IRAs and Distressed Property

by Safeguard Financialwww.IRA123.com

IRAs and Distressed PropertyPart One:

Exploring the relationship between “distressed” properties and Self Directed IRA real estate investing.

For property owners who find themselves in a situation where the value of their real estate is less than what is owed on a mortgage, these are “distressing” times.

Usually, it’s a combination of declining values and the inability (or unwillingness) of the owner to

continue to make loan payments that causes a property to be classified as “distressed”.

To describe properties in various stages of distress, certain terms have become all too familiar to us…foreclosure, short sale and REO (real estate owned property).

Here’s a quick definition of each of the stages of distressed properties:

Foreclosure – usually means the owner has stopped making mortgage payments and the note holder or lender has given notice that unless payments are brought up to date, the property will be sold at auction, to the highest bidder.  The owner can bring the loan current and thereby avoid foreclosure.  However, if this doesn’t occur, the property may be sold for the amount owed, rather than market value, making the purchase attractive to investors.

Short Sale – occurs after a property is in foreclosure, but prior to a public auction. In this circumstance, a note holder or lender agrees to accept less than what is owed on

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the property.  This is especially attractive to an investor, since they are able to purchase the property for less than they would pay at a foreclosure.

REO – means real estate owned by the lender.  This is similar to a short sale, except the lender owns, and has taken possession of, a foreclosed property. Typically, the mortgage holder ends up with the property because the public auction did not produce an acceptable bid. Considered the best way to buy a distressed property, an REO eliminates the seller from the equation leaving only the investor, investor’s agent, the lender and the lender’s agent. Without the emotion of ownership involved, the transaction becomes purely a numbers game.

While it is unfortunate that real people are suffering real loss, it is a foregone conclusion that each of these stages of “distress” also signals an opportunity for the Self Directed IRA & 401(k) investor.

About 70% of our Self Directed IRA clients are focused on real estate investing and, not surprisingly, many of them are pursuing distressed property sales – in their own neighborhoods and in regions of the country where the fundamentals of economic recovery are in place.

We regularly work with investors who are picking up properties at significant discounts – often for less than it would cost to build.  They are then receiving excellent cash flow as rentals, or flipping the properties for handsome profits.  Best of all, they are actively growing their retirement funds with tax deferred or tax free gains by utilizing a Checkbook IRA or Solo 401(k).

If you’re a seasoned investor then it is likely that you are already participating in this segment of the real estate investing marketplace.  If you’re a novice, but recognize there is opportunity awaiting you, then you’ll definitely want to stake your claim in this area of Self Directed IRA real estate investing.

Knowledge is power…so goes the saying.  One of the best ways to succeed in distressed properties or any other form of real estate investing is to build a solid team – and thereby leverage the knowledge of experienced professionals.

Since some Real Estate Brokers are now “specializing” in distressed sales, it is advisable to hook up with one of these professionals…who has local knowledge. 

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They, in turn, will be able to recommend others, such as a competent real estate attorney who can make sure your interests are being protected.

When it comes to funding real estate investments with a self directed IRA or Solo 401(k), Safeguard Financial has you covered.  We have decades of real estate investing experience in house, as well as a solid understanding of how to properly work with banks, realtors and title companies to get deals done right.

Even with a top rate team in place, you need to be able to speak the language of “distressed property sales”.  Just like with Self Directed IRA investing, there is a wealth of information on the internet and we recommend you take full advantage of it. 

For your convenience, here are a few links that you will find helpful:

• Handling Short Sales Foreclosure Sale Basics Buying a Short Sale Home

• Distressed Homes in Default – Distressed Short Sales and Foreclosures

Part TwoThe advantages of being a cash buyer utilizing a Self Directed IRA or 401(k)

Cash is king…especially when it comes to buying “distressed” properties, including foreclosures, short sales and REOs (Real Estate Owned).

In today’s “upside down” real estate market, investors with cash have a distinct advantage over a competitor who obtains a mortgage to complete a transaction.  The cash buyer is much more flexible and has the

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ability to act quickly.  Owners and lenders who are involved with foreclosed properties love this combination.

But, here’s a little secret: Retirement investors who have set up a Self Directed IRA, or a Solo 401(k) plan with checkbook control, have the same advantage as a cash buyer. Not only is cash immediately available, but these retirement investment plans also offer flexibility and spontaneous transactional ability.

This is possible because retirement funds have been moved to a checking account whereby the owner is able to execute a transaction on behalf of their retirement plan and write a check, or obtain a cashier’s check… immediately and without the delays of a 3rd party review.

Many retirement investors question whether a Checkbook IRA (also known as an IRA LLC, Real Estate IRA LLC, Self Directed IRA LLC or Solo 401k) is necessary for investing in real estate.

