Real Estate – Putting Those Profits Where They Belong in Your IRA Account & Your Pocket!

I’m going to talk about my favorite subject in a little more detail today…Real Estate, and how it can put more of that green stuff where it belongs…in your wallet!

A self directed Roth IRA invested in real estate allows the owner to keep more profits in the account, rather than handing them over to the government. Some of you may have little knowledge about purchasing real estate in your IRA. Many people still think that the only investment options are stocks and bonds or certificates of deposit. Well, there is a lot more that you can do!

Whether you want to buy raw land, single family homes, commercial property, an apartment building or a mobile home, you are surely hoping to make a profit. You may want to hold the property for several years and wait on the value to grow or you may be a rehabber, planning to flip the property for a quick profit. Either way, the self directed Roth IRA invested in real estate has several advantages, and here are a few.

First, there are no capital gains taxes. All returns are either tax-deferred or tax-free, depending on the type of account that you have and the withdrawals that you make. Purchasing real estate in your IRA can be easy. It just takes some time and knowledge, as well as the right custodian.

Many brokerages will not handle a self directed Roth IRA invested in real estate. It’s not that the IRS doesn’t allow it. The laws regarding retirement accounts allow people to invest in almost anything. It’s just not a traditional investment type and most brokers are not familiar with it. And, you would be better of to choose someone who is.

So, in order to begin purchasing real estate in your IRA, you need to find a company that is familiar with the option. Otherwise, you could run into problems down the road. Let’s say that you decided to let the new broker down the street manage your account.

You knew about the advantages of a self directed Roth IRA invested in real estate, so you took the plunge and bought a single family home, using funds from the account. The property is held in your custodian’s name and all income and profits are returned to the account.

Your son needed a place to live, so you decided to let him rent the property, since it was vacant. Being unaware of the self-dealing rules, the custodian allowed this to go on. Once the IRS saw that rental income was going into the account from one of your relatives, the account was audited, the tax-deferred status was lost and you were forced to liquidate the account. Why?

Because one of the rules about purchasing real estate in your IRA is that family members may not live in the homes that you buy. You can’t even buy a house that you plan to live in after retirement and hold it in your retirement account. It all falls under the self dealing laws and if your custodian is unfamiliar with them, then you will become the loser.

If you have knowledge and expertise about buying and selling property, then a self directed Roth IRA invested in real estate is simply another way to grow your portfolio. If you need to learn, there are people who can help. So, get some help and start investing in your future.

Joe Fazchas is a Real Estate investor as well as owner and founder of, a company that partners with private individuals and lending corporations nationwide for the sole purpose of financing and/or rehabbing investment properties. All of which is done using a proven “turn-key” Real Estate system…The ILOC IRA.

TACT Program – Solving the Real Estate and Banking Crises is Simple

There have been numerous articles and books written on the theories or reasons behind the residential real estate bubble and its bursting in 2006, which led to what will likely be remembered as the Great Recession. I can add that I am not one of the parties that share the blame. I was living in Europe from 1994 – 2007 and did not even own real estate in the US during most of that time period! Chalk that up to luck, not prescience.

I would like to focus on what can be done to get out of this mess. The answer is surprisingly simple, although as so many things in life that are simple, it will not be so easy to implement due to the number of banks and organizations involved. They need to change or eliminate the policies, guidelines, and artificial barriers these organizations created to stop the free market from correcting the situation.

The easiest way to understand the solution, is to realize that a bank’s balance sheet is far stronger when it has a performing mortgage loan, rather than a bank owned (REO) property on its books. A REO property is in reality a liability to the bank, inhibiting its ability to borrow and lend. A performing mortgage loan is an asset that can be sold in the secondary market, or used to borrow against to make more loans. The situation is similar when a bank has a performing mortgage loan (even at a lower face value), rather than having a non-performing loan that exceeds the value of the real estate backing it.

In the simplest terms, the solution is for the banking industry to use some of the same strategies as real estate investors currently use since bank loans are not available. Investors whose livelihood depends on the returns they earn on their invested capital, do not wait until a buyer comes along with the ability to get financing. With few mortgage loans being made, there are very few such buyers. The investors package financing in with the property sale to have a competitive advantage. The only step the banking industry took in this direction over the last year was their proposal to allow former owners to stay in their homes as renters. The banking industry lacks property management skills, so they picked the worst strategy to try. The banking industry needs to focus on providing financing to sell the homes, not to get into the rental business.

