why a Hard money lender only fund to fund to Self-Directed IRA?

Question

I have a deal try to get hard money financing. I have been told that as an individual without an llc or corp, they can only fund to Self-Directed IRA.

does anyone know why? and how does it work?

Jon Holdman · Answer

Thanks for providing that info.  That is much clearer.  This does not say they only lend to a Self-Directed IRA.  It says that they will lend to a SDIRA (which is somewhat unusual), but it does not say they will only lend to a SDIRA.

Further, it doesn't even say they only lend to entities.  It says they prefer to lend to entities, but they are willing to lend to an individual for your first deal or two.

Travis Sperr · Answer

I am a hard money lender and am very confused by your question.  We allow clients to close in entities, they also personally guarantee the loan.  Some lenders require the borrower closes in the name of an entity because it is much easier to show the loan was “business purpose” rather than a consumer loan, which makes all the difference in foreclosing, loan pricing, etc.

Lending to a SDIRA is a different ball game as the loans have to be non-recourse, we do these loans, just at a lower LTV.

Chris Clothier · Answer

Nate -

You definitely want to get a mentor or an experienced investor giving you some advice before you sing a hard money loan.  I have never heard of a traditional hard money lender who would only lend to an entity.  You do not have to have a SDIRA to borrow from most hard money lenders.

Chris

Nate Mao · Answer

got it, thanks all.

Jeff S. · Answer

Yes, thanks.

Makes much more sense.

Chris Martin · Answer

Regarding "There seems to be a belief that lending to an entity will avoid SAFE Act issues...", well... it is more than a belief. The SAFE Act only applies to owner occupant property. As a lender, I may ask for personal guarantees (and corporate resolutions, etc.) from all members of an LLC, but that LLC as owner will not "occupy" the property as a residence. It (the LLC) is a business and if I need to foreclose I don't have to observe a boat load of new regulations (new state statutes) that may severly complicate the foreclosure process. So, yes, HML is biased toward funding entities because of the SAFE implications.

Nate Mao · Answer

Ok, I am confused too, Its my first time need a HM. here is what exactly on my email from the HM lender:

""We prefer to fund vested to an entity (LLC, or Corp.) however for your first deal or two we can fund in your individual name. Funding to family trusts (Irrevocable Trusts) is doable, but complicates matters. We will fund to a Self-Directed IRA. We will NOT fund to Title Holding Land Trusts.""

Jeff S. · Answer

I’m confused by your question too.  There seems to be a belief that lending to an entity will avoid SAFE Act issues or associated problems lending to a homeowner directly on residential real estate.  Even if you intend to flip a house, you’re still the homeowner.  For this reason, some lenders will only do business with an entity believing it insulates them from you, personally.  I’m not sure I'd agree, especially if they require a personal guarantee.

Discussions with my attorney indicate it doesn’t matter.  If you loan to those with an ongoing proven track record in the rehab business, and they represent that the home is a flip, non-owner occupied, etc.,  it would be extremely difficult for them to claim you took advantage of them as innocent homeowners – entity or not.  In fact, I would think that if they were flipping their first home and you cleaned out someone’s hard-earned SDIRA thru foreclosure of their flip, you could still be in a world of hurt standing in front of a judge.

Jeff

Nate Mao · Answer

Thanks all, I also wonder how much is the bond should a general Contractor carry? I have a contractor only have $10,000 bond.
and he has a workman comp with "STATE COMPENSATION INSURANCE FUND" and it has no limit.

anyone heard of STATE COMPENSATION INSURANCE FUND?

Jon Holdman · Answer

Its possible the particular HML you're talking to specializes in lending to self directed IRAs.  That's something of a niche business.  Try speaking to other lenders.  Try asking this lender for a referral to a lender that will lender to an individual.

why a Hard money lender only fund to fund to Self-Directed IRA?

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