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October 12, 2008 at 08:00 PM
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.