Investments can be made directly from a Self Directed IRA custodial account. However, when investing in distressed properties, it simply will not work.  Reaction time is everything, and custodial paperwork/process is not well-suited for moving rapidly.

For more extensive information regarding custodial vs Checkbook IRA investing, CLICK HERE.

To illustrate the “cash is king” position, you need look no further than this article from the San Francisco Chronicle on August 23, 2009:

‘Cash Is King’ In Market For Foreclosed Homes

Since January, Jay Nielsen has put in 10 bids (on foreclosed homes); “some were up to $80,000 over asking price and were still turned down,” said Nielsen, 41, a medical assistant. Each time, the banks selected offers from investors with all-cash offers – even when those offers were lower than his, Nielsen said.

“Cash is king right now,” said Glen Bell of Keller Williams Realty in Berkeley. For foreclosed homes, “a cash offer that hits the target price will many times trump a higher-priced offer with a loan. The ability to close has become just as important to

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banks as price. The prospect of a property being tied up longer, still on their books and then falling out is costly.”

Escrow closes quickly and easily with a cash offer, while offers with a mortgage often take 45 days or longer to close, and can fall through if the financing hits a snag. The result is that average consumers say they are being shut out because they can’t compete against deep-pocketed investors snapping up homes to rent out or flip.

Read the entire article here: ‘Cash Is King’ In Market For Foreclosed Homes.

Part ThreeHaving the right plan in place before the investment opportunity arises.

During the course of a day, we receive at least one phone call from a potential client who is frantic to set up a Self Directed IRA plan in order to complete a real estate transaction that has already been set in motion.

This scenario has several potential downsides. First, it runs the risk of creating a prohibited transaction regarding mixing personal funds

with IRA funds (because of the down payment requirements). Secondly, if the investor has been aggressive in setting a closing date, there is a real possibility that the Self Directed IRA plan won’t be in place in time to make the closing.

Therefore, when it comes to taking advantage of purchasing “distressed” properties with a Real Estate IRA plan, the key is to already have the plan in place prior to engaging in a transaction.

Retirement investors who have set up a Checkbook IRA, or a Solo 401(k), plan with checkbook control, have the same advantage as a cash buyer.

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In an article in the San Francisco Chronicle dated Sept. 1, 2009, Carolyn Said, a staff writer, recounts the story of Nathan Foran who used his self-directed IRA to buy a dilapidated foreclosed house for $25,000 cash.

Foran plans to invest another $25,000 to $35,000 from the retirement account to fix up the property. He then hopes to rent it out for about $1,000 a month…money that will go straight into his retirement account.

Although Said doesn’t address the issue, Foran would have already had a Self Directed IRA, Checkbook IRA, Real Estate IRA or Solo 401k plan in place in order to acquire a foreclosed property. In fact, it is a foregone conclusion, since immediate availability of cash is required for such transactions and only a plan with checkbook control would afford this option.

The author of the article goes on to point out:

“With many properties at bargain-basement prices, more people have been turning to their self-directed IRAs as a ready source of capital to make real estate investments. Companies that manage self-directed IRAs say real estate investments by their clients are up as much as 30 percent over the past year.”

Further, she states that “Self-directed IRAs account for just 2 percent of the $4.2 trillion IRA market, but are among its fastest-growing segments. They allow access to a variety of investment vehicles beyond just stocks and bonds.”

“Most IRA real estate investors buy properties with all cash, the simplest approach”, Said points out. “If they don’t have enough funds to do that, they can partner with other IRA account owners, or even partner with themselves, for instance paying half from their IRA and half from their personal savings.”

Suzanne Gregg, an agent with Paragon Real Estate Group in San Francisco, has bought and flipped a couple of properties through her IRA and said she tripled her money.

“It’s not like you just buy a stock online and forget about it; it’s a little more hands on,” she said. “It’s a tangible asset you can see and manage.”

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As we have discussed, opportunities for picking up “distressed” properties abound. Yet there are 3 fundamental steps that should be taken in order to be successful:

Step 1: Education. Be able to speak the language of “distressed property”.Step 2: Put together a team of knowledgeable professionals to assist you.Step 3: Have the right plan in place prior to engaging in a transaction.

If you are serious about growing your retirement wealth through investing in distressed properties with your self directed IRA or Solo 401(k), contact one of our expert IRA advisors today. 

We will help you establish an investment plan that will enable you to be ready to act on opportunities quickly and gain the best deals.  Our experienced and professional team will have your Checkbook IRA or Solo 401(k) up and running in 30 days or less with the fastest, turn-key setup process in the industry.

Visit www.IRA123.com for more information of call 1-877-229-9763.

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