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Wraps

June 20th 2003

REAL ESTATE 'WRAPS'

CONSUMER LAWYER ON 'WRAPPING'


This article first appeared in February 2003 . Reprinted by request.

REAL ESTATE 'WRAPS'
by Tim O'Dwyer

If you are desperate to own your own home, be wary of a breed of real estate racketeers out to profit at your expense.

Recently Channel 9 Brisbane's EXTRA program ran a segment on a businessman buying cheap houses and "onselling" them at higher prices to folk who couldn't even dream of getting normal finance. He continues to own the houses he has bought and purportedly onsold, and makes repayments to his bank, while his "rent-buyers" are charged higher interest rates than his bank charges him. With a roof seemingly happily over their heads, his customers hope that one day they will get real loans to complete their purchases from him.

You may have seen the newspaper adverts in the real estate pages: "… you can buy now on low deposit, easy owner-finance …," "… low start option …", "… owner will finance. Low deposit. Low weekly payments …"

GET INDEPENDENT ADVICE
Some people with poor financial histories are being preyed upon. If they slip up on their payments, they lose their option to buy, the owner keeps everything they paid and can then re-sell the property to the next hapless hopefuls. If you are thinking of selling to one of these mercenary middlemen or you are wanting to buy a home and are tempted by their dodgy "don't rent" spiels, make sure you first get your own independent legal and financial advice.

In July 2001 property writer, Maurice Dunlevy, wrote an article for The Weekend Australian on "wrap-around mortgage schemes" being promoted through the wealth-creation seminars. Wrap-around mortgages might be the new form of private real estate finance, Dunlevy wrote, but judging by the reaction of one state government they are a scheme we could well do without. Dunlevy reported that the West Australian government was leading a push against wrap-around mortgage schemes. "Wrappers" stand to make big profits, Dunlevy explained, using a model touted at get-rich-quick seminars: a $100,000 property is resold for $120,000, and a 6.66% variable home loan rate becomes 10.66%. Monthly repayments on the original 25-year loan are $685.00 but the second purchaser pays $1146.00 a month on $120,000 loan.

REGULATOR'S CONCERN
West Australia's then Ministry of Fair Trading expressed concern about the schemes, complaining that such transactions left homebuyers exposed to significant risk. Then Fair Trading Commissioner Patrick Walker said the Ministry was examining cases of "wrapping" which followed a model promoted at wealth-creation seminars. While there were no apparent breaches of real estate laws, the Ministry was looking at offences under consumer credit legislation.

"My greater concern is that wrapping can be used to take advantage of people who are desperate to buy, have little financial acumen or are a credit risk and therefore are unable to obtain finance through reputable lenders," Mr. Walker told Dunlevy.

IF THE WRAPPER DEFAULTS
If the wrapper defaults on his mortgage, the end-buyer can be in serious trouble even if they have made all their payments to the wrapper. According to Dunlevy wrap-around mortgage originators were also active in Queensland and Victoria. He quoted publicity material from one mortgage company claiming to "open up the world of home ownership" to would-be buyers. The company boasted that bankruptcy and bad credit would not disqualify buyers from purchasing property through its program of home ownership made easy. The company said it acted as a third party to ensure that rent-buyers and owners did "the right thing contractually".

VIEW OF A FINANCIAL COMMENTATOR
A commentator for a financial magazine offers these thoughts on "wrapping": "Virtually anyone - even people who really shouldn't be undertaking substantial financial commitments - can own a property these days, given the 'no deposit' or 'miniscule deposit' deals promoted by developers, plus the growing range of sub-prime lenders who specialise in lending to people who can't get ordinary mortgages. Some of these sub-prime loans are at pretty reasonable terms (given the higher risk), so you'd really have to ask why anyone would need to buy into a wrapped property, and miss out on the legal protections they would have with such a loan with normal Consumer Credit Code protection.

Therefore, while wrapping deals might look good on paper (assuming you have no ethical problem with profiting from people in weak financial circumstances), you'd really be scraping the bottom of the barrel in terms of the 'credit risk' of the people who would occupy the wrapped properties. If they cannot get any better form of finance and have to get into a 'wrapped' property, they are probably people who will have problems with financial commitments. In other words, these wrapped deals might be much more hassle in the 'real world' than the seminar gurus would have people believe."

PROPERTY ACTIVIST'S CONCERN
Describing me as a "Brisbane lawyer and property activist" Dunlevy in his article said I was concerned about the close relationship between real estate agents and scheme promoters. Too many real estate agents have been too keen, in my view, to make quick commissions by selling vendors' lower-end-of-the-market properties to wrappers. "Anyone approached to sell their house should ensure they are getting the highest possible price", I said. "The best advice I can give to anyone desperate to own their home, and thinking about a wrap-around mortgage, is to stay renting."

WARNING
If you are an investor considering using a "wrap-around" - my warning to you is this: find a more conscionable way to make your money, pal. And watch out you aren't breaking the law, because when your naοve rent-buyers have second thoughts and seek out, independent legal advisers, their shrewd and consumer-concerned solicitors will be looking for the loopholes, the illegalities and the ways to make you pay!

[Tim O'Dwyer is a Queensland solicitor and consumer advocate.
watchdog@argonautlegal.com.au]
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