When investing with a self-directed IRA, you have the possibility to diversify your financial portfolio beyond traditional, publicly traded assets with investments like real estate or notes. One option available to self-directed account holders that has been growing in popularity is the ability to do seller-financing. In today’s article, we will explore what seller-financing is and how self-directed IRAs can participate. Eddie Speed, owner and president of Colonial Funding Group LLC, joined Quest to provide knowledge on the subject. Eddie has been in the business of all types of notes – seller finance notes and performing notes, buying loans, etc. He frequently shares his expertise at trainings across the country, at his own note conference, NoteExpo, – and now today with Quest.
What is Seller Financing?
When purchasing real estate, its common to need additional financing. Sometimes the buyer and seller would rather create the arrangements themselves – rather than getting a bank involved. “Seller financing” is when the seller handles the financing process instead of a banking institution. Typically, in these types of real estate agreements, the seller allows the buyer to pay in installments rather than using a traditional mortgage from a bank or other financial institution, and sellers can own and oversee the debt. Overall, seller-financing allows the buyer and seller to cut out the middleman.
How Does Seller Financing Work with Self-Directed IRAs?
When using a self-directed IRA to invest, you always need to be aware of how the IRA is involved. There are a few ways a self-directed IRA can own a seller finance note. The first way is the SDIRA can actually sell the property and offer financing to the buyer. The seller is wearing two hats. They are the seller of the property, but they are also agreeing to be the bank. You can sell a property in a self-directed IRA, and you can have a note payable to your IRA. One good example would be seller-financing a rental. The other way is that your self-directed retirement account can buy someone else’s seller finance note. Then, that note is assigned to your retirement account.
Why Would Someone Want to Seller Finance a Property?
One of the biggest reasons somebody would seller-finance a property is because they discover they’ve bit off more than they bargained for. Eddie shares one prime example of this. “Small investors have bought rentals, and they found out that rental didn’t cash flow as well as they thought. It was a lot more aggravation than they planned for and more of a job than an investment.”
“I have a lot of people that we’ve helped exit the rental landlord space. They seller-finance and now they just act as a bank. They don’t get invoices and they don’t get aggravated – they just get a check. So, that’s a good example of why somebody might seller finance,” says Speed.
Another reason someone would seller finance in today’s market is because they simply like being the bank and providing options for others. “As a result of the pandemic, 30% of the people that could qualify before the virus can’t qualify today,” Eddie says. There are a lot of ‘left behind buyers’. Seller-financing with self-directed IRAs brings those buyers back up to speed.
Seller Finance Due Diligence
Like any investment, when seller-financing, you should always conduct proper due diligence. Due diligence ensures your investments are as safe as possible. Always be sure to do due diligence on not only the note, but the person on the other side of the investment, too. First and foremost, focus on the type of buyer and the collateral. Good collateral leads to good buyers that leads to good notes. When seeing if it’s an A-grade note or a D-grade note, there are certain things you can look out for.
Eddie’s 6 characteristics to determine A grade or D grade note
- The borrower – the person who owes the money
- The property itself – the collateral
- The buyer’s equity
- The terms of the note – the interest rate, payment, terminals, how much do they pay and how long do they pay
- Their pay history – how they paid
- The paperwork
The most important element that any investor must evaluate is the moral characteristics of their counterparty. Always consider trustworthiness of someone who is wanting to do a deal with a self-directed IRA. Be sure you can trust them to do what they say they’re going to do.
“Fraud exists in real estate and in the note business,” Eddie says. “I’ve lost more money to fraud than I ever have any other bad decision. There are two sayings I follow. One is from Ronald Reagan, and he says ‘trust, but verify.’ The other is ‘I never met a conman I didn’t like.’ The truth has a crystal and ring to it and a consistency to it. So, when I say ‘trust, but verify’, it does not mean to verify by asking them questions. Verify what they’re saying by their industry reputation, something that should be verifiable by other parties.”
Advice For Self- Directed IRA Investors
For those that have considered seller-financing, Eddie shares his advice for those looking to get started IRA investing. The most important thing to remember is that you shouldn’t be scared to learn something. Anything new will take time and commitments, but the reward is usually worth it. The other thing you should always be doing is finding the voids. When you find the void, you’re finding the opportunities that can produce.
“Those voids are where I generally focus on solving problems that lead me to good transactions. How do you learn what the voids are and how they work? You must learn some market conditions, and then go see how these market conditions play out on specific transactions,” Eddie says. “We’ve been doing it for years. We do research every week to go find out what the market says about this or that, what is not being serviced, etc. There are 2 million loans being served with notice of default this year. That equals opportunity. There is also a big void in the conventional mortgage credit criteria – about 30%, less people. Those are two very specific examples of voids in a hot market.”
Additional Seller-Finance Resources
When it comes to seller-financing, reviewing case studies are a great resource. Seller finance case studies can help create a better understanding of how the transactions work and give you a first-hand look into the process. Educational events are also a great place to not only learn something new, but also network with others that can help you learn the business.
“Real estate investors can do really well if they have an educational platform for seller finance techniques,” Eddie shares. “For the past 20 years, I’ve had a training company where I help people that are highly seasoned and those that are fairly new to the business in these strategies called Note School.
You can also learn more about self-directed IRAs and seller-financing by talking to a certified IRA specialist at Quest Trust Company. Our team of representatives is always available to provide free education and additional resources. If you have more questions about crypto investing, call our office at 855-286-4727 or schedule a free consultation to speak with an IRA Specialist today.
About Eddie Speed
Eddie has been in the business of all types of notes – seller finance notes and performing notes, buying loans that are not really seller financing, etc. Since 1980, W. Eddie Speed has dedicated his professional life to the seller financing and non-performing note industry. Over the years, he has introduced innovative ideas and strategies that have positively impacted the way the industry operates today. Eddie founded NoteSchool, which is a highly recognized training company, specialized in the teaching of buying both performing and non-performing discounted mortgage notes. He is the owner and president of Colonial Funding Group LLC, which acquires, and brokers discounted real estate secured notes. In addition, he is also a principal in a family of Private Equity funds that acquires bulk portfolios of notes. He has been a leader and innovator in the Note Business for over 30 years. To learn more about Eddie, visit his website.