Using a Wrap as a negotiation with the bank

Banks generally don't like wraps at all. But they do take into account potential rent on the property to be purchased.

As the property is going to be an 'IP', you may need mortgagee consent to let the premises which generally means they will have to view & approve the 'lease'. As there is no  lease and no caveat with a wrap, you could always try to run under the bank's radar by not seeking mortagee consent.

Sorry Richard, I didn't realise that a wrap contract permitted the registration of a caveat – as I did not believe the documenation created an equitable interest in the land (this lifting wraps a little above where I hold them, still not very high though).

Lenders mortgage agreements would usually prohibit on-selling via an installment contract a property over which they have a mortgage without their permission. Same with granting options over the property.

Terry, if onselling a property via an option would require a DFT licence (buyers agent) why wouldn't selling a wrap?

Hi Richard

Does that rule apply to selling properties under a standard contract?

Our solicitor tells us that with a Developers License in QLD you need to deposit the installments with the government until the final payment when you are selling a property you own without an agent being involved.

That's why at his suggestion we now have three separate entities, that allow us to do six times three _new_ wraps per year.

Another way to meet the legal obligation is to get friendly with an agent and put your wraps through his office.  You'd normally negotiate a substantially reduced commission for this.  Or even get your wife/friend to become a Licensed Real Estate Agent.

But getting back to the original question, plus subsequent ones…

Banks were negative about wraps in the past, but they seem to be less so now.

Before you get the loan, treat it like an ordinary IP.   The bank will ask to see a rent appraisal from a RE Letting Agent.  For the purpose of establishing income from the property they will initially base their estimate on this, with an allowance for vacancy.

Then wrap the property, ask, and show the bank the contract if they want to see it.  We have done so with several banks over the years and they have not objected. e.g. Bank of QLD, Bankwest, Westpac, CBA.

However, when you buy the next property, you can show the bank the income statement for the earlier wrapped house, and they will take the actual wrap payment as the income.  Some banks want to see the actual wrap contract (and they seem content with that), others are happy with a statement showing the income.  If you use Ezidebit (or similar) to collect the payments from your wrappee you can print out a nice payment history and send it to the bank.  The amounts will match up with your bank account where the payments are deposited by Ezidebit.

So it's a little tough in the beginning unless you have a high income separately, but it gets easier as you go on. 
We have many houses wrapped using loans from the CBA (NB: Important!  Separate mortgages!), and the CBA knows exactly what we do with them.  In fact, our banker often asks "Is this one going to be a Wrap or a Lease Option?"  But they still ask for a rent appraisal and use that as the basis for the new loan.  Of course, as I said above, when the next loan is created this is adjusted to the real income from that property.  The exception is where we are renovating a house and there's no one in it yet, and we buy more in the meantime.  In that case the bank uses the rent appraisal as before for that particular property.  (These days there are so many good buys around that we seem to have a number "in the air" at any one time)

Hope this helps a little.

Cheers

Hi AdoubleU

WA has its very own rule about real estate Instalment Sales Contracts (often called Wraps), i.e. WA requires that you have a Credit Provides licence if you are going to provide Instalment Sales Contracts within the State.

We are not WA based but our vendor finance friends in WA tell us that the licence is easy to get and not too much of a pain at all.  Good luck.

Cheers,  Paul