Hello,
I am not new to property investing and have a good understanding of Wraps, but would like to ask a few questions to investors who are currently using this technique. Please note I am not criticising the technique but am hoping someone can clarify a few points…
Is it ethical? I have heard Wrappers say they are doing a deal to help a ‘battling family’ who otherwise would have to rent, If you wanted to help them wouldn’t you advance them a deposit or at least charge only a nominal amount above what the bank charges you in interest?
Why do Wraps typically involve selling a home above market value and then charging an interest rate above market? If it is ethical why not charge either the inflated purchase price, or the inflated interest rate instead of both?
Why can’t ‘the battlers’ get a loan in the first place? with 100% financing and non conforming lenders it is pretty hard Not to get a loan in Australia these days. If they are at such a risk of default that the bank wouldn’t lend them money why would you take them on as a debtor?
How long do you expect the people to stay? Is there a contingency plan for when ‘battling families’ decide to move elsewhere?
Do you really feel like you own an asset, when you generate cash but no capital growth?
How long do you expect a deal to last for?
Would you live in ‘wrapped’ house?I hope someone out there can answer some of these points
Thankyou.
I am not new to property investing and have a good understanding of Wraps, but would like to ask a few questions to investors who are currently using this technique. Please note I am not criticising the technique but am hoping someone can clarify a few points…
Is it ethical? I have heard Wrappers say they are doing a deal to help a ‘battling family’ who otherwise would have to rent, If you wanted to help them wouldn’t you advance them a deposit or at least charge only a nominal amount above what the bank charges you in interest?Ummm sounds nice in theory Wesley, but I hardly think it’s going to be financially viable for a wrapper to borrow the money for say a $200k house and only earn a few dollars a week, they’d be better off in a term deposit. It has to be a win-win.
Why do Wraps typically involve selling a home above market value and then charging an interest rate above market?Wesley, you’ve been reading too many negative articles about wraps. Try talking to rick Otton about wraps – he regularly sells houses at market value, and I’ve seen examples where he’s charged below market interest rates. I’ve done that myself. Having said that, the typical model is probably more as you describe.
If it is ethical why not charge either the inflated purchase price, or the inflated interest rate instead of both?Again, be careful of generalising.
Why can’t ‘the battlers’ get a loan in the first place? with 100% financing and non conforming lenders it is pretty hard Not to get a loan in Australia these days.Sorry, I don’t agree with that. To get 100% finance you have to be totally squeaky clean, in full time employment etc etc. My buyers are definitely not in that category! It’s possible to get 90% from a non conforming lender, as long as you’re willing to pay over 10% – more than I charge.
If they are at such a risk of default that the bank wouldn’t lend them money why would you take them on as a debtor?Again, who says that they’re at such a risk of default? Most of my buyers are great people, they pay on time every week – they just didn’t have a big enough deposit to get a loan, and usually you can add in maybe a few credit marks, or non regular income to make it harder. I don’t take on people if I think there’s a risk of them defaulting.
How long do you expect the people to stay? Is there a contingency plan for when ‘battling families’ decide to move elsewhere?I usually aim to help them refinance in 1-2 years (and often will take back a 2nd mortgage if they can only borrow 80%). My contracts contain clauses to cover the buyer in the event that they decide to move on and have equity built up. They are entitled to that equity.
Do you really feel like you own an asset, when you generate cash but no capital growth?This is a cashflow business, not an asset investment. I still have “normal” assets for my long term capital growth and security.
How long do you expect a deal to last for?As long as it takes… usually 5 years is the maximum I look for.
Would you live in ‘wrapped’ house?Don’t need to – I have my own! But if it was the only way I could get started, yes, I’d pay the extra for a year or two and then move into mainstream finance.
Keep smiling
Felicity
Hi FW,
Thankyou for your reply, you have set me straight on some of the finer points. If everyone conducted their deals the way you have described then I would consider Wrapping a legitmate, ethical technique. Unfortuntely I don’t think every investor attracted to wraps operates like this!
RegardsUnfortunately, Wesley, I agree with you that there are some less than squeaky clean operators out there. However I also believe that most wrappers do operate in an ethical way, but because they do so, nobody ever hears about them!!!
Keep smiling
Felicity“I still believe the majority are unethical.”
