A new trend is emerging from the nation-wide real estate slump: An increasing number of investors with self-directed retirement plans are seizing the opportunity to buy bank-owned properties at depressed prices, using money from their IRAs.
Bank repossessions, or REOs, account for 30 percent of total foreclosure activity in the second quarter, according to RealtyTrac(R). Along with foreclosure activity increasing around the nation, there has been a spike in investors buying all types of foreclosed real estate with IRA funds.
The western states are among the hot spots for investors taking advantage of the chaotic housing market and downward trend in prices by purchasing property with their self-directed IRAs.
The IRS allows all types of real estate to be purchased by an IRA, including single- and multi-family homes, timeshares, rental property, office buildings and tax liens. Because the property is held within a retirement account, investors must follow IRS rules about this type of asset or run the risk of having their entire IRA disqualified. For example, an investor cannot live in the property once the IRA has made the purchase and all expenses for the property must be paid for with funds from the IRA. More information on IRS rules concerning IRAs can be found on the IRS Web site at www.irs.gov.
IRA owns property if mortgage foreclosed
Holding deeds of trust/mortgages has also become a popular alternative, which has led to another trend: A larger percent of investors who purchased deeds of trust/mortgages with IRA money are ending up with not just the note but the property, due to foreclosures. From April to July of this year, Fiserv Investment Support Services, which acts as the trustee for self-directed retirement plans, recorded 37 instances in which the deeds of trust/mortgages held as assets in client accounts were defaulted on. Clients then foreclosed upon the property and now own the actual property within their IRA. Last year during the same time frame, only one or two clients foreclosed on deeds of trust/mortgages.
Investors interested in holding deeds of trust/mortgages in their IRA should be aware of this possibility and find a trustee that can also hold real property, in case a foreclosure ensues. An experienced trustee can make the process seamless from holding a mortgage in the IRA to owning the actual property.
Lenders tightening up on loans for real property in IRAs
The record number of foreclosures is also causing lenders to tighten their requirements for investors interested in getting a loan to buy real property with their IRA. Today it’s typical for lenders to require a 35 percent down payment, which must come from the IRA. Per IRS regulations, the lender must lend money to the IRA entity, not the investor. If the IRA defaults on the loan, the only recourse the lender has is to take ownership of the property. Despite the crack down by lenders, IRA owners are still finding it possible to obtain these loans through some national lenders, as well as private money lenders and local banks. Sometimes the property seller is also willing to act as a lender.
For individuals who find real estate to be an appropriate investment for their portfolio, the key is having a self-directed IRA with a trustee that allows real property to be held as an asset within the account. Investors should choose a trustee that has experience administering real estate in retirement plans, is familiar with IRS laws and can answer questions about this type of investment. The right custodian will be able to help every step of the way to make the real estate transaction an easy process.
About the Author: Sean Gultig is the vice president of IRA Services with Trust Industrial Bank, also known as Fiserv Investment Support Services (Fiserv ISS). In 2007, Bob Beriault, president and CEO of Fiserv ISS, agreed to purchase Trust Industrial Bank from Fiserv Inc. This transaction is anticipated to close later this year, once FDIC approval is obtained. Through its management, employees and predecessor entities, Fiserv ISS has over 30 years’ experience administering real estate in self-directed IRAs. You may contact Mr. Gultig at Sean.Gultig@FiservISS.com.