Lending Resources Group (LRG) just completed an exhaustive 5 month loan process in assisting its client refinance 26 of his 44 homes in Milwaukee, Wisconsin. The ups and downs and twists and turns that this process took are far too voluminous to describe. However, there are several salient factors that helped reach a successful financial solution.
One important hurdle to overcome was the value of these properties. The lender originally stated they would not refinance any properties valued at less than $50,000. They later changed that to $40,000. The client paid approximately $20,000 to have 35 of his 44 properties that he believed worth more than $40,000 appraised. The lender’s appraiser valued the first 10 properties with an average of approximately $55,000 each. This led us to believe we shouldn’t expect to have a problem valuating the remaining 25 properties at $40,000 or better. As it turned out, the appraisers – there were 2 for the remaining 25 houses – only gave values of $40,000 or better to 15 of the remaining 25 properties. Their assessments seemed to be very inaccurate in some cases; 4-plexes with the same or greater square footage adjacent to single family houses on the same street being valued at $20-30,000 less. Nevertheless, our hands were tied and we had to accede to the lender’s appraised values. The result was a much reduced loan amount which compromised LRG’s client’s obligations to pay the lienholder’s mortgage as well as back taxes that he inherited when he purchased the properties several years ago.
The lender indicated that we would be ready to close this transaction once the appraisals were completed. This was towards the end of December 2014. However, that wasn’t close to being the case. First, the lender required the client to get every tenant of the 26 houses to sign a 6 month lease. In addition, the client needed to have every tenant sign an acknowledgement there was no lead based paint in these homes.
Then, the lender requested a letter from the first lienholder stating the amount that was owed by the client. Once that was done, we were again led to believe we were headed towards closing. The client produced a letter showing that the lienholder reduced the payoff by $150,000. The lender fired back that they wouldn’t lend more than 85% of what was owed. All of a
sudden the lender was using some left field rule not to lend on the amount owed if that amount was reduced. This was in addition to the reduced values of the houses with a maximum loan amount of 55% of those values. The closing was delayed through the end of January due to these factors.
There were several other problems that caused this closing to be delayed and almost resulted in not closing at all. However, in the end, the client was put into direct contact with the lender to put to rest concerns the lender had regarding the lienholder’s mortgage, taxes owed, acceptable mortgage terms and more. The result was a successful close of escrow on March 2, 2015. The client was able to repay a large portion of his debt to the first lienholder as well as a large portion of back taxes that were owed. This refinancing prevented these houses from being foreclosed. LRG is now trying to help the client refinance his remaining 18 houses with another lender.
“I was introduced to Mark Robbins and his company, Lending Resources Group, through a mutually known banker. I met with Mark in person to discuss our need to refinance the 56 acres known as Pacifica Highlands owned by myself and my partner. Mark showed himself to be very interested in helping us obtain the financing we needed. I knew I had the right guy for the job when Mark dissected the preliminary title report and outlined exactly what we needed to do to correct this so a lender wouldn’t be deterred from adverse title issues.
Our property was unentitled and unpermitted property along Highway 1 in the coastal town of Pacifica, just 10 minutes south of San Francisco. Having been in the real estate development business for more than 40 years, I know that financing unentitled bare land is about the toughest type of loan to get. The good news was we had a strong broker price opinion of $6.4MM for the land’s value, the land was zoned for 11 single family homes (one for every 5 acres) and we also had a ‘conservation easement’ that allowed (and still allows) us to donate a portion of this property to the Golden Gate National Recreation Area in return for substantial tax deductions.
We needed between $1 -1.2MM to repay our 1st lien, cover closing costs and provide interest reserves for 1 year. I spoke with Mark on a daily basis for more than 3 months. I know how diligent he was in helping us find the right loan to gain better control of our property. There were a lot of ups and downs before he found the right economic fit to meet our needs. Mark and Lending Resources helped us obtain $1.3MM to refinance Pacifica Highlands. This put us in a better position to obtain the entitlements and permits that will make our property more valuable today. Thank you Mark for your hard work.”
“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 we got the property 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 and we started the non-recourse loan process immediately. Lending Resources Group (LRG) got 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 property was on Beach Road.
