Thank you for joining me today. I have Quest’s Dallas Office Supervisor and transaction specialist Robyn Ruston here with me today. She’s an expert when it comes to almost anything involving real estate, notes, or private entity purchases. Today, we are going to be talking about how to streamline the process for lending and borrowing when a Self-Directed IRA is involved.
Sarah: If someone is interested in doing a private loan with their Self-Directed IRA, what does one even need? Whether that be making sure preliminary boxes are checked or providing forms, what is needed to make sure that funding gets taken care of?
Robyn: Well, first and foremost, the IRA accounts have to have funds. Then, it depends on what type of note they want to do. So, they decide that with the borrower, what kind of note they want to do, (secured or unsecured). For instance, we’re always going to have to have a Direction of Investment Form. It doesn’t matter what kind of loan they’re going to do, they will always need the Direction of Investment. It’s our internal form that tells us, you know, where to send the money, their interest rate, maturity date. It just gives us the general information of what the investment is. It tells us the pertinent information on how to process the funds.
Sarah: And that information is very important. We can’t fund without it.
Robyn: Right. So, if they want to do one that is secured with a note, then we would need a promissory note and we need the deed of trust and/or mortgage showing that the IRA is the lender. Once the note is completely paid off, the borrower will submit a release of lien and Quest will sign it releasing the IRA from that asset. The supporting documents specify the terms between the borrower and the lender. The biggest thing to remember is that, in order for them to do any type of investment, we always need supporting documents determining whatever they’re going to do.
Sarah: Got it. I also heard you mention… you touched on the fact that they have to decide all those terms. That’s an important part there.
Robyn: Yes, that’s decided between the borrower and the lender. They decide all the terms, and how it’s going to be written. They find somebody who drafts all the documents surrounding the investment. That’s what makes it self-directed. As the custodian, we review all documents and we make sure that it’s in compliance with IRA terms. We make sure that we have the right vesting on there, and that we have the information that’s needed in order for us to be able to hold that investment.
Sarah: Perfect. So, I’m sure that you probably have lenders calling in all the time asking “how do I fill out these forms?”, and “What do I do?”. How often do you get lenders and borrowers calling in for questions and how do you address those?
Robyn: When it comes to answering questions, we can answer questions for the borrower and to the lenders. But we can only answer questions for the borrower to an extent, as long as they don’t pertain to the lenders account. We don’t mind like talking to the borrower to let them know what’s needed or the steps for the investment process, just so both sides of the party are fully aware of the steps that are required to make an investment happen. So, we do also talk to the borrowers often.
Sarah: I’m sure one of the biggest questions that a lot of the borrowers have when they call in is “I have to pay back my lender! How do I do that?”. How does the lender get paid back? Can you talk a little bit about that and where those funds have to go?
Robyn: There are a couple of different ways. We can always provide Delivery Instructions to our lenders, so that the borrowers can make payments a couple different ways. They can wire over the funds to an IRA account. They can send them via ACH or through check, and they can even use our online payment methods. You know, we make it pretty simple and easy. They will send the funds directly to Quest and then we will allocate those properly to the clients’ IRA accounts.
Sarah: Now, one thing that you touched on there that’s really important – something that I think all of our readers should know – is those funds have to go back to the IRA accounts. I’m sure that’s a big mistake many people make. Interest payments must be made to the IRA.
Sarah: So, while they’re going through that funding process, what’s one of the biggest things that you see holds people up getting that investment funded on time?
Robyn: Most of the time, you know, what I see is that the documents aren’t worded right; we don’t have the correct language, meaning the vesting is incorrect. Another is that we don’t have any wiring instructions. So, the best way to just kind of make that go quicker is to make sure the client understands a few things. We always let the client know, “why don’t you go ahead and get the terms drafted and then submit those over to us.” Let us look at them. We’ll tell them, “this needs to be corrected. That needs to be corrected.” Once you get the final draft, that’s when I would get people’s signatures and stuff like that, because every time you make a mistake or every time you have to correct the document, you have to go back and get a signature again.
Sarah: I can see how that could be a holdup.
Robyn: The best way to streamline the process is to go ahead and just submit all documents over for a preliminary reviewWe can’t draft it, but we can review it and let you know if it meets all of our requirements. We can say, “go ahead and get the borrower to execute” or we can let them know, “hey, your vesting is incorrect or you’re missing the maturity date, basic information”. That way they can correct it.
Sarah: And even if one thing is missing, that’ll hold something up. We have got to have it all.
Robyn: We’ve got to have it all.
Sarah: One thing that you mentioned at the very beginning when we were talking about what’s needed, you said that it depends on what type of note and I want to go back to that, because that was really important. There are unsecured versus secured. Now, if somebody wants to do an unsecured note, what type of due diligence should be done before entering in to a Self-Directed IRA investment like that.
Robyn: Yes, we recommend that the client does a bit of research and that they know what they are investing in, especially with an unsecured note. The great thing about our IRAs is that they are self-directed, but it can also put more responsibility on the account holder since all of the investment details are curated between the lender and the borrower. It’s best definitely to do some due diligence and just make sure that they are aware of what they’re investing in, making sure that they are agreeing to these terms in this loan, right? And then to just making sure that everyone’s goals is met at the end of their investment, their promissory note.
Sarah: Mhm. Perfect. Moving right along… What are some common questions that you get? What do people call in and have the most questions about? Let’s address some of those.
Robyn: [chuckles] Mostly, “where’s my funding?” Oftentimes, we get asked, “can we go ahead and fund without a signature from the borrower” or “how is the investment status, what is the status of the investment?”
Sarah: And if they wanted to check on the status of an investment, do they have somewhere where they can do that?
Robyn: Yes. The QTC Investment Hub has an investment tracker. It’s located in their Client Portal.
Sarah: Awesome, well do you have any other words of advice that you would give to either lenders or borrowers to help them streamline the process?
Robyn: Yes. To just make sure that, as the client, they are responsible for knowing what is exactly needed for their note and what we look for. That way they know for when they’re getting their note drafted. We can always send it over to them through email. So, when they’re getting it drafted they can make sure that everything is included. I also recommend that, before they even start to process, do their digital research. Really look into who they’re borrowing from or on the other side, who they’re lending to. Go on the internet, Google at home, see if you can find out any information, and check with somebody who’s already invested with those people. You know, just kind of get their feedback on anything. Borrowers should be willing to let you talk to somebody who has already invested with them or lent them money.
Sarah: That is such a good point.
Robyn: If they have a good track record, they shouldn’t have any problem answering your questions. So, just pick it apart and just make sure that you know what you’re going into. And that last thing is just to set realistic expectations and times. All of this will really help in streamlining the process.
Private loans and other notes continue to be one of the most popular investments held in Self-Directed IRAs, and it’s’ helpful to understand some of the ways to keep the process moving smoothly. If you have more questions about how to lend and borrow funds with a Self-Directed IRA, feel free to call our office at 281.492.3434 and a representative will be happy to help answer any questions.