Purchase your next investment property at auction with an IRA

The national moratorium ended last month, presenting investors with an unprecedented opportunity to participate in the real estate market, more specifically at foreclosure auctions.

Typically, to close the sale of an auction property you must be able to provide the funds within a short window of time. This may lead you to believe that cash is king when it comes to your purchasing power at an auction. However, with a self-directed IRA at Preferred Trust Co. you can purchase a property at auction with qualified funds just as effectively as you can with cash.

If you are looking for a way to diversify your retirement portfolio with a tangible asset that has the potential for capital preservation and historically higher returns, a self-directed IRA may be the missing link. A self-directed IRA opens the door to investing in alternative assets, such as real estate, in a tax-sheltered account. This provides you with the unique ability to realize potential capital gains and/or interest income tax-deferred or tax-free, depending on the type of account.

You may be thinking that there is no way you could move qualified funds fast enough to execute a sale, right? In this article, we discuss three proven methods for IRA account holders to participate in an auction.

First, you need to do your homework.

Whether the auction is in-person or online, the goal is still the same — acquire the piece of real estate at a fraction of the price.

The first step is to identify and complete your due diligence on the subject property, including the verification of the bidding and funding requirements of the auction established by the subsequent jurisdiction (i.e., state, county or city regulating body). For example, most foreclosure auctions will only be able to accept cash, a bank money order or a cashier’s check for payment. In some states, you must pay for the property in full immediately following the auction. Other states will allow you to pay a percentage at auction and then pay the rest within a certain timeframe. County foreclosure auctions will often require advance deposits to be able to attend the auction. The deposit amount varies across municipalities, but generally runs from 5 percent to 10 percent of the expected final bid amount of the property.

The next step is to determine the maximum amount you are willing and able to bid on the property based on the amount of funds you have available in your IRA account. Understanding the above-mentioned variables and your maximum bid amount will ensure that you have the funds you need to both attend the auction and potentially purchase the property.

Common IRA misconception debunked

There is a common misconception surrounding self-directed IRA custodians that they are too slow to provide the funds from your IRA account (cash, bank money order or cashier’s check) that are required as payment. The truth is that it is possible, however, communication is key.

Method No. 1: Cashier’s Check

It is important to give your custodian as much advance notice as possible of your intentions to participate in an auction with your IRA. For example, at Preferred Trust Co., if you communicate the date of the auction and complete the corresponding paperwork to direct your investment, a cashier’s check can be obtained on behalf of your IRA within 24 hours.

If you win the bid, you may need additional funds to complete the transaction depending upon the state or municipality. At Preferred Trust Co., this transaction process will be completed within the allotted timeframe. If you do not win the bid, you must return the cashier’s check to Preferred Trust Co. within 10 days from the auction date. If you are unable to return the cashier’s check within that timeframe, you can request that Preferred Trust Co. make a redemption of the funds from the initiating financial institution. There is a bank fee associated with a redemption request, which will be deducted from your IRA account.

Method No. 2: IRA LLC

The second method that can be used is to establish an IRA-owned LLC with checkbook control. In this scenario, the LLC is owned by the IRA as the single member and you as the manager. A bank account is established for the LLC for which you hold the checkbook authority. The LLC is then funded by the IRA and ready for you to use as purchasing power. Establishing an IRA LLC takes some time to complete and should be done well in advance before you consider participating in an auction.

This method gives you the flexibility of directing your investments without the involvement of your custodian, which will speed up the transaction process. However, managing an IRA LLC places more responsibility on the IRA account owner to prevent the execution of an IRS-enforced prohibited transaction or investment. Conducting any prohibited transaction or investment, even if unintentionally, will cause your account to lose its qualified tax-protected IRA status, making you liable for taxes and additional penalties if applicable.

It is imperative that the LLC is established correctly and in the name of the IRA. You can give Preferred Trust Co. a call at 888-990-7892 or email at info@ptcemail.com to learn more about this process.

Method No. 3: Distribution with Proof of Purchase

The third method is to take a personal distribution from the IRA. Although we do not encourage this type of transaction, it is possible if you are crunched for time and cannot obtain a cashier’s check or establish the Checkbook IRA/LLC before the date of the auction. A distribution is considered a taxable event so you will need to provide proof of purchase within 60 days.

When the property is purchased through the IRA the prior personal distribution will be reclassified as the earnest money deposit upon the final closing of the investment property. You must make certain the purchase is in the name of the IRA, i.e., Preferred Trust Co. FBO (for benefit of) your name and account type. If you do not purchase a property at auction with the funds you received from the personal distribution, you will need return the funds to your IRA within 60 days or you will be responsible for the associated tax consequences and a 1099-R will be reported to the IRS.

Regardless of what method you choose to use, once your bid is accepted and the transaction is complete, you will need to provide a copy of the following documentation to Preferred Trust Co.: the certificate of sale or purchase and sale agreement, certificate of title, title insurance, copy of the quit claim or special warranty deed, proof of liability insurance and a BPO or appraisal.

As you can see, you are more than capable of participating in an auction with qualified funds through a self-directed IRA. If you are interested in adding alternative investments like real property to your retirement strategy, call 888-990-7982 to schedule a no obligation consultation at your convenience. Through Dec. 31, Preferred Trust Co. will waive the establishment fee and first year administration fee for all new accounts. Visit our website at www.preferredtrustcompany.com and apply online to take advantage of this offer today.

Preferred Trust Co. is at 2140 E Pebble Road, Suite 140, 702-990-7892, preferredtrustcompany.com, Financial Institutions Division of Nevada License No. TR1002. Preferred Trust performs duties of a custodian and as such, does not sell investments or provide investment, tax or legal advice. It is an accredited member of the Better Business Bureau.