Short Sale Home in a Self-Directed Real estate IRA

Buying a Short Sale Home in a Self-Directed Real Estate IRA

We have had a nice, long bull market in real estate over the last decade. But despite the long string of increasing house prices nationwide, more than 1 home in 11 in still seriously underwater. A new report from ATTOM Data Solutions found that about 8 percent of homes – more than 5 million dwellings, were worth at least 25 percent less than the outstanding debt that these homes secured. That’s a record low, down from 28.6 percent of homes in Q1 2012 – but Self-Directed Real Estate IRA investors should take note that some of these sellers will be very motivated. The downside, of course, is that in order to buy one of these homes at an acceptable price, they will probably need to get the lenders to agree to a short sale.

What’s a short sale?

A short sale is one in which one or more lenders on the property agree to accept less than the amount owed on the home, in order to get the home sold. They may do this if they understand the homeowner needs to move and/or cannot continue to make payments on the property and cannot pay the balance on the loan. If everybody wants to avoid a foreclosure, but the homeowner’s situation is otherwise hopeless, then a lender may agree to the short sale, releasing the owner from the balance, recovering what they can and getting a non-performing or soon-to-be non-performing loan off their books.

Where are the most underwater homes?

Louisiana and Mississippi lead the country with the greatest percentage of seriously underwater homes, at 20.8 percent and 16.9 percent, respectively. Arkansas is next, at 15.9 percent, followed by Illinois (15.6 percent) and Iowa (15.2 percent).

Boiling things down to the city level, the towns with the greatest percentage of seriously underwater homes are divided between the Deep South and the Rust Belt, with Baton Rouge, Louisiana (20.7 percent), Youngstown, Ohio (19 percent), New Orleans, Louisiana (19.0 percent), Toledo, Ohio (18 percent) and Scranton, Pennsylvania (17.7 percent) topping the list.

Boiling things down still further, there are 27 zip codes nationwide where the percentage of homes securing debt worth 25 percent or more than they are worth – including areas of Detroit, Virginia Beach, Chicago, Cleveland, St. Louis and Atlantic City.

More than 70 percent of homes in area code 08611 in Trenton, New Jersey, were underwater by 25 percent or more. Following Trenton are zip codes 63137 in Saint Louis, Missouri (64.8 percent); 60426 in Harvey, Illinois (62.3 percent); 38106 in Memphis, Tennessee (60.5 percent); and 61104 in Rockford, Illinois (59.6 percent), according to ATTOM’s research.

New Orleans and the surrounding parishes, as well as southern Mississippi are of course still feeling the after effects of much of their housing stock being literally underwater after Hurricane Katrina in 2005.

Buying a home in these areas for Self-Directed Real Estate IRA accounts can be tricky. But in many cases, lenders may be willing to take a haircut because their ability to continue to collect on these mortgages is doubtful. Eventually these homes will wind up in estate sales and auctioned off at fire sale prices, or owners will simply walk away from their mortgages and mail in the keys, leaving the bank to auction off the home to investors at steep discounts. In many cases, they would rather sell the home to you and eat a relatively small loss on the loan than risk a much bigger loss, later, after undergoing the time and expense of a foreclosure.

Some of these struggling areas may have incentives for real estate investors and homebuyers to develop in the area, so check with local real estate agents and other experts first for the latest homebuying and investment programs.

Buying a short sale in a Self-Directed Real Estate IRA

If you can get a good price on a short sale home, it may be a great addition to a Self-Directed Real Estate IRA. But be prepared for some challenges:

  • It can take time to get the lender’s approval.
  • Secondary lienholders, such as home equity lenders, may also need to agree to the short-sale, and not just the original lender.
  • You will probably need to buy “as is.” And troubled or struggling homeowners tend to defer a lot of needed maintenance. But it may be less risky than buying a home at a foreclosure option: At least you will be able to inspect the property.
  • These transactions sometimes fall through at the last minute if a struggling seller cannot come up with some cash of their own at the closing.
  • The seller could file for bankruptcy, which would halt the short sale negotiating process.
  • The lenders may not buy the seller’s story, or not be willing to take as big a loss on the loan as you require to buy the property – in which case, it’s back to the drawing board.


  • Work with an experienced local agent. Especially if you are new to Self-Directed Real Estate IRA investing and/or do not know the lenders in the area. Experienced agents will know what local lenders have a track record of approving. This knowledge may be more than worth their commissions.
  • Do not lowball the original offer. The banks know what area homes are selling for. If you lowball, and they have multiple offers, they may not even bother with a counteroffer.
  • Put up substantial earnest money. This shows the bank you are serious.
  • Include a pre-approval letter if you are getting a mortgage, or proof of funds.
  • Work closely with the lender’s Loss Mitigation Office. They are the ones who need to approve any short sales, so stay on good terms with them.

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