Entrust New Direction Blog

Many Realtors® and Real Estate Investors have been upset and up-in-arms this summer about bill HR1728, which passed in the House and is in process in the Senate.  This bill has admirable, if late, aspects aiming to prevent predatory lending.  That's not what makes many Realtors' stomachs churn.   The bill also takes on seller financing, which is increasingly utilized in a credit-desert environment like ours today.

Seller Financing allows the buyer and seller to work out a deal on payments, frequency of payments and interest rates, independent of banks or professional mortgage companies.  Seller Financing is what allows a self-directed IRA owner to lend money on real estate and create passive income for their IRA.  These deals happen thousands of times each year by real estate investors, IRAed or not.  Many real estate sales could not have happened in this credit-crunch environment without seller financing. Under this bill, an individual is only allowed one seller-financed deal every three years, or else register as a lender.  This is, to say the least, a complicated process.

The National Association of Realtors® initially supported the bill.  From their newsletter May 11, 2009: "NAR is supportive of this bill because it protects both the consumer and housing sector."

However, the NAR swung on this issue.  The latest "news" comes from correspondence from NAR clarifying their position.  The NAR reports that the Senate Banking Chairman, Chris Dodd, indicated that “this issue is not on his ‘mustdo list’".  

I would like you to take the following two messages from this e-mail and NAR. First, the bill looks like it will die due to inactivity in the Senate. Meaning, these requirements, which are not in effect, will not go into effect anytime soon. Second, if the bill begins to move in the Senate, NAR will work diligently to have a full exclusion for seller financing added to the Senate's version of the bill, or increase the limitation so it does limited harm to consumers that have to utilize this type of financing.

This is one case where congress's tortoise pace might be to our benefit as real estate investors and Americans.  

Photo courtesy of MiiiSH.

It's not news that banks these days are about as popular as a thundercloud at a solar car race. And why should banks be popular now (or ever)? The one good thing banks ever did for the regular Joe and Jolene was loan money. When you wanted a new car but couldn't afford it, or a bigger barn for your dairy cattle, or a new addition for the new addition in the family, or, these days, a home of your own at all, detached or not - the bank lent you the money, with interest. I always thought that this was how banks made their money. Boy was I wrong.

How Banks Make (Made) Money

Sure, banks may take some interest money in, but their major source of revenue is investment. You've heard the adage, "It takes money to make money". Well, banks had money, all right - our money. And they made money on all sorts of investments that may have been listed grade A, but clearly were grade F or G. In meat quality grading terms, you wouldn't feed that to the racoons (unless you really don't like racoons).

The Credit Snipe

Now, when banks could be making interest money on business, home and car loans, they're too scared to provide credit. This is where you and your self-directed IRA fly into the scene, your cape waving in the wind, a big blue B on your chest.

Your self-directed IRA can save the day! Three scenarios where your retirement fund can be a better bank.

1)After a close loss, the first baseman from your softball team confides that he's paying 15% interest on his Giganto TV loan. Happily, you confide in him that you can pay off his loan and lower his payments. Your IRA will earn 10% interest tax-deferred or tax-free.

2)Your next door neighbor was trying to get ahead of the game with fix 'n' flips, but his last fixer-upper didn't flip. He tells you that he doesn't want to foreclose and he can't rent it for as much as he needs. What he needs is a bridge loan from your IRA, just until the housing market picks up a bit. He's happy to pay less than his current ballon loan, and you're happy that your IRA will earn 8% returns.

3) The sweet older lady who owns your neighborhood craft shop confides in you that The Kraft Nook may not be providing knitting needles and painted pine cones for long. Why? Her business relies on monthly loans so her shelves can be full of popular hobby helpers, but not brimming with the flourescent orange yarn that nobody wants. Your IRA can save the day.

Think about who you know and what they're paying interest on.  Most likely, you know someone who needs your IRA to be a better bank. 

Learn more by registering for these free webinars, Learn the Secrets the Bank Doesn't Want You to Know From a 15 Year Veteran and Overcoming the Top 5 Fears of Private Lending.

Behold the lever, first described in 260 B.C. (or so the historians say) by Greek mathemetician Archimedes.

The lever has helped people accomplish more than they thought possible. I imagine the first time a lever was used, it seemed magical.

Behold the lever, 2009:

Using a self-directed IRA, you can more than double your buying power if you use leverage to purchase real estate. More and more banks are learning about self-directed IRAs and offering loans for purchasing real estate. Because the loans are non-recourse (only secured by the asset), a loan to a self-directed IRA is the most secure option for a bank (and for the IRA).

Of course, some restrictions apply:

1) The loan must be non-recourse, which means your personal credit, and the rest of your IRA does not apply to the value of the loan - only the property does.  In the case of defaulting on the loan, the bank takes over the real estate.

2) In most cases, the property must be income-producing.

The down payment is usually in the neighborhood of 40% of the value of the property.  This means you more than double your buying power, which means you could increase the value of your retirement money (or make up for stock losses) faster.

Contact us if you have questions or view this helpful FAQ.