What Is Property Wrapping
(wraps/vendor finance)?
Property Wraps are where you provide vendor finance for a property. Vendor finance can be used by investors both to purchase property as well as sell it.
The advantage to an investor of using a vendor's finance when purchasing property is to avoid having to qualify for and obtain conventional bank finance, and/or to minimise or avoid having to pay a 5%-20% deposit.
For Example:
A wrapper buys a property for $100 000 and then advertises the same property as being available for sale with vendor finance. The sale price is $130 000. The buyer of the property enters into a contract which outlines repayments on the sale price. The buyer does not take ownership of the property until the last instalment is made.
Property Wraps – A Consumer Affairs Story Waiting To Happen
Consumer Affairs Story 1 – Taking Advantage of Less Fortunate Buyers
Property wraps work most effectively when targeting buyers who are unable to obtain conventional finance. Targeting these buyers can appear like you are taking advantage of people and their financial situation
For Example:
A wrapper buys a property for $70 000 and then advertise the exact same property (without any improvements) for sale with vendor finance at $110 000. The actual value of the property has not risen but the wrapper makes $40 000 due to the fact that the buyers cannot get conventional finance.
Consumer Affairs Story 2 – Mortgage Breach Of Terms
Property wrappers usually need to use conventional finance to buy the original property. Through on-selling this property without the approval of your mortgage provider you are usually breaching the terms of your mortgage. A normal mortgage contract will state you are not allowed to on-sell a property without approval from the mortgage provider.
For Example:
A wrapper buys a property for $125 000 using a conventional bank mortgage. He then advertises the property for sale with vendor finance at $175 000. As the wrapper will be entering into a sale contract on the property, he is breaching the terms of his mortgage. The wrapper’s mortgage contract will state that he cannot sell his property without approval from his bank.
Consumer Affairs Story 3 – Property Wrapper Defaults on Mortgage Repayments
Property wrappers who have used conventional finance to buy the original property, have to continue making the mortgage repayments. If the wrapper defaults on the Mortgage Repayments the financier can take control of the asset, leaving the rent to buy person without anything to show for their repayments.
For Example:
John enters a rent to buy (wrap) agreement with Richard whereby John takes ownership of the property once he has made his final payment. Richard defaults on his mortgage payment 6 months into the agreement with John. Richard’s mortgagee takes control of the asset, ejects John from the house and sells the house. John has lost 6 months worth or repayments and does not have ownership of an asset.
Positive Cash Flow Property Investment – The Alternative
Property Wraps are highly speculative and risky forms of property investing. Once entering into a property wrap the wrapper does not make any of the capital gains on the property. The capital gains go to the person purchasing the property. A more solid and smart investment strategy is buying and holding Positive Cash Flow Property Investment
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