Jenman - Find an Agent you can Trust logo
phone icon 1800 1800 18

Reading Time:

4 minutes

Published:

02 December 2003

Wrapping

What’s the issue?

Hi Neil,

I log in to your website almost every day. It is shocking that such corruption can be allowed to occur right under the noses of the ACCC and ASIC. The regulating authorities don’t need more power, they just need to start using the power they already have!

I have just finished reading Steve McKnight’s book “0-130 Properties in 3.5 Years”, and it was an excellent read.

I specifically wanted to ask you a question about wraps, which as you know is Steve’s favoured “wealth creation vehicle”. I understand your stance on wrapping. I also understand why you take this position – there is just so much room for unscrupulous people to take advantage of others who are struggling financially.

My question is – if you went about wrapping the way Steve McKnight preaches it (i.e. full disclosure, win-win outcomes, etc), what is the issue?

If you can keep the “client’s” repayments below the amount they would otherwise have been paying in rent, and if you explain to them the risks of the property market declining and the value of their house not appreciating, surely there would not be an ethical problem?

Is your standpoint based on the theory that although SOME people would do it ethically, there is just too much risk of unscrupulous practices?

Please advise – I would really appreciate your thoughts and advice.

RESPONSE

In a rapidly rising market, wraps can indeed give the appearance of being beneficial to both parties – the wrapper and the wrappee. The wrapper gets a handsome profit and the wrappee appears to get a home which increases in value beyond the initially inflated price.

However, regardless of market conditions, there is always a dangerous risk for the wrappee. If the wrapper does not make the payments to the bank, the wrappee gets kicked out. It’s that simple – and that horrible. It doesn’t matter how long the wrappees have been in the home, it doesn’t matter how much work they have done to the home, it doesn’t matter if they have always paid their payments on time, the threat of losing the home, at any time through no fault of their own, remains with them until they either refinance with a traditional loan or make their final payment to the wrapper. This could take 20 years.

I concede that not all wrappers intend to harm or exploit battlers. Indeed, I have spoken with Mr McKnight and believe he is well intentioned. However, whether someone deliberately or unintentionally places another in danger, it does not remove the danger.

The simple truth is that wrapping is high risk for the wrappees.

I do not like to refer to wrappees as buyers because, until such time as they pay out the debt to the wrapper, they do not have their names on the title of the property. Therefore, they do not have the same rights as traditional buyers. They are little more than tenants paying increased rent with the chance that one day they may own the home – provided, of course that nothing goes wrong with the wrapper. In which case, they lose everything.

Wrapping is an unethical system. As with incest, it can’t be made right.

Also, it is misleading to refer to wrapping as vendor financing because, as I have said, the method of financing denies the wrappee the rights they would normally enjoy with a traditional loan.

The only way to make wrapping ethical would be to grant the buyer a loan under the traditional manner. Whether the loan comes from the vendor (which is true vendor finance) or from some other source, it doesn’t matter. What matters is that the wrappee’s name is on the title.

But then it would no longer be wrapping. It would be home buying. And the wrappers would be out of business.

Neil Jenman

Footnote – I disclose my personal experience with wrapping. Click here
.

Those who read this story have often referred to the lawyer as unethical. He may well have been a rogue. I don’t know. It doesn’t make any difference. If he had been the nicest lawyer in town, the result would have been the same. My friend would have still have lost his home.

***************
If you wish to send a question or comment to Neil Jenman you are most welcome. Neil tries to read every e-mail and respond personally. We have posted some of the common questions together with those we feel may help you. Thank you for your interest.
Share this:

Comments

Comments

Leave a comment

Your email address will not be published.
Required fields are marked *

Subscribe to Neil's Consumer Alerts

Enter your email and each month we'll send you information and tips on the real estate industry and advice on how to avoid the tricks and traps when buying and selling homes.