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2nd Mortgages as an IRA Investment Part 1

Investing in Real Property Through an IRASecond Mortgage IRA Real Estate Investing

I attended a great IRA class. The class was on investing in Real Estate through your IRA. The class was actually written by our CEO, Terry White and I’ve seen him teach the class at least ten times. However, this time it was being taught by another real estate investor here in town. I thought it would be interesting to see someone else’s take on Terry’s class, so I decided to go. My hope was to go to the class and just blend in, but the instructor knew who I was, so I ended up having to give my opinion and participate a lot more than I had hoped. It turned out to be a great class and I really got a lot out of it.

How to Buy Second Mortgages on Foreclosed Realty

One thing that the speaker talked about was buying 2nd Mortgages on foreclosed properties through your IRA. It was very interesting and I thought it would make a good blog topic. It’s kind of complicated and pretty in depth, so I’m going to do my best to explain it. I have a feeling that I’m going to get a bit “long-winded” on this subject, so I’m going to divide it up into two sections: foreclosures and 2nd mortgages. Please bear with me because this is good stuff.

Learn a Little More on the Foreclosure Process

I guess first I should explain how foreclosures work. I’m sure it’s different depending on what State you live in, but here in New Mexico when a property is foreclosed on, it goes to auction on the courthouse steps. This is not a metaphor, the auction literally takes place on the steps in front of the courthouse. If you start going to these auctions, you’ll start to notice that it’s pretty much the same people there every time. Make no mistake, this is no place for amateurs. Buying foreclosures is a big boy’s game and if you don’t do your homework, these guys will eat you for lunch.

Guess Who Gets Paid First?

The typical property at a foreclosure auction will usually have at least one mortgage and perhaps some other liens. For this example, let’s assume that there are no tax liens or any other type of liens on the property. Also, to make it easy, let’s assume that the property is worth $150,000 and there is a first mortgage of $50,000 and $5,000 in back payments due on the property. The first mortgage is considered the first position lien, which means that the first $55,000 ($50,000 for the mortgage and $5,000 for back payments due) generated from the sale will go to pay off that lien. If someone outbids the value of the mortgage and any liens on the property, the remaining money would go to the person who is being foreclosed on.

The first position lien holder will want to bid at least $55,000 to make sure that they do not lose any money on the sale. If they end up getting the property back for this price, they can simply re-sell it and get back the money owed to them from the first mortgage. If there are additional mortgages on the property, they would be in inferior positions to the first mortgage. This means that the first mortgage is paid off first and if there is any additional money made from the auction, that money would go to the other mortgages on the property.

Lien priority is based on when things get recorded.

More on Mortgage Investing to Come.

In my next blog entry, I will talk about 2nd mortgages and how to invest in them. If you have any questions about any of the information in this blog, please contact your CPA or tax professional. The Sunwest Trust News Blog is not to be considered tax or legal advice. It’s simply public information that we think might be helpful to our clients. As always, Sunwest Trust does not give any investment advice or endorse any investment products.

photo credit: Rev Dan Catt via photopin cc

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.