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May 1st 2003


Comment by Neil Jenman

In all the glory and greed of the wealth created by the accelerating real estate boom, many battlers have been left behind. While property prices have soared, the percentage of Australians buying their own home is unchanged. The boom seems to have doomed many people to a lifetime of renting. Enter the new real estate heroes kind-hearted investors ready to help battlers.

And welcome to Real Estate WRAPS, a method taught to would-be investors by the get-rich-quick gurus.

WRAPS are touted as a great way for battlers to buy homes. "Look for the Norm and Sheila," types, says one guru to investors. These schemes are also known as Vendor Finance. They are hailed as breakthroughs for investors. In reality, they have been around for years. Back in the 60s and 70s, they were known as Terms Contracts. Or 'termies' for short.

Critics accuse these 'wrap investors' of preying on the poor and the gullible. The investors say they are helping battlers. And most righteously too. One advertises himself as 'the Aussie Battlers' Hero', a description he claims was used by a television program. This investor has now chosen to become a guru himself. He is so kind he has written a program to show other budding investors how they too can be heroes to battlers. "Each time I help a family out, I earn a 5 figure pay cheque," he boasts. "Fill your pockets with thousands of dollars", he adds. Send me your money and I'll show you how. Yeah, a real hero.

Wrap investors say WRAPS is a classic double win (a much-abused expression meant to convey that everyone wins, but which often means one person wins double while another loses everything). And this is exactly what can happen to battlers when they get involved with WRAPS.

Here's how the scheme operates: The investor advertises for battlers. A catchy ad may say: "Can't get finance? Only got a low deposit? Help available." Often, these investors don't have a home to sell at the time they place their come-on ads. First they must find a suitable battler and then they find a home. A sort of reverse dummy bidding in the investment market. Use a dummy home to attract battling renters who dream of owning a real home.

Having found the battlers, the kind-hearted investor buys a home and gets a loan. Let's say the investor pays $100,000 and borrows at a 7% interest rate. The investor then "sells" the home to the battlers (but does not transfer title) for, say, $130,000. The investor becomes a de-facto financier, effectively charging the battlers a 9 or 10 per cent interest rate. Instead of the battlers simply paying rent, they essentially pay inflated interest on the inflated price to the investor. The theory goes that they can, one day, pay the balance of the money to the investor who will then transfer ownership to the battlers. Provided they don't slip up and miss a payment. In which case, the deal is off, the battlers are out and the investor steps in and takes the home, together with reaping the benefits of any improvements made by the battlers. Depending on the terms of the agreement (and any applicable law), the investor may also be able to keep all the money paid by the battlers the inflated payments on the inflated interest rate, together with the deposit or option fee squeezed from the battlers when they moved into the home.

But even if the battlers never miss a payment to the investors, they are forever at great risk. These battlers are the paper link in an iron chain constructed as follows: The battlers make payments to the investor and the investor makes payments to the investor's lender usually a bank. If the battlers pay the investor but the investor does not pay the bank, the battlers lose everything even though they have done nothing wrong. The bank steps in and kicks out the battler. The investor keeps all the money paid by the battlers the inflated payments on the inflated interest rate, together with the deposit paid by the battlers when they moved into the home.

Kind-hearted investors? Heroes?

No. More like real estate pawn-brokers from a Dickens novel.


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