-Do you have any proof???? How many do you beleive are unethical? 20%, 40%…. How many???
And how are they unethical????“Even if they were regulated, I still think it is not the most ethical thing to make money off the poorer members of society by charging them inflated prices and higher interest rates.”
– I have recently wrapped a house to quite a wealthy (income wise) couple, they have the income, they just seem not to be able to save (esp. after a wedding), so just like Harvey Norman or Bing Lee, I offer finance. The only difference is I charge a higher price for the house, because unlike Bing Lee or Harvey Norman I actually sell assets that increase in value – if Harvbey Norman sold assets that increased with value on finace, do you think they would charge a higher price for the item??? Of course they would.
“I don’t see charging someone more for a non-deductible debt as doing them any favours. I would like to see wraps restricted to investment properties until such time as the buyer can afford to refinance the property into a normal loan if they want to live in it.”
– Ummm, all debt is non-deductible on a PPOR….
In regards to restricting weaps to investment properties…
So what your saying is that a person whom can’t afford to get a deposit together gets a wrap and rents it out – So in effect they are negative gearing the property and not only that they have to pay rent to live in a rental house… which they can be kicked out of (might take 3 months, but they can be kicked out).So lets run the figures…
Wrappe $60K income, $300 in rent, $100 in negative gearing per week… So they make lets say $700 and then they have to pay over $400 a week in repayments and negative gearing???
Also what happens if the renter move out, now they have to pay $500?-$600??…Are XXX X XXXXX???? These people want to live in the house. If they wanted to run a rental business, they would of rented out a house already… But they dont – they want to live in there own house and not pay dead rental money…
Also what happens when the wrappes don’t pay – we kick out the tennants? But they have a contract, so it comes down to who has the deepest pockets in court…. So in the end we win at massive cost to the wrappe, renter and in the end we will charge a higher price (interest rate and backend)….
Thankgod you don’t make the rules….Rgds.
Lucifer_auI have decided to do a similar thing to Felicity, and hopefully you can gain a some more understanding…
Also it makes me understand the process better (and we can’t let Felicity have all the fun!).“Is it ethical?”
-Are payday loan operators who charge up to 500% per yr ethical? Some would say yes, because the people might really need the money for medical emergancy… In really, it really depends on what you see as ethical…
Believe it or not we actually make less of a % mark up on interest than the banks (so we borrow at 7% and charge 8.5%, banks borrow at 5.2%).“If you wanted to help them wouldn’t you advance them a deposit or at least charge only a nominal amount above what the bank charges you in interest?”
-We ask for a much less deposit than they would have to pay (and most can’t even get a loan so any deposit would be useless). As I said before Banks traditional made a higher mark up on the interest rate than we have.
“Why do Wraps typically involve selling a home above market value and then charging an interest rate above market? If it is ethical why not charge either the inflated purchase price, or the inflated interest rate instead of both?”
-We are selling an appreciating asset – the new owners get to keep all the CG, we get none. If another business provided you finance on an appreciating asset, they would do the same.
“Why can’t ‘the battlers’ get a loan in the first place? with 100% financing and non conforming lenders it is pretty hard Not to get a loan in Australia these days. If they are at such a risk of default that the bank wouldn’t lend them money why would you take them on as a debtor?”
-Banks still have a restrictive lending policy, and many people who could easily qualify on income can’t because of the deposit (this is a common factor in Sydney). Also some people have not been in Australia ‘long enough’ (although they are full Aust. citizens), another reason is some people just hate banks and refuse to have anything to do with them..
Also most people can get 100% financing, only those who own other property…“How long do you expect the people to stay? Is there a contingency plan for when ‘battling families’ decide to move elsewhere?”
-We hold property up to 5yr before we basically tell them to refinance, of course they can (and do cash us out a long time before that).
“Do you really feel like you own an asset, when you generate cash but no capital growth?”
-If it puts money into my pocket it’s an asset! I think it is wrong thinking to base major decisions on CG, because what happens if those CGs don’t turn out to be a reality???..
“Would you live in ‘wrapped’ house?”
Yeah, I would. There is nothing like owning your own house and making it what you want (rather than a landlord, etc).
Rgds.
Lucifer_au“I did say “I believe!”.
