Real Estate Nerds 03: Bad Beats

Bungling Your IRA Account

Scott Maurer

Certified IRA Services Professional

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Chasing the shiny things can get you into a lot of trouble, including screwing up your IRA account. Scott Maurer, Director of Business Development for Advanta IRA, says that a lot of times, those new to retirement planning are too trusting and not asking the right questions. For whatever reason, the common threads for people that have bungled their IRA accounts is that they are not fully understanding of what they’re getting involved in. They’re not really doing their due diligence or seeking outside assistance to really evaluate their plan and its investments. On today’s episode of the Real Estate Nerds Podcast, our host and attorney Scott Smith and Scott Maurer talk about all of the ways people screw up their IRA accounts, some mistakes investors can watch out for, and the proper steps to take to avoid losing your money.

IRA Custodians: How They Can (And Can’t) Help You

[1:00] Our host asks Scott Maurer to describe a deal where someone really bungled their IRA, but thought they were making an awesome investment. Scott Smith also wants to know what typically happens that makes these deals end badly.

[1:28]The mistake Scott Maurer sees over and over is that people botch IRA investments by failing to fully understand tehm and seek the appropriate kind of professional help.

[1:50] Scott Smith  asks if those making major IRA mistakes simply  don’t use IRA accounts often, or are attempting one-time deals.

Scott Maurer remarks that that’s often true, or these are investors who are too trusting of their professionals and simply not asking the right questions.Other investors simply don’t understand the risks or these investments genrally, and are lured in with promises of returns that are higher than stock market averages.

[2:38] Many of these investors are perfectly intelligent and even successful in their own fields, but simply aren’t familiar with IRA accounts.

[2:58] As an Custodian at Advanta IRA, Scott Maurer is legally barred from advising on whether a deal is good or bad for the client.

[3:08]Scott Maur er elaborates that due diligence issponsibility of the clients: “It’s written in our documents and the forms they sign.” IRA custodians are limited in their ability to advise, and typically refer clients to tax advisors or attorneys. However, their role is to esnure compliant documentation, not advise on investments.

[3:56] Scott Smith offers an insider secret on exploiting lawyers’ lust for money: Attorneys are so hungry for business that they’ll offer extremely cheap, or even free consults.

Scott has used this trick himself to get a cheap half-hour consult. This means the lawyer can review your deal and offer dirt-cheap egal advice on your situation. Attorneys do this in the hopes of getting more of your business.

Our host explains the risk of going cheap on legal advice. Getting improper, or no professional help can place the whole investment on the line. He recommends that new investors get a more seasoned investor or attorney in the field for help.

[5:03] Scott Smith expands on his tip for exploiting lawyers’ need for consultations. Many attorneysare willing to go to great lengths just to get a consult.

Scott Maurer agrees and encourages his clients to get attorneys involved. While some go through with the deal regardless, others make more informed decisions or even opt of out IRA investing on their lawyer’s advice.

[5:44] Even if a professional advises against an investment, it’s a good idea to listen: “Sometimes, the deal that you don’t do is important than the one that you did.”

How an IRA Deal Went Sideways

The two Scotts discuss a real-world example of a new IRA investor making a bad deal and what exactly went wrong.

[5:59] Scott Smitth asks for a real example of how an investor botched his IRA deal, even with professionals involved.

[6:18] Scott Maurer describes a client who was promised 10-12% returns, and blindly trusted his mortgage broker’s claim. The investor reasoned that with 20% down and a loan for the remaining 80% from the bank, he was sure to strike it rich. The client was new to real estate, and didn’t understand equity or the terms of the loan.

[7:08] Scott Maurer explains how the investor’s naivete on real estate and lack of familiarity with how real estate financing works ended up costing him.

[7:33] The client made a mistake by trusting a mortgage broker who was more interested in getting his fee than the client’s success.

Insider Tips on Getting the Most Out of Your Attorney and Custodian

The Scott Smith and Scott Maurer share their professional perspectives to help investors understand, and exploit, the roles and motivations of Custodians and lawyers.