I have been working on this solution for 18 months and so many naysayers told me it could not be done, that I initially believed them. Fortunately I heard about a gentleman across the country that had been working on the same concept. He had sufficient success acquiring bank owned properties from small local banks, that he started holding seminars on the topic. He coined the phrase “Bank Seller Financing” and pitches it as a great way to acquire properties. He appropriately cautioned that this was not a phrase that would get a positive reception within the banking industry, since “seller financing” was viewed as competition by mortgage lenders. I am indebted to Michael P. Watson and his seminar for rebuilding my determination to expand this simple solution to resolve a massive problem – the US housing market crisis.

Let me summarize the US residential real estate market issues, as if there was a US real estate market. In reality there are many sub-markets with varying degrees of these problems and opportunities. Detroit, Cleveland and Buffalo (where I was born & raised) are very different real estate markets than Las Vegas, Los Angeles, Phoenix (where now I live and invest), or most metro areas in Florida. The key issues are:

– property values have declined, in some markets precipitously,
– many homes are now below their mortgaged value, and far below their “market value” during the bubble,
– banks have too many properties they own due to foreclosure,
– banks are faced with many non-performing loans and the prospect of even more foreclosures,
– some counties (like Maricopa County where I invest) are sending out ridiculously low assessments for 2011 and scaring more homeowners into turning their keys over to their lenders, and
– with the current high unemployment rate the majority of people believe that real estate prices will continue to decline, despite evidence to the contrary.

As a case in point, I was shocked when investors at a recent meeting of the Arizona Real Estate Investors Association (AZREIA) were polled about whether they believed housing prices would fall further, are near bottom, or are rising. Approximately 75% felt they would decline, 14% said it was at or near bottom, and 1% (including me) felt they were rising. All of those investors have access to the same very detailed market data, so I was shocked how differently we each filter that data based on what the media and the gurus are saying.

Back to the issues, there is one key issue which is both the crux of the problem, and the crux of the solution. There is not enough money available to make mortgage loans to meet demand. Ask your friendly bank executive if money is available for mortgages and they will give you the party line – “yes, we are lending every day and have plenty of funds available”. Publicly available data on lending, current underwriting requirements, and government issued guidelines give a totally different answer. The truth is banks do not have sufficient reserves to make enough loans.

Since banks are not lending, hard money lenders and private mortgage lenders (like my company) cannot even meet 20% of the investor demand for loans, despite charging annual rates of 12-18%. If plenty of mortgage money is available, why do I get daily requests, far exceeding our capacity, for Private Mortgage Loans, Transactional Funding, Seller Financing, Contracts for Deed, and our Lease-to-Own program? Trust me, it is neither because of my good looks, nor because I offer rates below government subsidized bank loans.

Many people believe that demand for real estate is low, and that is depressing the market. The opposite is true in many markets. In the Phoenix market, sales in 2009 and so far in 2010 were on par with the peak years of 2004-2006. Pending sales are now at levels that make those earlier years look like slow periods. Incidentally, during the peak years the Town of Buckeye, where I live, was the fastest growing housing market in the US. By 2008 the bubble burst and about 90% of the properties for sale were distressed sales. Like the rest of the Phoenix market, sales now exceed the peak years, and I have prospective buyers asking for our financing help daily since they can’t get bank financing.

The solution to the real estate and mortgage crises is simple, and it is not new and stronger regulation. To the contrary, the more the government meddles the worse things will likely get. The banking industry, and I include the mother hens in FHA, Fannie Mae, and Freddie Mac along with the banks, need to eliminate the self inflicted policies they imposed and barriers they constructed after the real estate market collapsed. These policies are analogous to locking the doors once all the horses escaped.

I recently submitted a number of purchase contracts on bank owned (REO) and short sale properties (with non-performing loans). So to those that say there is no demand – I am ready and willing to buy hundreds of properties that meet my cash flow requirements, if the financing is available. There are another 100 investors like me in the Phoenix area flocking to the auctions, bidding on REO listings and on short sales. If financing were available, prices would be rising even faster than the 13% year-over-year increase we saw in April. That was not a misprint; Phoenix area prices rose 13% since April 2009!

