My Roth 401k bought a land contract in late August of 2017. I found the Roth 401(k) property investment opportunity while speaking nationwide on taxation of real estate and self-directed IRA’s/401k’s. During one of the breaks, a member of the audience asked me if I could find a process server in Newark, Ohio, which is near my home in Columbus. While I could not recommend a process server, I was curious as to what they intended to do with the land contract. They wanted to sell it. They bought it for $6,500 and agreed to sell it for $13,500. Since the underlying house (3 or 4 BR, depending on the use of one of the downstairs rooms) is worth around $55,000, this is a great deal for my 401k and I was happy to see the sellers make a quick buck.
We used a local lawyer to file for forfeiture of the land contract and eviction of the debtor. Once in court, the debtors, who had fallen on hard times and seemed like decent people, asked if we would rent to them month-to-month for 4 – 6 months while they qualified for public housing. They are able to pay $600 per month, which is $150 below FMV (fair market value) rents. We agreed. Why not? It makes the judge happy, gives the debtors a chance to get our lawsuit cleared from their records, gives them time to move in a convenient and dignified fashion, and means we are much more likely to get back a “non-trashed” house. We even agreed to provide them $500 cash for keys if they kept the place in shape and left it “broom clean” when they moved out. They signed a release of the land contract, so our title to the home is free & clear.
With the exception of the basement, the house is in pretty good shape. Though I have to mention that it wasn’t the house the hedge fund or we thought it was! It was the house next door to the one that was in the picture – they even gave us the wrong address. Typical. Do your homework!
The 401(k) property investment will cost about $10k on rehab, most of it in the basement which needs shored up and dried. Between the purchase price, the rehab, and lawyer/title fees, we should have just shy of $25,000 in it.
We have three options with that property at present:
a) I know an investor with rentals in the neighborhood. We discussed his paying me $30k for it. I’d take that deal pre-rehab. He wants me to rehab it and sell at that price. I think I will “pass”. Too much juice to give it up that cheaply.
b) I could rehab it and rent it out. It’d probably rent for $750. But I do not have properties or a property manager in that area. I’m not very interested in dealing with a new set of contractors, property managers, attorneys, laws and so on for just one property. Pass.
c) There is a huge demand for paper secured by a first mortgage on real estate – lots of people are chasing return in a “zero interest rate” environment. If we sell on another land contract, at $55,000 with 10% down and some decent screening, the paper should sell at face value (assuming an 8% – 9% interest rate) after seasoning for a year with complete & on-time payments. Selling the note after a year for $50,000 to $55,000 and reinvesting that money in a rental property in a region where I already have other rentals is very appealing to me. I think that’ll be the plan for me and my 401(k) investment property!
By attorney John Hyre, Iralawyer.com & realestatetaxlaw.com