-I believe the world is round, but I need to have facts to back it up otherwise it’s a irrelvant comment.Otherwise I stand by my comments.
Rgds.
Lucifer_auMr. Eccentric
Don’t pussy foot around. If you think they are unethical, say so.
If I wanted to start an argument with an anonymous person in a chatroom I would start out saying they are unethical, however if you read my post you will note that I wanted to form a view on wraps and therfore asked intelligent questions regarding them. I don’t ‘pussyfoot’ around and instead of sledging wraps I would rather learn about them.Hi All,
I have edited a number of posts that included personal attacks – by all means debate the topic – or in sporting parlance play the ball not the player.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Hi,
In a nutshell, wraps are a form of private finance, which, by itself is neither ethical nor unethical.
It’s the person applying the technique that puts that flavour on the deal.
Are most investors who use the technique unethical? That sounds like a big call to make.
What I’d say is that most of the stories in the press seem to relate to investors who unethically applied the wrap strategy.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
I don’t think there are figures like these available.
Having said that, I have yet to hear a single bad media story on someone doing wraps in Melbourne, for example. And yet even to my limited knowledge there are at least 10 people who have done 10+ wraps in Melbourne & Geelong. There are quite possibly a lot more!
So I consider it likely that the percentage of “unethical” operators is probably quite low – as you said, good stories rarely sell newspapers or fill space in current affairs shows.Keep smiling
FelicitySorry, but I just have to add my two cents here…..
ETHICS – is not about technique, it’s about a philosophy of how you conduct yourself, and, your business, be it wrapping, or any other business for that matter…..
If someone says that they believe wrapping to be unethical, then that is their right to have that view, although I would say the comment is unbalanced and maybe that is because of the slant thanks to a one sided media… I’ll leave this one alone…. I think this kind of comment is used here too much to incite arguements which end up degenerating into a locked or deleted thread…..
Of all the wrappers I and my partner have met, I have yet to see one acting or conducting their business unethically….. Of all the newbies I come across in email approaches from here, I also advise about wrapping ethically, becoming involved with the VFA, and, above all, doing the right thing…..
My words above are comments in general. There is no attack on anyone here…. everyone is entitled to their own opinion….. but, when that opinion is written down in this forum, i’m also entitled to question it….
I’d like to see healthy discussion here…..
Wrapping DOES need regulation… the consumers DO need some protection…….. BUT it is also the consumer who should also do their homework / due diligence on a house purchase, the seller, and, the financier….
Cheers
Scott
Pelican Investments
http://www.pelican-invest.comwhen things are going well people (including wrappers) behave ethically in most circumstances. the crunch will come when a strain (see tension) is put on the relationship. so when interest rates rise and someone defaults, or when the wrapper has income problems of there own (they get divorced, lose there jobs etc etc), when priced drop and the wrapper sees 30 pct equity disappear b4 his/her eyes…..thats when you will see unethical behaviour occur.
why cant you see that wrappers!!!!
its not abt how you perform when the going is good – its how you perform when the going is tough.
thats why we need proper regulations to protect those who need to be protected!!!
MR DOGMATIC HAS SPOKEN!
Originally posted by The Mortgage Adviser:Originally posted by Pelicaninvestments:Sorry, but I just have to add my two cents here…..
If someone says that they believe wrapping to be unethical, then that is their right to have that view, although I would say the comment is unbalanced and maybe that is because of the slant thanks to a one sided media… I’ll leave this one alone…. I think this kind of comment is used here too much to incite arguements which end up degenerating into a locked or deleted thread…..
Saying mine, and others, comment that the MAJORITY of wraps is unethical is an “unbalanced” comment and implying that we are not intelligent enough to determine what is true or untrue in the medie will always end up in arguments. Just read back a bit and notice the word MAJORITY!!!
Of all the wrappers I and my partner have met, I have yet to see one acting or conducting their business unethically…..
And you have met the majority??? Is this how you come to the conclusion that your comments are less “unbalanced” than those who oppose you? I don’t think all those wrappers you have met would show you the details of their personal contracts so I think you are assuming a lot.
My words above are comments in general. There is no attack on anyone here…. everyone is entitled to their own opinion….. but, when that opinion is written down in this forum, i’m also entitled to question it….
Questioning wraps is ecatly what some of us are doing. You are no different questioning us who question wraps.
