hospital for a 6 days ( 3 in ICU) ....bill was around US$50,000 ....no worries I think I'm insured. First insurance company points out that since my trip didn't start and finish in NZ coverage doesn't apply (eek) second insurance company says no worries ...pay the bill first and then send us the receipts and you'll get your refund in a few months. (double eek) ..you might be able to raise US$50,000 quickly ( i had to pay before they would let me leave the hospital) without any worries but it would have been a real strecth and cost a lot ...unless mummy came to the rescue. ....luckily a friend who came and saw me in hospital knew a guy who knew a guy and was able to get the hospital to send the bill direct to the insurance company. ....

This story rolls on and on and on and there where several more close calls..... i could have lost my job etc etc.

If one or more things had gone pear-shaped then I could have easily gone under. Not that it would have been a complete disaster, but I almost certainly would have been forced to cash up by the bank.

So my point is don't say something can't happen... to often those kind of words come back to haunt you.

They couldn't hit an elephant at this dist. . . .
Killed in battle during US Civil War.
~~ General John Sedgwick, Union Commander, d. 1864


Now as to if wraps are good or bad .... I would say .... you have good wraps and bad wraps and these tend to be a function of the people running the wrap rather than the wrap itself.

To counter that I have seen examples of bad wraps where people have been screwed over ....I have yet to see an example of a good one .... mind you who would complain about a good one?

POOMBA or anybody smarter than me

Whats the difference between a wrap and a lease option??? They not the same rose by another name??

Cheers
Spaceman

[Richcrooks]

Hi Spaceman,
Couldn't agree more. If someone really wanted to do me they could. This applies to anything in life - not just wrap mortgages.
I also agree that there are good wraps and bad wraps - unfortunately you never hear about the good ones - but you have motivated me to ask my clients and those who have cashed me out for references. Maybe that will still some of the negative press.
I'll eave it to someone more loquacious than me to explain the difference between a wrap and a lease option.
Richcrooks

[NZGEMS]

Hi People, just looking through a few posts and I thought I could contribute here, I did 14 wraps in 2001 after I attended John Burleys bootcamp just because John was so passionate about them, 2 with investors too again because John was passionate about it (I had no trouble qualifying for finance) the investor ones caused some problems (because I gave them too much control which I shouldnt have done) you get better as you go along.

I did have a few get behind in their payments and I charged them penalty interest which I have written into my contract, I had no cash out penalty, they just had to pay the lawyers costs etc if it was in the first 5 years, i bought all the houses 70-80% of value and onsold them for about 90-95% of value at the time so they got a GREAT deal. I allowed the ones which got behind to sell the houses which a couple did (I could have taken them back) and one did walk out and just give back the keys, mainly because I think she didnt want the husband to get anything, he had taken off with someone else from what I could make out.

You are dealing with people the banks wont loan to remember and while most were nice people the language was not always the best especially if they got into trouble, they like to blame the very person who has helped them get into their own home, ME!!! I wont be doing any more, and I really only did try them because of Johns passion for them, it was good to help people get into their own homes, but now I just tell them to go to the bank and ask for finance.

I had a few others i had been going to wrap but when i went to put them in they didnt have the deposit they said they would so i had put them in renting with my rental manager looking after them, all of them had to be evicted down the track.

Still they served a purpose at the time, as the income covered some slight negative cashflow I had from a few other houses I had purchased with good equity in them, remember in 2001 the market was flat so flipping wasnt easy, was easy to buy below value but not easy to turn quickly.
I still beleive they have their place if they are done for the right reasons and the person putting the tenant/buyers in is coming from sincerity of wanting to help the people and not just wanting to line their own pockets.

The banks did have some people go broke who were doing it which is one of the reasons they went against it as the innocent buyer looses their house.

and yes if I had gone broke there was that risk they had to trust in but I was able to get a lawyer to vouch for my financail standing although naturally they wouldnt give a guarantee just told them that our financial standing was very good.

lets face it what other option do these people have anyway if the bank wont loan to them.

I have 3 left still all still paying but some time this year we are going to approach them as the bank has told me they will give them loans, all are paying fine and they may as well do their own thing now. I did all mine with full disclosure to the banks too.

Just my views, hope they helped. Robyn