[7:59] Scott Smith gets real about the motivations for everyone else involved in the deal: cold hard cash. Custodians, lawyers, and mortgage brokers are all motivated by their paydays, but limited in what advice they can offer. The person receiving the loan is solely motivated by money, while the professionals have specific roles they are allowed to operate within. These roles limit what advice they can and cannot give.

[8:28] Scott Maurer explains that the Custodian’s hands are tied. If an investor asks whether they can lend $100,000 from their IRA, the Custodian will simply tell them they can. But legally, they are barred from saying whether that is a good idea for this particular investor.

[9:03] Scott Smith offers some insight on selecting the right attorney and the importance of finding a lawyer who is appropriate for the deal. The best choice, in his opinion, is to find a lawyer who is also investing similarly themselves: “You need somebody who’s an investor in that field to tell you whether the deal itself is good.”

The attorney’s qualifications matter. The wrong type of attorney will simply tell you what you can do, rather than what you should do: “You really need a should. You need somebody else in there especially for your first couple of deals.”

[9:25] Scott Maurer’s client ultimately did get advice from a real estate attorney, he just did it too late. The client finally retained a real estate attorney because he had to foreclose on the borrower after over-lending from his IRA. When borrower walked, the IRA covered the loss, but the note was worth far less than the property.

[9:56] Ultimately the client spent substantially more on the attorney. If he’d gone upfront, he could have paid a few thousand dollars. But because the client waited, he paid thousands more to go through foreclosure and his IRA took back the property.

[10:16] Scott Smith points out the additional fees for foreclosure and the attorney’s services hit the misguided client even harder in the pocketbook.

Networking to Avoid Disaster: Use Your Real Estate Investing Community Wisely

The two Scotts conclude that there’s a better way to avoid this level of loss and drama: do your research upfront, hire the right attorney, and seek help from the investing community. Scott Mauer points out that you can get a lot of good advice from seasoned  investors completely free.

[11:00] Scott Smith concurs, and adds that getting this advice is easy. “It’s just as easy as popping into any real estate Meetup group and then just announcing in a meeting, ‘I’ve got a deal. It looks like this. Is anybody here ever done a deal like this who is willing to talk to me?'”

[11:30] Networking is critical, and you have no excuse, because it’s also free. Your network can save your ass well before things go bad, and can be a huge piece of your investing plan. Scott Smith puts this bluntly: “You’ve got to have a network, otherwise you’re going to get taken by somebody that knows more than you. That’s just the world we live in.

[12:00] Veteran investors also have something to gain from sharing their experiences with newer investors. Scott Smith points out that like most humans, even seasoned investors get lonely too: “They want a real estate friend. Just go and be their friend.”

[12:05] Scott Maurer agrees, adding that more experienced investors attend these groups to find more deals and build their network.

[12:23] Scott Maurer offers advice for new investors: “Don’t be afraid to ask questions…If you’re just getting started, there are no dumb questions and everybody in that room has been where you have before.”

[12:45] Scott Smith highlights another way to use the feedback of other investors. You may have a good deal if other people want in on it too.

[13:14] If you take away one piece of advice from this episode, make it this: If your professional isn’t telling you if you should do the deal or not, they’re not giving you advice on the deal itself. They’re just doing their part. Lawyers, custodians, and CPAs are generally going to tell you what you can do, not what you should do. Get advice from someone who can answer the “should” questions. 

The Takeaway: Due Diligence Is All on You

The bottom line for today is to always do your own homework, and of course, get professional help. Just be sure it’s the right kind of help. Thanks for tuning in to this week’s Episode of the Real Estate Nerds Podcast. This was a Bad Beats episode, our series on investors who’ve crashed and burned in real estate and  the investing game.

Listener Resources

Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.

For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.

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About Scott Maurer

Scott Maurer is the Director of Business Development for Advanta IRA. Advanta specializes in administering self-directed IRA and retirement accounts. Scott has worked for Advanta since 2006, and is a frequent speaker and lecturer on the topic of self-directed IRAs and using retirement funds to invest in real estate and other alternative assets. Scott oversees the sales, marketing and education staff to insure that new clients receive proper guidance and support when establishing relationships with Advanta. Scott is also an attorney and a member of The Florida Bar, although he does not give legal advice to Advanta clients.