I’d like to see healthy discussion here…..
Don’t imply those who oppose you are unbalanced or lack the intelligence to see through the medie and you might get some healthy discussion.
Wrapping DOES need regulation… the consumers DO need some protection…….. BUT it is also the consumer who should also do their homework / due diligence on a house purchase, the seller, and, the financier….
If you believe this, you CLEARLY agree that there are problems out there with wrappers!!! I can’t see any further need to discuss this. Some wrappers are unethical, some are ethical. It is the amount of each in dispute.
Cheers
Scott
Pelican Investments
http://www.pelican-invest.comEccentric… Departing from a recognized, conventional, or established norm or pattern. Deviating from a circular form or path.
hmmmmm….. Sad again to think that I’m aiming any of my comments at you… If you can’t engage in balanced conversation here, then, there is no point in anyone posting……
You take a posting that was discussing things in a balanced way, and, make it look like it was an attack on you…
When I mentioned unbalanced, you straight away assumed I was saying you or others were unbalanced…. you dont seem to understand…. I’m talking about comments that take into consideration several angles…..
Why are you so defensive ?? I’m certainly not… all I want is for this to be discussed FAIRLY… instead of it being a witch hunt….
But I want to ask you this….. you seem to be singling out wraps as the only industry that has unethical and ethical people….. ???? Can I assume that this is not the case ???
I almost wish I hadn’t posted my original question as it looks like ppl are just picking things they want to hear and attacking each other. for my 2 cents I prefer property to buy reno. and hold, I have only ever bought in Sydney and Brisbane, within 20kms of CBD in suburbs where there are more owner occupiers than renters. YES my purchase prices are higher and YES they are not cashflow positive BUT they provide higher leverage (higher LVR’s) and better capitel growth which I draw down and use in shares where I can get a much better return on my ENTIRE investment. If I hated shares or couldn’t trade obvioulsy trading property or cashflow positive would be better for me.
MA,
Agreed !!!…..
But isn’t that the same in every industry ???
MA,
Yes, but you need to make comparisons with other industries and wraps, and, both have the same ethical numbers…. right ???
Scott
Pelican Investments
http://www.pelican-invest.comHi Wesley (cute name), I have grappled with the question myself, and only after consuming several packets of Tim Tams and putting myself into a sugar induced coma did the answer come to me.
If I am the sort of person who wants to rip others off: I WILL DO IT !!
If i have no integrity : I will treat others with DISRESPECT!
If My world view revolves around the size of my bank balance: I will be consumed with greed and do all in my power to advance my wealth.You cannot help but get personal when discussing this subject,for your primary motivation to employ this strategy is what counts.
My primary wrap motive: (oooh now i’ve stumped myself, give me a minute….)
Ok here goes, the reason i employ this strategy is because it truly is a win win situation.
Yup, I make money (there i said it, somebody get a rope…!!)
The client gets a HOME, remember they came to me..
WE ARE TOTALLY TRANSPARENT IN OUR DEALINGS WITH OUR CLIENTS. So they know the deal before they sign We talk through different outcome senarios, including default,refinancing etc.BEFORE THEY SIGN !!I look at it as helping the client on to the first step of thier financial freedom ladder
This is my opinion, by reading this post you here by forfeit the right to sledge or abuse me. Any harm or distress this post may cause is unintentional.
1wesley,
I see wrapping as being a banker. Whilst people talk about people being put in their “own” homes, I have yet to see a wrapper on here saying that they don’t actually own any homes because their clients own them. Wrappers still see the houses as the wrapper’s house, even though the rhetoric is that the house belongs to the wrappee. I see wrapping as a financial exchange. I see it as the wrappee being a tenant until the mortgage is paid off.
So when I see wrappers saying they have 40 houses or whatever, I wonder why in the next breath, they are saying they are helping people to buy their own homes. Really, if this were the case, the wrappers would own NO homes (the wrappee owns them, right?)
If you buy and hold, as has been your strategy, wesley, then you own your own properties. If you wrap, then the properties are the wrappees. I would rather own my own IP’s then be a banker.
kay henry
Welland throughly articulatory said Kaye, It’s all about the strategy you wish to employ. I personally do not see the house as belonging to me. I say, i have ‘on sold’ the property.
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