All Forum Posts by: Alan Johnson

@Charlie MacPherson  Once again you have provided me with valuable insight....  It's hard for me to comprehend that a 900% return on investment within 30 days isn't enough profit.  More food for thought, I guess...  

@John Thedford Regarding my reference to value add/creation, wouldn't $331k from a cash buyer in my example be of more value to the seller than netting $323k after deducting 5% commission from a selling price of $340k?

@Rob K. Yes, you can establish an IRA account with a brokerage firm and transfer from your self-directed Roth to the Roth at the brokerage firm. It is a separate IRA account that you would direct independently from the self-directed IRA account. I'm not sure what you mean by "outside the self-directed custodian's control"; the brokerage account custodian would have no more or less "control" than the self-directed IRA custodian.

Your self-directed IRA custodian may charge fees for a partial transfer, so you would want to check their fee disclosure document.

Also, I know that you are not really asking about checkbook IRAs, but you might want to consider separate IRA accounts for your brokerage activities and your self-directed activities.

Note this from the IRS website: "Generally, if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is includible in his or her income."

So if you had other assets (including exchange-listed investments) in the same IRA account as your self-directed investment and the IRS determined you had conducted a prohibited transaction, the exchange-listed assets would be deemed as distributed along with the self-directed investment.

Having separate IRA accounts for brokerage and self-directed investments can provide you with a "firewall" of sorts in the event that one account engages in a prohibited transaction.

@Charlie MacPherson Thanks again for the detailed reply to my comment.  I looked at the link to MA Law that you provided and must say that I have a different interpretation.  I'll offer my interpretation here, with the intention of contacting a few attorneys in MA this week to obtain a consensus of their legal opinions.  I am certainly not licensed to practice law or offer legal advice, but my thought process goes like this:

1) The definition of real estate broker in the link you provided contains the phrase "any person who for another person" (the emphasis is mine).  But in the example above, the option holder would be acting on his or her own behalf, not on behalf of another.  I see a difference between buying and selling an option I personally own, and trying to sell or market an option owned by someone else in return for a commission or fee.

2) You acknowledge that I can proceed with the purchase of real estate as long as I have the financing, close on the deal, and take possession of the property.  This I can do without utilizing a broker, correct?  I am representing myself as purchaser.  Once I own the property, I am free to do with it as I wish, including selling it to someone else.

3) Why then can I not enter into a different arrangement with the property owner?  Why cannot I say instead to the property owner "I am not sure that I want to buy your property, but I am very interested.  In return for $1,000 today would you sign an agreement to sell the property to me or anyone I designate for x$ anytime between now and the next 60 days?  If I decide not to proceed at the end of that period, the agreement expires and you have no further obligation to me.  In either event, you get to keep the $1,000".

Are you suggesting that if I want to buy the property flat out from the seller I can do this without a broker, but if instead I want to buy an option to buy the property from the same seller, my option transaction must be handled by a broker?  That doesn't seem consistent to me.

But as I said, this is getting very complicated and touches on points of law that I do not understand and certainly am not qualified to address.  So at this stage I think it best that I engage the services of an attorney to get a legal opinion.

Again I thank you for your views and for providing me with some serious food for thought and research.

Alan 

@Charlie MacPherson  Thanks so much for your reply to my comment, and especially for providing the example.  Call me naive (I'm not a real estate investor and probably never will be; my interest is from a business model and value creation standpoint), but it seems to me that embracing a major paradigm shift away from wholesaling in favor of options could bring more discipline, fairness, and respectability to the process.

Let me try to explain using your example.  Say an investor makes the same assessment as you did about the property's potential value.  Because there is some risk involved (the property will "probably sell at $335k - $340k"), the investor offers the property owner $1,000 for a 30-day option agreement to buy the property for $321k (this is your minimum valuation of $325k less the $4k needed for rehab).  Once the agreement is in place, let's say that the investor locates a buyer willing to pay $331k for the property.

The investor sells the option to purchase the property to this buyer for $10k. Buyer's cost for the property is $321k + the $10k paid for the option = $331k.

The investor receives $10k, which is a 900% return on the option investment (in less than 30 days!)

And the property owner receives $322k in total ($321k upon sale of the property, and $1k from the sale of the option).  Moreover, if the investor can't sell the property in 30 days, the option expires but the property owner still has $1k to apply against the carry costs they incurred while the option was in place.

Would you have any ethical or legal concerns with this approach?

There are so many back-and-forth discussion threads on BP between wholesalers and licensed agents that it reminds me of the feuds between cattle ranchers and farmers in old west movies from the 50s and 60s.

Rather than risk legal difficulties by trying to wholesale using purchase agreements with various "subject to" escape clauses, why not simply avoid these issues altogether by executing an option agreement with the property owner instead?

Option agreements are specifically designed to achieve what a wholesaler is basically trying to accomplish (i.e. during term of agreement property owner has obligation to sell to option holder at agreed price, but option holder can choose at his/her sole discretion whether to proceed with purchase, sell/assign the option agreement to another buyer, or simply walk away from the deal by letting the option expire without exercising it).

Or am I missing something here?

@Mark Pedroza raises an interesting point about straight option agreements.  Rather than risk legal difficulties by trying to wholesale using purchase agreements with various "subject to" escape clauses, why not avoid these issues altogether by executing an option agreement with the property owner instead?

Option agreements are specifically designed to achieve what a wholesaler is basically trying to accomplish (i.e. during term of agreement property owner has obligation to sell to option holder at agreed price, but option holder can choose at his/her sole discretion whether to proceed with purchase, sell/assign the option agreement to another buyer, or simply walk away from the deal by letting the option expire without exercising it). 

I'll be the featured speaker at this free event.

The 90 minute presentation will provide the basics of self-directed IRA investing, with a focus on real estate. Attendees will get an introduction into how self-directed IRAs work, permitted investments in your IRA, typical investments that are popular in self-directed IRA accounts, real estate investing with an IRA, and how to get started.

Throughout the presentation there will be numerous examples and case studies, with ample time for questions and dialog.

Come attend this event for an opportunity to participate in a live meeting event and have your questions answered in person!

Due to limited seating, all attendees must register via this link: https://www.eventbrite.com/e/real-estate-investing...

@Tyler Mundy This is a very intriguing question and one that occurred to me when I began to look into how wholesaling actually works.  I am aware of wholesalers that try to make the deal into a "win-win" for both themselves and the seller, and in speaking with them I think this can actually be a potential competitive advantage.

I'm relatively new to BP and still 'researching' how the majority of wholesalers operate, but it seems to me that real estate purchase option agreements are a more elegant way to conduct this type of business.

I'm in the process of trying to put together a blog that, hopefully, will allow me to demonstrate this.  It only has one post at the moment (which is just a very simple illustration of the concept of options), but my intention is to add content to it as I discover more in my research.

I hope you'll follow and participate in my journey.

Alan  

This looks like a motivated group!  I don't live in the area and therefore wouldn't be able to attend, but lately I'm on sort of a mission to try to improve the quality of the events I do attend (or are considering).

In my area, Meetups tend to come and go.  I used to travel from NJ to Manhattan to attend some really interesting Meetups after work, only to find out once I got there that there were a lot of 'no-shows.'

So I took it upon myself to write a whitepaper with the title "How to Attract Investment Opportunities at Meetup Events".

It is based entirely on my own opinion and experiences, so I would consider it a big favor if any of you were to provide me with your feedback for improvement.  If you'd like a copy to review, just send me a PM.

Thanks!