Neil Jenman Answers Wrap Questions
Trying to straighten a bent method.
QUESTION: I have been reading some of your articles on Wraps or Instalment/Terms contracts. I have to say, that I totally agree with you about the issues of the vendor not paying the underlying loan, or possibly going bankrupt. This is something that could happen. As far as the buyers losing the property based on defaulting with payments, isn’t it true that the same thing would happen if they defaulted with the bank?
ANSWER: Yes, of course. However, if consumers default on a bank loan, they still get the equity which has built up in the home. With wraps, they get nothing.
QUESTION: If the vendors were to have some way to have these legal documents regulated, just like documents produced by the REI and made sure they were compliant with DFT, would these concerns still exist? Meaning that if a vendor wanted to sell the property on vendor finance terms, they would only be able to use an approved set up documents.
ANSWER: If the documents for wrapping contracts were similar to the documents produced by the REI, consumers would be unlikely to receive adequate protection.
QUESTION: Another item I have been wondering about is the issue of payments made by the vendor to their bank. If there was an Escrow type service like in the USA, where a third party company managed both party’s interests, then this would reduce the risks of vendor defaults. Perhaps the vendors could be forced into purchasing the properties in the name of a trust, and the buyers could be part of that trust during the contract term, meaning provided they did not default, then the property could be re-financed in the name of the trust, the original vendor’s interests could be paid out, and everyone would be happy.
ANSWER: It sure gets complicated trying to make a crooked system straight. One of the attractions of wrapping (for the wrappers) is that the wraps are so heavily weighed in favour of the wrappers and against the buyers. Sure, if someone could come up with an iron-clad method of protecting the buyers, it would be a vast improvement on most current arrangements. However, the fundamental problems of an inflated price and a loaded interest rare would still remain.
QUESTION: Most of what I have viewed on your site about these kinds of deals seem to be very emotionally documented. Like your friend who died of a heart attack. While it was sad about what happened to him on the property he purchased and lost, had there been regulations to stop anyone being able to sell and not care what they did to the purchaser, none of that would have happened. Perhaps your friend may have still passed away at the same time anyway due to other conditions, unrelated to this house purchase?
ANSWER: My friend did not die because of a wrap deal. Because of a wrap deal he died without owning the farm he loved so dearly, despite having made all the payments under the wrap contract and having built a home on the land at his own expense. His family were left almost penniless.
QUESTION: I have seen cases of people being able to use this system to gain proper finance in 12-24 months, and without using these systems, they would still be renting. Some have gone on after short times and purchased investment properties. Again, this would not have been possible without starting with a “wrapped” property. I also know a couple who were just plain careless with money. The vendor tried to help them over a 12 month period and they were not interested in fixing their defaults. The banks would have kicked these people out after 90 days. This vendor has given them over 12 months.
ANSWER: During a boom, when prices are rising, the dangers of wrapping are disguised. With falling prices and rising interest rates, thousands of battlers are now in grave danger. I am sure that wraps are going to become a huge scandal in the future.
QUESTION: On a final item, let’s assume vendor financing was banned. Would you still see it as not ethical to sell a house to a buyer, and only accept 80% of the contract price, if the vendor was willing to lend 25% to the buyer for 1-5 years, on a second mortgage (provided they had serviceability)? This would mean the buyer had their name on title and again the risks are much less for them.
ANSWER: This question shows how even the wrappers are confused and how they do not understand what they are doing. It is misleading to refer to wraps as “vendor finance”. I have nothing against a vendor financing part of the purchase for the buyer – provided, of course, that the buyer’s name is registered on the title and that the interest rate is not excessive nor the repayment provisions harsh.
QUESTION: It seems like the “bad stories” are only ever one sided. Vendors who kick people out of houses for being one day or one week late are just plain horrible people. People who I know that sell houses this way have never operated like this. It seems sad that you and some people in the media paint everyone with the same brush.
ANSWER: It seems sad that wrappers appear more concerned with protecting themselves than protecting consumers. The part I find most distressing about wrappers is how they often say, in public, that they are helping battlers. However, when you see what they say in private, a different story emerges. As one wrapper boasted when trying to get people to come to his seminar, “Every time I help a battler I fill my pockets with cash.”
The only method I would consider fair is as follows. The buyers must have their name on the title. The selling price must not exceed fair market value and the interest rate must not exceed current bank rates. Finally, all buyers must obtain legal advice from a lawyer of their own choosing before they sign anything.
That’s it. Simple – four little requests which provide adequate protection for consumers.
THE WRAPPING DEBATE