All Forum Posts by: Alan Johnson

@Jarid S. Johnson I debated about responding to your post because I wear two hats -- I am employed by a self-directed IRA custodian, but I also have my own SDIRA account as well. I ultimately decided to respond due to your statement that "it's a scary thought." Insofar as possible, I will try to contribute from the standpoint of how I made the decision to self-direct a portion of my IRA funds.

As anyone in a customer-facing role on the "custodial side of the table" will tell you, one of the toughest challenges is to provide education and information without it sounding like advice (which we are not permitted to give).  So we fall back on the standard suggestion -- namely, "consult with your attorney, CPA, and/or financial advisor."

But sadly, the professional most likely to be able to give you this advice (your financial advisor) probably can't help you much because he/she either a) doesn't understand self-directed IRAs, and/or b) is limited in what they can offer in the way of investment products.

So self-direction definitely is a scary thought.  It was scary for me.  You see, for me personally, I do understand the stock market better than I understand alternative investments..... (which is to say that on a scale of 0 to 10, my understanding of the stock market is about 2 or 3, but my understanding of alternatives is about a 1 or 2.) But I decided that if a prospective client asked me if I have a self-directed IRA account (which many have), I wanted to be able to say 'yes.'

I am able to sleep at night with my self-directed investment because it is less than 5% of my overall retirement accounts.  I would suggest, therefore, that you not make an SDIRA investment until you are not scared to do so, either through education, investing only a small amount initially, or both.

As far as education goes, I have a dog-eared copy of Mat Sorensen's book "The Self-Directed IRA Handbook" close at hand on my desk at work. You can easily find a copy on Amazon. It is the most thorough book I have personally been able to find on the subject, and as an attorney he provides summaries of many of the key court cases that have helped to shape how the IRS regulations are interpreted and enforced.

Also, there are a number of little bells that go off in my head when reviewing your thread comments and your profile.  When speaking with prospective custodians and TPAs (Third Party Administrators), I suggest you pursue, among other things, some of the following topics:

1. You have a background in video production that you wanted to apply to real estate investing. Were you thinking that you would create videos of the properties owned by your IRA? If so, have a conversation about whether the custodian believes that might be a prohibited transaction.
2. You mentioned fix and flips in your profile. Have a discussion with the custodian about UBIT as it relates to this strategy if done in your IRA.
3. You mentioned your interest in an LLC whose members are all IRA accounts. Talk with the custodian about how the LLC is going to be managed, and who will be doing it.

Good luck, and I hope that my thoughts are of some help to you.

@Brian Jordan Thanks. There seem to be a lot of moving parts that the wholesaler has to orchestrate once the P&S has been assigned. You need to have both the seller and the assignee at closing. So I assume:

1. You mentioned that the $2,000 deposit is non-refundable.  However, in the (unlikely) event that the seller does not close, do you return the $2,000 to the assignee? (Presumably, the answer is 'yes', otherwise why hold the deposit in escrow?)
2. If the assignee fails to close, you get the $2,000.  But in this case, what do you do about the contract you have in place with the seller?  Do you proceed with closing and purchase the property yourself?

Thanks,

Alan

@Tom Gimer @Justin Smits  Thanks so much for taking the time to answer my question.  My $10k example was admittedly unrealistic.

However, by way of further background, @Dustin Heiner wrote an excellent article on this topic on his website masterpassiveincome.com titled "What to Do When A Buyer Backs Out From An Assignment Of Contract".

In it he suggests a scenario where the assignee decides not to proceed, perhaps after discovering a big ticket repair item that would cost significantly more than the portion of the assignment fee held in escrow.  So it's possible that the assignee might decide to cut his losses and forfeit the fee amount he already paid in.

Regardless of why this might happen (which is really immaterial), the questions I should have asked are:

1. How frequently (percentage of a wholesaler's deals) does it happen that a buyer backs out of the assignment, and
2. When it does, how successful are you in pursuing the alternatives mentioned in Dustin Heiner's article?

I came across an interesting thread on when assignment fees are paid here on BP with the title Paid at Closing vs. Paid at Assignment. It raised a couple of questions in my mind about the risks of wholesaling, namely the implications in the event that you assign a contract and the buyer backs out.

It seems to me that Paid at Assignment would both:

1. Result in committed assignees, otherwise they would risk losing the money they paid the assignor, and
2. Provide the assignor with a significant cash cushion against breach of contract if they cannot locate another buyer prior to closing, and ultimately decide to cancel the contract with the property owner.

