Life’s A Beach – Another True ‘IRA Loan’ Story! No comments yet
The clients, a married couple, began working with Lending Resources Group in February of 2011. They desperately wanted to buy a rental property with their respective IRA’s in the Florida Keys. They put offers in on properties on 2 occasions only to be outbid both times. Who said we’re in a down market? That doesn’t seem to be the case in the Florida Keys. Both times the property was pre-approved for a non-recourse loan, but to no avail. The third time was the charm. The clients were first in line this time to buy a single family home on ‘Beach Road.’ We started the non-recourse loan process immediately. Lending Resources Group (LRG) obtained the pre-approval from one lender after being turned down by another. However, after 3 weeks of gathering information about the rental market in the Keys and the various paperwork required, the lender decided to turn it down. Now hear this! The lender didn’t like the fact that the buyers lived in the west, more than 2000 miles away from the property and were concerned that a well known property management company couldn’t be trusted. We couldn’t overcome this.
Time was ‘awasting’ as they say and 1 of the contract’s stipulations required a $50,000 deposit by a certain date which was drawing very near. If that deposit wasn’t made on time, the seller was going to cancel the contract . Our clients were informed there were backup offers and would lose this house.
The clients had their IRA’s invested in stocks with Charles Schwab and were reluctant to cash out of those stocks right away while they were waiting for a loan approval. However, it was important for them to move their funds over to an IRA custodian in order for this transaction to close. While the accounts were in the process of being transferred, the deadline for the $50,000 deposit was drawing very near. The timing became such that the transfer of the clients’ separate IRA accounts to the Custodian couldn’t be done in time for that down payment to come from their custodial account. It had to be made from one of their Schwab accounts or they were going to lose the deal. We were literally down to the last day for this to be done.
LRG got on the phone with Mrs. Client and the Schwab company representative to make this happen. First, the transfer of Mrs. Client’s IRA funds from Schwab to the custodian company that had been set up to go through that same day had to be cancelled. Second, the paperwork to request a wire transfer of funds from Mrs. Client’s account to the escrow/title company in Florida handling this transaction had to be completed. By initiating this and getting a wire confirmation number for the seller’s agent, we were able to stave off a breach of contract and maintain control of the purchase for the clients. This was just the first of several battles to be fought to complete this transaction successfully.
Meanwhile, this loan had now been turned down by the 2 most prominent non-recourse lenders in the U.S. LRG had one other source for this loan and began the process. However, it was made known to the buyers that they didn’t have much time left to close. It became apparent that if we were to go through the typical loan process with a required appraisal, we wouldn’t be able to close by the required last day of April. We reverted to one last resort and requested that the seller carry back the mortgage balance. The buyers inquired through the seller’s agent if they would be willing to carry back the balance of the purchase price in a deed of trust; thereby making it a non-recourse mortgage as required by the IRS. The sellers agreed to do this to enable the IRA buyers to complete the transaction as soon as possible. Now the fun part was about to begin.
Mrs. Client called LRG and asked if we could arrange for the mortgage note to be written for the sellers to sign. The sellers were impatient and the clients believed they were on the verge of cancelling the transaction if they didn’t meet the deadline for closing. The clients didn’t want to deal with anyone new to get this done and requested this to be handled by LRG as soon as possible. LRG contacted a firm that they deal with for these mortgage notes. It was determined that Florida was a ‘Mortgage’ state rather than a ‘Deed’ state which meant that the note had to be written with mortgage language rather than deed language. LRG was able to get a mortgage note written by a close associate who has knowledge of these notes and knew the appropriate language to use for this particular ‘non-recourse’ mortgage. The sellers were given the note to review and approved it so we were ready to move toward closing.
At the same time, the title company was in the process of readying the paperwork and found that they didn’t have a current survey of the subject property. It took a week to get that – more valuable time lost. Once the preliminary title report was updated, we came to find out that the hazard insurance binder hadn’t been prepared as had been previously requested by the title company. The title company will not close a real estate purchase without hazard insurance in place. To make matters more complicated, it was determined that the subject property needed a new roof. The insurance company stated they wouldn’t issue coverage without a new roof and the title company said they couldn’t close the transaction without insurance. The buyer scrambled, spoke to several other insurance companies and roof contractors. After a 2 day delay the buyers were told that as long as they had an agreement with a roofer to replace the roof, an insurance company would issue the required insurance coverage and the title company could close. Whew – that was a close one!
Still, the best was yet to come.
Once the sellers approved the mortgage note, it was ready to be signed by them as well as the custodian company and the sellers. The note was written the way other non-recourse mortgage loans are written with the custodian company on title ‘for the benefit of Mr. Client’s IRA and Mrs. Client’s IRA. However, when the custodian company received the note they said it was written incorrectly. It was supposed to designate the exact percentage of ownership of each person’s IRA in addition to the other language. LRG made sure that change was made and the note had to be re-signed by all parties. The buyers and sellers signed and notarized them. Again, they were resent back to the custodian company for their signature. This time the custodian company said the wording of the title was still incorrect. Not only did the percentage of ownership have to be added but the title had to say Custodian Company ‘fbo’ Mr. Client and repeat the same wording with the custodian’s name for Mrs. Client. This was not only expressed to us by the manager of the customer service department but it was put in an email. So once again, LRG arranged for the appropriate changes to be made and again all the papers had to be changed accordingly. That meant they had to be re-signed and notarized for the third time.
After we went through all of this and 3 more days had been lost – we were already past the closing date – the custodian company again said the papers were incorrect. Now they were saying that they couldn’t be the custodian for the wife’s ownership portion because her IRA funds for the down payment made into escrow came from a different company, Charles Schwab, and not from her IRA account with the custodian. No one at the custodian company ever said this was an issue until after the third time of re-doing the paperwork.
How were we going to resolve this? LRG suggested to the custodian company to have them wire Mr. Client’s IRA funds to escrow to substitute for Mrs. Client’s $50,000 original down payment. Then the escrow company could send the wife’s funds to the custodian company and place them in her account. The custodian company could then take claim to her IRA and officially be her custodian for this transaction. They would then send her funds back to the title company once it was time to close the purchase. Great idea, right? However, the custodian company wasn’t willing to release the husband’s funds (even at his request) without the proper language on the documentation and the proper language couldn’t be applied without the wife’s funds being in her account. Further, the title company wouldn’t release the wife’s funds to the custodian without first having equivalent funds in escrow to substitute for her funds. We were at a stalemate! The prospects of this transaction taking place began to look grim.
Being that this was a team effort, Mrs. Client sprung into action. During most of this transaction, LRG had been dealing with both Mr. Client and the custodian company. Mrs. Client decided she had had enough of the custodian’s shenanigan’s with their misinformation and misdirection concerning this entire procedure. She contacted the President of the company and told her in so many words that she needed to fix this problem asap. All the custodian company had to do was release Mr. Client’s funds to the title company. The title company would release Mrs. Client’s funds back to the custodian at which point the custodian could go on record as the custodian for both spouse’s IRA’s. Lo and behold, Mrs. Client’s efforts rung a very strong cord with the President and the custodian company. The exchange of wire transfers took place over 2 days following Mrs. Client’s efforts. The paperwork had been written correctly after being changed 3 times, maybe 4? The custodian company signed the loan papers, the deed of trust and sent them to title. Title was able to record and close after the clients’ funds and the sellers’ funds were deposited to escrow.
The Clients finally owned their charming ‘IRA purchased’ house on Beach Road in the Florida Keys. They hope to retire their some day. Until then it will be their hard fought investment in the sun!