WHY ‘WRAPPING’ SHOULD BE CALLED RIPPING
By Neil Jenman
Real estate wraps have two main ingredients – greed and deceit.
An article in The Weekend Australian (June 28) is unlikely to prick the consciences of the real wrappers or, as they are becoming know, the real estate pawnbrokers. However, it may cause the authorities across the nation to take a closer look at how thousands of battlers are being exploited.
Real estate wrapping works like this: A wrapper (who may prefer to be called an ‘investor’) buys a home (usually one in need of repair) and gets a loan from a mainstream lender. The wrapper re-sells the home to a battler at an increased price – usually around $20,000 – $40,000 above the price paid by the wrapper. The battler then pays the wrapper an interest rate up to four percent above the rate paid by the wrapper.
The wrapper gets a profit on the price of the home and on the payments. That’s the greed, or as the wrapper (sorry, investor) prefers to call it, the profit.
The pro-wrapping view, put forth by the wrappers, argues that battlers, who cannot borrow from mainstream lenders, can now buy a home. The wrappers argue that they are, at worst, providing a service to the disadvantaged. Some wrappers claim they are the Aussie battlers’ heroes. It sounds so good, so noble; and there’s the evidence – battlers in their ‘own homes’.
The second view is anti-wrapping which argues that battlers are, at best, being placed in a high-risk position. At worst, the battlers are deliberately deceived into thinking they are buying a home when, in reality, they are being preyed upon by investors devoid of morality.
Wrappers are often “graduates” of get-rich-quick seminars, pushed by the likes of self-proclaimed ‘entrepreneurs’, ‘multi-millionaires’ or ‘legends’ such as Brad Sugars. These seminars teach would-be millionaires how to exploit the less fortunate in society.
Granted, some seminar graduates may be well-meaning, but they obviously don’t understand ethics.
Leaving aside the greed, let’s turn to the deceit – and not the deceit about battlers being told they are “buying a home” when they are little more than exploited tenants who pay what ever little life’s savings they have as a deposit followed by a weekly impost far in excess of rent – but the deceit with the name often used for wrapping – vendor finance.
Like real estate agents who change the term dummy bidding to vendor bidding, some wrappers like to change the term ‘wrap finance’ to ‘vendor finance’. Makes it seem respectable. As the wrappers point out, vendor finance has been around for years. Even state governments have done it, by allowing tenants to buy a home with finance supplied by the government.
But herein lies the lie in the term vendor finance when used with wrapping. When a buyer gets bank finance the buyer’s name appears on the title to the home. Sure, the bank has a mortgage over the home. But the home is in the buyer’s name. Not so with wrappers who have not provided “finance” in the traditional safe sense. With wrapping the buyer’s name is not on the title. The wrapper’s name is on the title. The bank that loaned the money to the wrapper has a mortgage on the home and the battlers have, well, at best a caveat, which is like an unsecured note.
If the wrapper does not make the payment to the bank, then the bank takes the home. And the battlers get kicked out. The fact that the battlers may have made regular payments (at four per cent about the bank rate) to the wrapper is of no consequence. The battlers are out. If the battlers have made improvements to the home, even if they have spent thousands of dollars on it, the risk is worse. If the wrapper doesn’t pay the bank, the battlers lose everything.
And this assumes, of course, that the battlers have managed pay their inflated payments. Many collapse under the strain. It’s only early days yet and the full effect of wrapping is still to be seen.
The more time passes, the more battlers will be kicked out. Already the default rate of battlers in wrapping is ten times the normal rate. The banks know this, that’s why they don’t finance the battlers. Nothing is worse for a bank’s image than having to kick families out of a home. But the wrappers don’t care. If the battlers don’t pay, this is good news for many wrappers. They get the house back, they get the battlers’ deposit, they keep the inflated interest payments and they get the benefit of any improvements. All they do is find another victim, (sorry, battler).
HEROES OR PREDATORS?
If the wrappers really were heroes, they would sell the homes to the battlers at the true market price and lend the money at the true interest rates. And then they could legitimately call it vendor finance.
But they can’t do that, of course, because there wouldn’t be any profit for them. Their profit comes from two sources: selling the home at the inflated price and charging the battlers an inflated interest rate.
On top of this, the home is not in the names of battlers. They are at the mercy of the wrapper. The battlers could make payments for ten years, have an illness or a sudden loss of income, miss one payment and get kicked out.
Wrappers, when they are in their Aussie-hero-mode, claim they are helping battlers avoid a lifetime of renting. But what the battlers have done is swap a lifetime of renting for a life of risk and exploitation. The battlers are the victims of predators.
The correct term for wrapping is not vendor-financing. It’s wrapping. It should be called ripping.
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