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 is 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. 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!”
“The ability to purchase real estate with your IRA has been in existence for many years. However, most people believed that they had to buy their property entirely with cash. They did not know that they could obtain a loan to help them with their purchase. For those few who have heard they could get a loan, they have not known how to go about getting one. Further, for those who have known they could get a loan, they have not known who to call on for help to obtain this special financing. I am here to provide that help.
Before I can inform you how to invest your IRA funds in real estate, I have to tell you the reason it is so difficult to do. The IRS does not permit the IRA owner to personally guarantee a mortgage for the purchase of property with their IRA. The majority of banks that issue mortgages require a personal guarantee for those loans.
Under normal circumstances, if the mortgagee (property owner) cannot or does not meet the payment requirements of the mortgage, the bank can use whatever legal means at its disposal to obtain payment from the mortgagee. The bank can sue the property owner and obtain that individual’s personal assets to satisfy the mortgage debt.
As a result most banks will NOT lend money to purchase real estate through an IRA, because they cannot obtain that personal guarantee from the borrower. The only “recourse” the bank has to satisfy the mortgage debt incurred by the IRA is the property and the rental revenue that the property generates. Therefore, the IRA owner must obtain what is called a NON-RECOURSE loan in order to purchase real estate if they cannot pay the entire purchase price in cash.
That brings us to the “HOW TO” of making an investment in property with your IRA. The first step in this process is to establish your IRA account with a custodian/trust type company that specializes in handling an individual’s IRA investment in real estate. This is necessary for several reasons. Again, the IRS does not permit the IRA owner to handle any financial transactions in respect to the ownership of the property. The custodial company must pay all bills and receive all rents associated with the ownership of this real estate.
Once you have established this account, the time is right to find a property worthy of your investment. In order to identify the right property to invest in, there are a few important things for you to know. First, you will need to have enough money in your IRA to make a minimum down payment of 30-35%. Depending upon the type of property and the lender, you may need to make a greater down payment.
Second, you need to find a property that is either already rented or will be easily rentable once you own it. The property being purchased by your IRA must be an investment property. It cannot be a primary or secondary home.
The third thing you need to keep in mind is that the rent the property will generate should be 1.2 times greater than the mortgage payment required by the loan. If you find that your property is not generating enough rent to exceed your mortgage payment by 20%, then make sure that your IRA has sufficient assets to cover any deficit for a prolonged period of time. This will include other monetary items such as property taxes, insurance and homeowner association dues. The lender will look closely at the IRA’s assets as a pre-requisite to obtaining the mortgage.
Once you have identified an investment property to purchase, then you need to call a mortgage broker who knows how to help you structure a non-recourse loan with a non-recourse lender. As previously mentioned, there are very few non-recourse lenders. After many months of research, I have found several lenders that will establish a non-recourse mortgage for an IRA owner. It is important to have the right mortgage consultant for this kind of transaction so they can make sure that you have all the necessary qualifications to get the loan approved.”
“Well here’s another one for the books. The ingredients are these:
1. Take one hard working male with excellent credit who has suffered through numerous financial setbacks over the past 30 years.
2. Mix in a business that has been in both Mill Valley and Tiburon for 46 years which he has been running for the past 10 years.
3. Throw in the finest soft frozen yogurt ice cream this side of the Mississippi.
4. Complete this recipe with a consistent net profit each year for the past 4 plus years.
5. And, WHAT DO YOU GET?
I’ll tell you what you get, a successful cash flowing business that cannot get one bank to provide this hard working Marinite a line of credit for $35,000. Every bank we turned to – some major name banks, some community banks – all said, “we’re not comfortable with the amount of his debt.” However, he has proven consistent record of paying all of his bills early or on time, he has paid down principal portions of his debt throughout the year, he has maintained 700 credit scores throughout the year, yet no bank would lend him any money. He simply needed a small line of credit to get him through the 3 leanest months of the year for his business – the winter months – November, December and January.
