Any advice for lending from an SDIRA?

Question

Hi everyone,

I have a private lender lined up who will be lending (unsecured) to me from their SDIRA (checkbook controlled IRA).  I'm just a bit confused about how to get the ball rolling.  It is as simple as finding an attorney to put together a promissory note and then transferring the funds from the SDIRA to my account?  I'm only a bit hesitant because it's an IRA and I do not want to make a wrong move and trigger a taxable event or a penalty.  Does anyone have experience with this type of transaction or maybe even know an accountant and or lawyer in the Eastern PA area that would be a good resource to talk to?

Thanks in advance

Marc

Steve Babiak · Answer

See this other post for my recommendation:

https://www.biggerpockets.com/forums/49/topics/555773-what-is-the-happy-path-for-a-private-money-lending-transaction?page=1#p3375602

Jeff S. · Answer

Title companies are insurance companies.  They have attorneys but these are not your attorney nor that of your lender.  Nor are they IRA custodians.  Title companies will review your loan documents to protect themselves and for no one else.  No lender should rely on a title company to prepare a complete loan package or expect to be fully protected.  Additionally, no lender should be using loan documents prepared by their borrower.  In whose interest do you think they will be written?

Real estate loans consist of many more documents than a note and deed of trust or mortgage, as often recommended here. In fact, the documents addressed by the attorney in the referenced thread are also incomplete but I recognize he was just trying to make a point. It sounds like your lender should call him.

“I have a private lender lined up who will be lending (unsecured) to me from their SDIRA”

You might be confused about personal guarantees, @Marc Izquierdo.  If the IRA is borrowing money, the IRA beneficiary cannot sign a personal guarantee.  When lending, the IRA should absolutely require a personal guarantee, assuming it’s a loan to your entity.  To recommend otherwise to your lender is terribly unfair and something that should be questioned by his or her attorney.  You also didn’t describe your relationship to the IRA owner.  If you are related, your lender must ensure this is not a prohibited transaction (i.e. no loans to linear ascending or descending relatives, etc.).

“… and then transferring the funds from the SDIRA to my account?”

Money should always be wired to a neutral party such as title, per written lender instructions.  Never directly to the borrower.

Carl Fischer · Answer

Hi @Marc Izquierdo. I agree with many of the previous posts - it is best to have the promissory note transaction facilitated by a neutral third party, whether that be an attorney or IRA custodian. To break it down, because the note is going to be unsecured, the title company would not necessarily need to be involved. If a note is secured, it means there is a type of security or recourse for the lender to take in the event the borrower is unable to pay. Usually the security is something along the lines of a mortgage on a property. In that situation, the title company would most likely be involved, because now the IRA is a lienholder on the property. If it is unsecured, the recourse available to the lender is not directly associated with a piece of collateral, like a mortgage. It is important to make sure that the lender on the note is the IRA as a separate entity than the IRA account holder and that the account holder never touches IRA money on the way out of OR back into the IRA. Once the note is drawn up between the two entities, the SDIRA will then send you the check/wire for payment.

You mentioned that the SDIRA is checkbook controlled. The only thing that changes in that case is the lender is no longer the IRA but rather the LLC that is owned by the IRA.

If you have any further questions, or would like more information on good attorneys in the PA area, I would be happy to connect.

You mentioned that the SDIRA is checkbook controlled. The only thing that changes in that case is the lender is no longer the IRA but rather the LLC that is owned by the IRA.



If you have any further questions, or would like more information on good attorneys in the PA area, I would be happy to connect.

Drew Holland · Answer

@Marc Izquierdo  There's a company called Equity Trust Financial (or investments; something like that).  Search "equity trust self directed IRAs" in Google and you'll find them.  They specialize in SDIRAs and admin; they can help you.  If you can't find them, message me and I'll find the name and contact for them.  - John Bowen at Equity Trust; just remembered while typing this.

Steve Babiak · Answer

There is a common reason for investors to need “unsecured” loans as in no collateral. Say a hard money lender is in first position, and the HML stipulated that there will be no second liens (because a deed in lieu is simpler that way); but investor needs the rehab to be funded some too, so then seeks lenders willing to do loans with no collateral so that the HML is kept in good standing.

Steve Babiak · Answer

@Jeff S. - that “unsecured” part in the OP was not caught by me originally, until you highlighted that in your post. This is beginning to sound much more risky for the lender, with there being no collateral.

And you are correct when you surmised that the attorney I suggested in the earlier link will have many more “documents” included in the lending package.

Marc Izquierdo · Answer

Thanks a lot for all of the responses.  There's a ton of great information here.  If anything, I definitely have learned that the lender should absolutely be working with an attorney to prepare loan documents and it's not as simple as a promissory note.  Thanks @Steve Babiak and @Jeff S.for driving that home.

To clarify what I'm looking to do a bit more, this loan would be for the down payment and/or rehab on a future property.  So as of right now, there is no property and no real estate to secure it.  It's pretty much a personal loan like you would get from a bank.  The lender is a long time family friend and this would not be a prohibited transaction based on my research.  When I said unsecured, I meant no physical collateral but I do intend on providing a personal guarantee (maybe that technically makes it secured?).

I intend to purchase my next property using conventional financing and historically, these lenders don't like unsecured funds to be used as down payments unless they've been seasoned in your account for 3+ months (i.e. they don't ask you for more than 3 months worth of bank statements during underwriting). The thought process is to have my private lender lend me the money now so that it can season in my account by the time I find something to purchase.

Jeff S. · Answer

Well, maybe I’m confused @Steve Babiak.  I read “unsecured” as there would be no personal guarantee.  Not that there would be no collateral.  I assumed this was a loan secured by real estate.  Otherwise, why even post on this board?  Perhaps, @Marc Izquierdo could clarify?

Steve Babiak · Answer

If you read the link I supplied earlier that was a post written by an attorney, you will discover that he advises to never let a title company create lending documents. That post should be mandatory reading for anybody considering getting involved with private lending.

Rick Pozos · Answer

If you have a contract at a title company or attorney (I dont know which you do in Penn), let them know that your lender is your friends self directed ira. They will do the documents to close the transaction with the sdira as the lender. The Title co or atty will get the docs to the lender for approval.

Your friend should know how to request money for a transaction. Money goes to the Title Co/atty. NEVER does money go straight to you.

Any advice for lending from an SDIRA?

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