NZ 1st homebuyers are ScReWeD...

[wns]

The target market for a wrap is someone who can't qualify for a loan from the bank at 7%. eg. credit problems, ex bankrupt etc etc.

AND / OR they have good income but don't have enough deposit money.

[trackers]

So that begs the question, what sort of hoops would you make the purchaser jump through before handing the house over? Run some credit checks?

[trackers]

quote:Originally posted by Shrewd Crude

quote: Shrewd Crude Posted - 12/01/2007 : 4:28:00 PM

I guess housing is a way to get things going if your up for starting in the deepend in the short term...

I agree SC... good point...haha

random

[Steve]

[quote]quote:Originally posted by JoeKing

Originally posted by rmbbrave

I buy a house and borrow the money from the bank at say 7%. I then sell the house to you and finance you at say 10%. The contract is based on immediate possession, delayed settlement(like 20 years)paid in installments, pretty much like a hire purchase agreement.

It doesn't make sense to me as it appears that the 'vendor' would have missed out on the capital appreciation, so I will do an example showing the first year:

Assume house costs $300k, house prices increase 10% pa


BASED ON A WRAP:
Your CASH Income $30,000
[u]Your CASH Expense $21,000</u>
Your CASH Profit $ 9,000

Your 'lost' capital appreciation ($30,000) which suggests that you are down a net $21,000 overall.


BASED ON CONTINUED OWNERSHIP:
Your CASH Income $18,000 (based on a 6% rental yield)
[u]Your CASH Expense $30,000</u> (int $21k, ins $1k, rates $3k, r&m $5k)
Your CASH Loss ($12,000)

Your capital appreciation of $30,000 makes you a net $18,000 up overall.


CONCLUSION:
Overall, while a WRAP appears good on a CASH basis, in actuality a WRAP only benefits the vendor when property prices are stagnating or decreasing. The WRAP will cost the vendor when property prices are appreciating!

[trackers]

[quote]quote:Originally posted by Steve

quote:Originally posted by JoeKing

Originally posted by rmbbrave

I buy a house and borrow the money from the bank at say 7%. I then sell the house to you and finance you at say 10%. The contract is based on immediate possession, delayed settlement(like 20 years)paid in installments, pretty much like a hire purchase agreement.

It doesn't make sense to me as it appears that the 'vendor' would have missed out on the capital appreciation, so I will do an example showing the first year:

Assume house costs $300k, house prices increase 10% pa


BASED ON A WRAP:
Your CASH Income $30,000
[u]Your CASH Expense $21,000</u>
Your CASH Profit $ 9,000

Your 'lost' capital appreciation ($30,000) which suggests that you are down a net $21,000 overall.


BASED ON CONTINUED OWNERSHIP:
Your CASH Income $18,000 (based on a 6% rental yield)
[u]Your CASH Expense $30,000</u> (int $21k, ins $1k, rates $3k, r&m $5k)
Your CASH Loss ($12,000)

Your capital appreciation of $30,000 makes you a net $18,000 up overall.


CONCLUSION:
Overall, while a WRAP appears good on a CASH basis, in actuality a WRAP only benefits the vendor when property prices are stagnating or decreasing. The WRAP will cost the vendor when property prices are appreciating!

Quite true, never noticed that... But I believe JoeKing mentioned that he charges higher for the property than he would to a 'normal' buyer

[JoeKing]

quote:Originally posted by Gofor Broke
ok Joe a dumb question. why would I borrow the money from you at 10% if I can get from the bank at 7%

quote:Originally posted by wns

The target market for a wrap is someone who can't qualify for a loan from the bank at 7%. eg. credit problems, ex bankrupt etc etc.

AND / OR they have good income but don't have enough deposit money.

Wns you've done this before )
Add self employed, new immigrants without a local savings history, beneficeries (with guaranteed income), Students with wealthy parants (banks want self earned/saved deposits), people with "cash" deposits they are reluctant to disclose to bank, people deemed as "part time or temporary" workers like "relieving" teachers/ nurses etc, that are in fact full time employed, people employed on casual basis eg Chefs... etc etc.

Steve it is late and Ive had a big day, not wanting to debate numbers which can go on forever, just quickly, your numbers...
"BASED ON A WRAP:
Your CASH Income $30,000
Your CASH Expense $21,000
Your CASH Profit $ 9,000"
You have not accounted for rates and insurance, say $3,500, maintenence say $2000, now paid for by purchaser. So are you saying even $14,500, per year profit after puting up not one cent of your own money PLUS a one off $37,500 interest free loan from IRD (gst refund) which is non taxable, BAD?? And of course we have not yet counted in the day to day tax benefits, phone, petrol, office space, power allowance, advertising, new lawn mower, garden tools, paint, garden improvements.. shall I continue till breakfast?.
Cheers
JK

[Halebop]

The wrap model works well in the same kind of market the pretty much everything else works well in - a rising one.

Buying a house at a lower price and selling it again at a higher price is a time honoured trading strategy enjoyed by developers, flippers, wrappers and everyday garden variety property investors.