Let’s not forget that he has been running this business for 10 years, lost $200,000 when the town of Tiburon forced his business to close after driving traffic away from Main Street where he had set up shop. All the while Woody’s has been serving the community with not only his phenomenal, sweet tasting, soft yogurt ice cream but supporting local schools by volunteering his time and his business name to their money raising campaigns. Yet, no bank would step up to the plate and provide WOODY’S YOGURT PLACE with a small business loan.
This all points to a bigger issue – the TARP money. Where did all the money that the federal government gave to the banks go and what did it get used for? Wasn’t it supposed to be used to infuse the economy by helping the small business person? If the banks got bailed out, shouldn’t they help ‘bail out’ the small businessman who desperately needs financial assistance to get him through some tight times? Well, my experience as a commercial loan broker proves otherwise. That money hasn’t been provided to the local economy the way it was designed. The banks have kept those funds, fattened up their balance sheets, bought other failing banks and, in general, horded that money.
To be fair, perhaps some of the banks that turned Woody’s loan request down didn’t get TARP money, or if they did, maybe they have helped some business people with their financial needs. However, we do know that the big banks we approached definitely did get TARP money. Matter of fact, Woody’s owner has accounts at both of those banks, yet they wouldn’t lend him the much needed $35,000. We’re talking about a business that grosses $650,000 to $700,000 per year. Moreover, Woody’s owner is not the only businessman that I have seen this happen to. There’s some second thoughts about continuing to do business with these banks.
Lending Resources Group was not to be deterred. We continued to seek out a lender that would hear Mike Woodson’s (Woody’s) story and understand his predicament. One local bank which refused the loan was still good enough to refer us to a community center serving a local foreign community in San Francisco which makes some of its money by arranging small business loans through the SBA! Can you believe that? A foreign community service center who is granting small business loans to hard working, steady Eddy’s like Mike Woodson who need some cushion to get them through a few tough months of their cyclical business year. What a concept? A foreign community service center that is helping a local American obtain a loan that he couldn’t get from the banks in his own back yard including the bank that he uses for his payroll and credit card services.
That’s exactly how we ended up getting the $35,000 that Mike needed – through the foreign community center. They were very polite, very knowledgeable and very cordial to Mr. Woodson. They visited his place of business, interviewed him and were sufficiently impressed as Lending Resources Group has been all along. Mike Woodson is a standup businessman who has persevered and succeeded in the face of great adversity over the past decade while making Woody’s Yogurt Place a household name for soft frozen yogurt ice cream in Marin County!”
“Lending Resources recently helped an IRA investor obtain non-recourse financing for the purchase of a bank owned single family residence. There were many delays in trying to close this transaction. Some of those delays were the result of the bank dragging its feet on completing the paperwork or following through on the required approvals. Other delays were due to the usual last minute details of obtaining insurance for example. However, when it came to signing the actual loan papers, some of the parties involved in this transaction thought that the title to the property was not written correctly.
Title to property bought with IRA funds is usually written in the name of the IRA custodian company for the benefit of (fbo) the IRA investor (their name). In this case, the custodian’s name was titled with the word ‘The’ and then their full name – in this case Pensco Trust Co. The IRA holder didn’t sign the papers when he received them, because he was told by one of his advisors that the title was incorrect due to the word ‘The’ in the title. In addition, he thought his IRA’s designated number was supposed to be on the title which also caused him to question the validity of the paperwork.
Lending Resources sought to answer these questions once and for all. As it turned out the word ‘The’ was in the original corporate paperwork given to the lender’s legal department when the custodian originally filed its official name with that bank. Therefore, the bank would only use the name of the custodian on the loan papers as it was originally submitted to them. Further, to protect the IRA investor’s right to privacy, the bank never puts the IRA designated number in the title of the loan papers.
As a result of these questions regarding the way the title was written in the loan papers, the signing of the loan documents was delayed. Fortunately, Pensco confirmed the accuracy of the language in the paperwork and insured the papers were done correctly so there would be no repercussions any time in the future. We obtained the borrower’s signature as well as Pensco’s, returned the documents to the title company and, ultimately, to the bank for the loan to be funded. It was a good lesson for all parties concerned and also helped to confirm that the lender had written the loan papers correctly. The loan funded in time to satisfy the bank’s required timeline.”