With the economy what it is, many investors are trying alternative strategies to acquire real estate. One strategy is to buy a short sale, in which the owner or an attorney representing the owner has negotiated with his lender to sell a property for less then the amount owed on the mortgage. This allows the lender to get the property off their books and the buyer to hopefully find a great deal that will make him money in the long term.
Let me give you an example of how a short sale can work in a real estate IRA.
Bob bought a property in 2007 for $400,000. It was at the height of the market in an area that was not the most desirable, and in a state where foreclosures were commonplace. Circumstances for Bob changed. He lost his job last year. The balance on his mortgage at that time was $299,000. He could no longer afford the payments on his mortgage.
Bob tried to renegotiate his loan with the lender, a major banking institution, so he could make more affordable payments and stay in the property. Unfortunately, the bank denied his request for a loan modification as Bob no longer had a job or the income to support his almost $2,000 a month payment.
Bob had no choice but to either short sell the property or let it go into foreclosure. He listed the property with a Realtor at a price which the Realtor felt it would sell.
The Real Estate IRA as Buyer
Sally is a real estate investor. She liked Bob’s property as a potential investment but did not have the cash to personally to enter into a contract. She decided to use her IRA to acquire the property. She wrote an offer in the name of her IRA through the Realtor who took this to Bob and his attorney. The attorney negotiated with the lender on Bob’s behalf. Sally ended up writing a contract to buy the real estate in her IRA for an agreed upon amount.
After waiting for three months, the bank approved the offer. Sally’s IRA became the proud owner of a property with a $200 per month positive cash flow and a chance for appreciation.
We have clients at IRA Innovations who buy investment real estate with their IRAs and have done short sales with the banks to acquire these properties at discounted prices.
The rules to buying a property through a short sale, pre-foreclosure or an actual foreclosed/REO in an IRA are the same as conducting a traditional acquisition. The purchase contract has to be written from the start in the name of the IRA. In Sally’s case, it would be written as IRA Innovations for the benefit of Sally’s IRA #——-.
Lenders do approve short sales in the name of an IRA. Don’t be afraid to use this as a strategy to build your wealth tax-deferred or, in the case of a ROTH IRA, tax-free.
We at IRA Innovations do not give investment advice. It is important for the IRA owner to know what he is buying, do his own due diligence and understand the process. If you have any questions about how to do a short sale in your IRA, feel free to contact us at www.irainnovations.com. We are here to help!