Anything I need to do as "Seller" with Buyer using IRA?

Question

Am I, as a seller, responsible for anything regarding a buyers IRA? Is it there responsibility to know what to do legally before we close? Just making sure I am in doing everything correctly as I am not familiar with IRA's and the legalities surrounding them.

Also, with the buyer using an IRA, would this slow down closing times?

Thanks

Also, with the buyer using an IRA, would this slow down closing times?

Thanks

Kacey W · Answer

Thank you guys. We will keep pressing. This has been good for me because I can now really dive into IRAs, and learn that aspect of the business.

Jon Holdman · Answer

A person and their IRA are two legally separate entities.  They CANNOT do business together.  An IRA can buy a house using some of its cash for the down payment and getting a non-recourse loan.  The person cannot sign for this loan, only the IRA.  These loans are not easy to get, but do exist.  Down payments are high, 35-40%.  And there are tax consequences for the IRA.

A person CANNOT borrow money from their IRA for a down payment and then buy a house using the IRA money for the down payment and getting a loan in their name for the rest.  The problem here is the loan between the IRA and the owner.  That's a prohibited transaction.

I've read its possible for a person and an IRA to create a partnership.  For example an LLC.  Then the IRA puts in some cash and the person signs for a loan and the LLC owns the house.  I'm not convinced this is legitimate because an LLC controlled by the person is also a disqualified party.  If this is what your buyer is trying to do, it may be in your best interest for you and the seller to get on the phone together with the buyer's IRA custodian and discuss EXACTLY what the buyer wants to do.  At least, the buyer must have this conversation.  Ultimately, the custodian will make a decision about what deals they will allow.  If the don't like your deal, the deal won't go through, leaving you holding the bag.

As a seller, this is not really your problem, and I would avoid getting dragged in.  You're selling the property to some buyer.  The contract should state whether its cash or financed.  If its financed, require the buyer (not the person, whoever is listed as the buyer on the contract) to provide proof of a loan approval in the name of the buyer.  Put a "loan committment deadline" in the contract with a date.  If you don't have a firm committment (not pre-approval and certainly not a pre-qualification) from the lender by this date, the deal's off and you keep the earnest money.

Just getting an earnest money check from the IRA will require the custodian's involvement.  If the IRA is the buyer, the contract must be from the IRA, not the person.  The earnest money must be from the IRA, not the person.  If the person is signing the contract and giving you earnest money then saying the IRA's going to be involved, this person doesn't understand the laws and this transaction is not going to happen.

Chris Martin · Answer

The buyer can use IRA funds for the down payment, then borrow the remainder with a non-recourse loan... but I agree with Loc. One interesting twist to getting an IRA loan... the IRA can borrow from another individual's SDIRA, but this is a remote possibility since you say the "buyer is not real familiar with IRA laws..."

Keep in mind the custodian ultimately signs the contract and HUD-1 for closing. So if the IRA owner or you have questions, his custodian should be a resource to help.

Loc R. · Answer

The buyer can use IRA funds for the down payment, BUT the loan has to be taken on/signed by the IRA.

That being said, there are very few lenders for non-course loans to IRAs these days.  In addition, the terms typically make the buyer re-consider to buying in their own name.

Kacey W · Answer

Thanks Chris!

One more question, which I don't believe is possible: Can the buyer use IRA funds for the down payment only, and get a bank loan for the remainder?

I feel like this buyer is not real familiar with IRA laws (even less than I am), and because of that, might cause problems with the deal/structure going forward. I am not sure what I can do to help, except possibly move on to another buyer??

Chris Martin · Answer

The buyer, more specifically the buyer's IRA custodian, will know what the offer needs to contain. Don't be alarmed if the person you perceive as the "buyer" (the IRA owner) doesn't actually sign the contract, since it isn't necessary for the validity of the contract... since the custodian will be signing on behalf of the IRA owner. That may be the only unusual aspect of the transaction. As long as the account is funded enough for the purchase, you should not have any slow down or delay in closing.