But this raises another question. Let's say you execute a P&S with the property owner and give them an EMD of $500. You assign the contract to a real estate investor and receive a fee of $10k at assignment.  The investor fails to close and you cannot find another buyer in time, so you cancel the contract with the property owner and forfeit the EMD of $500.

But you've essentially made $9,500 for breaching the contract! This can't be right and I would suspect it would create serious problems for the wholesaler.

Does anyone have experience with this type of situation that they could share?

@Charlie MacPherson Yes, I understand your opinion from the other thread, and as I indicated in my response I want to get a legal opinion from an attorney.  I posted the question here in the hopes that either a) there are attorneys that follow this thread and would be willing to consult with me on this subject in return for a fee, or b) there are others on BP that could at least refer me to an attorney who might be knowledgeable on the matter.

BTW, I did leave a voicemail message for Henry Rappa on Monday, but he hasn't returned my call.  Perhaps you could intervene with him on my behalf and ask him if I might engage his services?

Thanks,

Alan

I have been told by a real estate agent that if I want to execute an assignable option agreement with a property owner that gives me the right, but not the obligation, to purchase the property at an agreed price during an agreed period of time, I must do this through a real estate agent. Otherwise, if I then sell (assign) the option to someone else, the Commonwealth of Massachusetts will deem this as brokering real estate without a license. Is this true?

@Kenny C. For starters, I recommend the book "How To Make Money With Real Estate Options" by Thomas J. Lucier. It is as close to an "operating manual" as anything else I have found.  It is loaded with sample documents (but see my caveats below) and step by step instructions.

Caveats:

1. The book was written in 2005, and various regulations and statutes may have changed since then.  In addition, these regulations and statutes vary from state to state, so you definitely would want to have any of the sample documents reviewed by an attorney before using them.
2. The book contains links for the documents, as well as contact information for the author.  However, the links no longer work and the office number and email address for the author are no longer valid as well.  If you can find an electronic version of the book in a format that can be copied (e.g., pdf version), then you could cut and paste the documents.
3. Contrary to what the author states in the book, I have been told here on BP that a real estate license is required to buy and sell options (at least in Massachusetts).  This doesn't seem logical to me, so I am in the process of confirming this with various attorneys.  Connect with me and/or send me a PM if you would like to be kept up to date on my progress.
4. Perhaps most intriguing to me is that the book does not go into detail about how to value and price an option.  I have some experience with listed equity options, and I believe the option pricing concepts in that arena can be applied to real estate options as well.  Again, PM and/or connect with me if you would like to discuss this further.

Hope this helps!

Alan

@Mike Hendrickson From what I am seeing, there actually seems to be two separate issues that are  used interchangeably depending on the author's viewpoint.

1. Is it legal?
2. Is it moral / ethical?

The second question seems to hit the hot button of a lot of contributors on BP, probably because it comes down to differing individual core values.

To illustrate, consider this hypothetical example:

Scenario 1: You're in a shabby second hand store and notice a dusty Van Gogh that you know to be worth $1 million dollars.  You ask the shop owner how much he wants for the painting, and he says he doesn't know.  He asks you to make an offer.  What is the moral and ethical price you should offer the shop keeper to purchase the painting?

Scenario 2: Same as above, except that the painting has a price tag of $100 on it.  Do you buy it for the asking price of $100, or do you offer more?  If so, how much more? (Or do you offer less!)

There is, of course, no universal answer to either situation.  It's different for all of us and, accordingly (at least in my view) not worthy of debate in a forum that exists for the purpose of sharing knowledge and experience rather than passing judgement on perceived motivations.

This is the primary reason why I chose the tagline "I would rather be judged by the quality of my contributions rather than perceptions of my motivations" in my profile.

To some extent your ability to rollover to an IRA could depend on how the plan is set up. The easiest way to determine this is to call the administrator of your plan (who you receive your statements from) and ask them how much, if any, of your account balance can be rolled over to an IRA.

Here is a link with some FAQs that might provide you with some additional insight:  https://www.dwc401k.com/knowledge-center/in-servic...

Note that I have absolutely no relationship with the company in this link.

@David S.  Hope all is well in Prairieville (I used to work at the BASF plant in Geismar in the mid-80s).

Your comment about an investor as a disruptor is hitting close to the point I was trying to make about options.  Rather than committing a 'large line of credit' to actually make the purchase and hope to come out the other end with a profit, executing an option contract with the seller instead on a distressed property could be done with 10% or less of the capital commitment, plus provide the investor with breathing room to determine if they can actually make the deal work out.

This used to be called 'speculating'; now it all seems to be lumped under the general category of 'wholesaling' and considered to be the equivalent of swindling...