Retirement Funds May Open New Doors
Self-directed IRAs can provide the funding answers that brokers’ clients seek
By Tom Anderson, president and CEO, PENSCO Trust Co.
Tightening credit and continuing foreclosures have contributed to a decline in opportunities
for mortgage brokers. Although the federal
government has made numerous attempts
to shore up major banks and lending institutions — with many programs under way —
it’s clear that mortgage brokers must find
new ways to deliver value to borrowers.
Despite the current dearth of available
credit, new countercyclical opportunities
are taking shape. These developments will
continue to occur as regulators apply limits
to the scope and breadth of lending levels,
ratios and practices in an attempt to moderate real estate markets and avoid future
crashes. Gone, for example, are the days
of low downpayments, even for borrowers
with FICO scores of 800 and greater.
With lenders under extreme pressure to
bolster their balance sheets — and taking
on new liabilities while experiencing record
foreclosures and asset devaluations — it’s
time for brokers to get creative. One way to
do this is to look to retirement accounts.
Mortgage brokers might not realize
that retirement accounts can fund real estate purchases. This lack of knowledge isn’t
surprising considering that credit was easily
available for most of the past two decades.
With Fannie Mae and Freddie Mac now under government conservatorship, however,
creative financing from traditional sources
will be obsolete. Moreover, as investors continue to shy away from the stock market,
many will look to self-directed individual
retirement accounts (IRAs) for alternative
Mortgage brokers should be ready with
knowledgeable advice and strong support
for clients. This means knowing the intricacies of using IRAs for real estate investing and choosing a well-qualified IRA
custodian to help.
Whether IRA investors can self-direct
their funds — something that can be done
with traditional and Roth IRAs — depends
on account-custodian rules. Transferring
accounts is possible and can take two to
Many investors in today’s market have
experienced losses in the past two years.
At the same time, they understand that
today’s depressed real estate prices won’t
last forever. Investors who can purchase
on an all-cash basis are gobbling up short
sales and real estate owned (REO) property in levels perhaps never seen before. In
some parts of the country, more than half
of recent real estate purchases have been
of foreclosed properties.
By understanding how retirement accounts, specifically self-directed IRAs, can
“Using self-directed IRAs to buttress clients’ existing
cash reserves can lead to success for those who take
the time to learn these investments’ intricacies and
who work with a knowledgeable IRA custodian.”
qualify buyers for these below-market purchases, brokers can help their clients capitalize on today’s prices and enjoy their own
returns, as well. Choosing an IRA custodian is one of the most-important steps.
IRA custodians make it their business
to understand the rules regarding real estate and debt investments made through
IRAs. The best custodians also provide
brokers education and support along with
the servicing necessary to execute transactions correctly and expeditiously.
When choosing a custodian, brokers should seek a regulated financial institution with a good track record and
downpayment — must be made on an all-cash basis to avoid violating the self-dealing
rules associated with retirement accounts. If
the IRA investor is not related to the prop-erty-buyers, however — or is a distant relative — then leverage can be used to close
the deal with a co-tenant purchase.
Often, an eager IRA investor can satisfy
the balance to make an all-cash purchase.
With an REO or short sale going for less
than market value — along with the possibility that the property will produce positive cash flow with a paying renter — many
IRA investors are willing to take a second
position for a reasonable return, especially
in today’s market.
To consider a more detailed example,
imagine a husband and wife who want to
buy a San Francisco condominium listed
at $700,000. Upon revealing to their mortgage broker that they can make a $40,000
downpayment, the couple learn that they
need another $40,000 down, which they do
not have. The broker asks if they have any
friends with an IRA who might be willing
to take a second position for an above-market-rate yield.
The couple find a close friend who is
willing to lend them $40,000 at 12-percent
interest for five years. The broker reruns
the numbers by a lender and reports that
the lender is willing to move forward with
an $80,000 downpayment — including
the friend’s $40,000 secured second mortgage, which the lender could take out in
the event of foreclosure.
This deal can benefit everyone involved.
The buyers close on the property, the seller
unloads the property, the mortgage broker
earns commission, the lender earns fees and
puts a strong loan on its books, and the IRA
investor locks in a 12-percent return.
In some more-complex cases, investors
manage limited-liability companies owned
by their own IRAs. These arrangements
can allow investors to get nonrecourse
loans from IRA-owned properties to provide financing for additional purchases.
In other cases, investors can get creative
by working with lenders on downpayment
amounts and placing funds in escrow while
certain conditions are met.
Investing in today’s economy is more of
an art than a science. Brokers who provide
creative financing solutions in a tight credit
environment can better help their clients.
Using self-directed IRAs to buttress clients’
existing cash reserves can lead to success
for those who take the time to learn these
investments’ intricacies and who work with
a knowledgeable IRA custodian.
Illustration: Dennis Wunsch
Tom Anderson, president and CEO of PENSCO Trust Co., is a nationally recognized expert, author and speaker on the topic of self-directed individual retirement
accounts (IRAs). Anderson has contributed to articles in numerous national
magazines. He has testified before the Internal Revenue Service and the U.S.
Department of Labor on IRA-related matters and has participated in a financial
forum that reported its findings to the Obama administration. Reach Anderson at
email@example.com or (800) 969-4472, ext. 5608.
knowledgeable employees. Brokers also
should ensure that the custodian charges
a reasonable fee. Generally speaking, the
fee should not be more than four-tenths of
1 percent annually on assets held in custody. After teaming with a good IRA custodian as a resource, brokers can begin to
help their customers seek and close deals
that rely on self-directed IRAs.
Let’s look at a hypothetical example. Suppose you have clients who want to buy an
REO property but can afford only a 20-per-
cent downpayment. The bank holding the
property will be unlikely to refinance the balance against a property already selling below
market value. Clients could get the additional
capital from their own retirement account or
from a loan taken against someone else’s retirement account.
If the clients use their own retirement
account or that of a direct relative, the purchase — using the combined resources of
the retirement account and the clients’ cash
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