Here are a few of the barriers to mortgage financing:

– REO properties require high reserves, inhibiting lending,
– non-performing loans require accruals and reserves, further inhibiting lending,
– bank REO, short sale and mortgage modification departments are understaffed,
– lending departments have policies to inhibit financing the sale of their own bank’s REO’s and short sales (notice the Catch-22),
– most mortgage loans help the bank selling the REO more than the one issuing the new loan (not a great incentive for issuing new loans),
– few investors and homeowners have FICO credit scores exceeding 720 (the new underwriting norm),
– individual investors, even those at the top of the Forbes 400 list are restricted to 10 mortgage loans in their name, regardless of assets, net worth and income,
– entities whether corporations or LLCs, as most investment funds are structured, cannot get mortgage loans regardless of their assets, profitability or book value, since those loans cannot be sold on the secondary market,
– bank executives are not aware of the conflicting policies they have put in place,
– too many separate governmental organizations regulate and “try to fix” the mortgage and banking industries, and
– there is intense pressure from the US Treasury for banks to buy T-Bills to finance the deficit.

To me it is very obvious from this list – banks do not have the money to lend due to their weakened balance sheets and reserve requirements. When distressed homeowners face this same dilemma, they reach into the bag of tricks investors use, selling their homes with seller financing, on a lease-to-own contract, contract for deed, or even turning over the deed “subject to” the investor taking over the payments.

Banking industry, meet the enemy – look in the mirror. It is time to heal thyself by implementing the TACT (Toxic Asset Conversion and Transfer) Program. Learn from and work with real estate investors and buyers to sell off your REO and short sale properties. You will strengthen your balance sheets and income statements, property values will continue to rise, fewer people will hand over their keys, and the real estate market will return to normal. This can be done in months, not in decades. For more detailed description of the TACT Program review other articles in this series.

Banking Industry: We have met the enemy, The enemy is us.

Launching the Women of Mid-Finance – Real Estate Brings Security

I had known Cecilia for several years and had spent many evenings at her flat near Coit Tower enjoying the view of North Beach and Russian Hill. She made a good income and paid a large amount in rent for the beautiful view she enjoyed. But to me it was not a smart use of money (to me, it was a no brainer for her to buy a place).

The problem was she did not have a down payment saved. So together we brain stormed solutions and determined that the best path to homeownership for her was to partner with someone and buy a 2-unit building with them. She needed a partner that had cash for the down payment and of course wanted to buy property. Her friend Catherine came to her mind almost immediately.

After consulting with Catherine they gave me my mandate: to find a 2-unit building with enough space to accommodate both of them as well as Catherine’s roommate, Lynne.

The challenge for me was to stay within their price range and find a building large enough and in good enough shape for them to move into.

After showing them property in the Castro and Noe I found them a 3 unit property with an illegal in-law unit, located in Lower Pacific Heights. This was actually a 2-unit Victorian structure (in-law behind the garage facing the rear garden) and a cottage at the rear of the property.

The property was not without issues, which is why the price was appealing. It had tenants in all three units and an abatement by the City due to the illegal in-law (an abatement is an order by the City to remedy a code or zoning violation).Finding a lender that would loan on a building that had an abatement filed against it was quite a challenge!

In the end, though, after much negotiating, the seller agreed to remedy the abatement prior to closing. However, this raised the sales price of the property, such that Catherine’s cash was not quite enough for the downpayment. After a bit of thinking, I located a private lender willing to provide second liens in order to bolster purchasers’ down payments. In those days, lenders allowed what was then called an 80-10-10 financing scenario (10% of the purchase price from the buyer in cash, 10% from a private lender and then 80% from the primary lender). After a few months of going to and fro, the deal closed and Cecilia, Catherine and Lynne moved into the property. Lynne in the cottage, Cecilia in the upper unit and Catherine in the lower unit.

Years later, looking back it was the best thing that Cecilia and Catherine could have done, from a personal and financial prospective. Catherine lived in the lower unit for 6 years and then sold her unit as a TIC interest to a third party and sold her interest in the Cottage and the in-law space to Cecilia. Catherine was able to parlay her money into several properties and is now a real estate developer in her own right! Cecilia was able to rent the cottage, live the in the upper unit and use the space that was previously the in-law for her home office. Cecilia and her new TIC partner then entered the condo conversion lottery and, after a few years, won a spot and were eligible to convert to three condominium units. Post conversion Cecilia sold the cottage (the third condominium).

The property has enabled Catherine to move on with her dream of buying and selling real estate and has given Cecilia the security every single mother desires. They are all still the best of friends, and are regularly in touch. Indeed, their purchase helped form a lasting bond such that they refer to themselves as the “Women of Mid-Finance”.

“Purchasing the property on Bush Street was a life changing discussion. A decision I would have never had the opportunity to make if my Realtor didn’t envision the potential for me and Catherine. It was a lot for two single women to take on, but my Realtor was an endless resource to us and we were good students under his tutelage. He changed my life.” – Cecilia.