Borrowing to buy the house with a provision for deferred settlement to a subsequent 3rd party is a profitable strategy in a strong and rising market because often you can purchase more property on the back of the superior interest income than you could if you just wacked down 20% deposits on standard rental investments. The downside as has already been pointed out is the capital gain is capped if and when the purchaser properly settles and refinances externally at a price set "x" years before.

The true downside is the total borrowing risk still rests with the vendor. If the employment market takes a dive and property prices diminish, the small margin made on the initial sale price may not cover the potential capital losses. Its often deemed that the superior strategy is to have more property, more debt, more sources of cash flow to hedge against the statistical probability of individual default. The downside again is that a sustained or sharp correction will not only erode profits but also the financial stability of the vendor. Like many more highly profitable lending strategies, there is an element of "borrow short, lend long" in that the property could potentially be stuck on the books, in a falling market, while borrowing costs rise or perhaps the loan is even called in by a nervous bank.

I have a friend who trades 4 to 5 properties per year, generally no more than 1 at a time. He typically keeps another 1 or 2 "bargains" for capital appreciation and to defer tax. He sells the properties himself using simple advertisements in the Newspaper offering 100% finance for a tidy family home. Over the last 4 years he normally sells a house on the 1st advert. He has a pet mortgage broker with sources of Low Doc loans who arranges the 100% finance directly with the purchasers. Because he buys well, contains costs during refubishment, works quickly and doesn't pay real estate agent fees, he averages +$35,000 per house that he sells, typically +$30,000 after financing. His "Keepers" require no equity because they are bought cheaply enough and value is added to borrow the entire purchase and refurbishment cost. Cash flow on these still tends to be tight in this market. Over 4 years he has roughly a million in equity tied up in his modestly cash flow positive "keeper" portfolio and clears another $150,000+ before tax from his trading activities. He still works his day job. More recently he's been looking at commercial property for his surplus cash but I suspect on current yields this could be an expensive lesson in "new markets".

The real secret, just like JoeKing's Wrap strategy, is that this is a trading business and not a passive investment. Anyone who couldn't make money operating a business in the last 4 years has obviously been in the wrong place or is a bit light in the brain matter department. I prefer my friend's model to JoeKings, despite its unsexy pedigree, because in a downturn his trading risk is restricted to the 1 (sometimes but rarely 2) properties he has "on the go". The secret of any trading business, be it supermarketing, car dealing or property trading is stock turn. Even in a strong market Wraps can have a very slow turn cycle, leaving a trader open to the vagaries of a softer trading environment. A "sale" made 2.5 years ago can also turn out to be anything but.

[JoeKing]

quote:Originally posted by trackers

So that begs the question, what sort of hoops would you make the purchaser jump through before handing the house over? Run some credit checks?

Trackers
No hoops, just a very simple basic credit application. And title is not transferred until final payment. Any improvements, alterations etc are covered in special conditions of s&p agreement
Most applicants are desperate wannabe home owners who have exhausted all other avenues. (which makes them vulnerable to scoobie "rent to buy " Rip off bastards!GRRR.
In my experience, when a renter becomes a home owner their whole attitude changes! Of the 16 (only) deals done we have only had one defaulter. The problem was a relationship bust up. We got together and decided their best course of action was to sell the house. They were charged penalty interest from time of default, the house was sold to an investor who kept the Mrs and children as tenants, who after all settlement payments came out with $12k profit.
Allways remember what goes 'round comes 'round.
Cheers
JK

[JoeKing]

Halebop it is late and I'd rather be asleep. I agree with most of your post but this:
quote A "sale" made 2.5 years ago can also turn out to be anything but.unquote
Quite misleading! An unconditional "wrap" deal is excactly the same as a conventional unconditional "sale". The paperwork includes a standard Auckland Law society Sales and Purchase agreement, penalties for any breaches are the same.
Cheers
JK

[Halebop]

quote:Originally posted by JoeKing

quote A "sale" made 2.5 years ago can also turn out to be anything but.unquote
Quite misleading! An unconditional "wrap" deal is excactly the same as a conventional unconditional "sale". The paperwork includes a standard Auckland Law society Sales and Purchase agreement, penalties for any breaches are the same.

Joeking my comment is not misleading and yes, a wrap sale agreement is very similar except for one key detail. An unconditional agreement does not mean the purchaser can settle, it just means they are obligated to settle. Next time you talk to your solicitor ask them if "unconditional" sales ever fall over? Ask them about recourse. The contract is only as good as the financial standing of the 3rd party and the value of the security (This is why in a rising market your single defaulter still came out ahead and you still made money). In a wrap deal the purchaser makes an assumption based on their standing several years rather than several weeks or months from the point where they must settle. If they become ill, divorced, underemployed, their business fails etc the assumptions they made many years before are going to be inadequate. If the purchaser has no money, no job, whatever, your right to enforce the contract will be a phyrric victory if the purchaser can't afford the penalties (let alone the house). You could spend more money via your solicitor to achieve nothing more than forcing the 3rd party into bankruptcy and still having to mark the house to market. Banks, with all their probity checks and lower interest rates still have to enforce mortgagee sales in even a robust property market.