Create a Self-Directe IRA Deal with a Non-Recourse Note
by Daniel Cordoba, CEA
The two can go together and when they do, it is a win-win for everyone - you and your IRA, and the seller involved.
First question: What is a non-recourse note? It is a loan that does not have a personal guarantee. For obvious reasons, this type of note is not the darling of the banking industry. Banks want low risk, and a high level of control, so they may shy away from this type of deal. You, the investor, need to know that banks, with their tunnel vision and underwriting processes, are not your only option. Second question: Can you convince the owner of a property that they can finance a non-recourse note? Absolutely.
When buying property with a non-recourse note it is difficult to find a lender that is willing to underwrite the purchase. Banks as we all know are only interested in providing notes that are in their benefit and in their time frame. As the saying goes "He who holds the purse strings calls the rules".
Let's turn the tables and provide the seller with a proposal for a note that he carries back and is fully negotiable on the market. What that means is that he is not required to hold the note any longer than one month. So if an investor is able to negotiate reasonable terms with the seller and the seller is able to sell the note immediately on the open market then you and the seller hold the purse strings
However, if two individuals, you and the property owner, were the parties in this deal, a non-recourse note may not be considered unreasonable terms at all. If you default, the original seller would be able to foreclose on the property.
If the seller was not comfortable with non-recourse terms, the note could be arranged to be sold to a note purchaser after you close the purchase deal. The seller is only required to hold the note one month, and can then sell it on the open market. The seller gets paid, with no fear of default, and you get your non-recourse loan and have purchased the property. The seller can, of course, hold on to the note. Interest earned on the loan is considered passive income, and has more favorable income tax treatment than ordinary income. If the seller keeps the note or sells it, it does not affect the original deal.
Advisors (such as those at www.RemiKnox.com/ know how to structure notes to be readily sold on the market, so the seller can be at ease deciding if they want to keep the note, or sell it to receive immediate cash after closing. Either way, the property owner can have peace of mind.
Since there are no fees to pay to a lender or loan broker along with the removal of any unnecessary requirements the closing costs should be lower. And those lower costs may provide leverage for negotiating a favorable terms.
Also if the note meets IRS regulations and the terms allow the option to pay down the principal, having to pay unrelated business or debt taxes could be eliminated or at least reduced.
The traditional bank route is not the only way to go. Non-recourse notes and IRAs can go together, and when the deal is sealed, it a success for the property seller and a success for your retirement account!
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