Tom Kelly: IRA funds proved key to waterfront investment

In a recent column, we discussed using a real estate Individual Retirement Account to purchase property. Sometimes, it can be the only source of funds available to make the deal possible.

Here’s an interesting story about a young couple who used their IRAs to buy a waterfront parcel on a Montana lake:

Al Lambert had lived in a small cabin on the lake’s south shore for as long as anyone could remember. One September day, after the part-time residents had winterized their cabins for the season, Al got in his truck and drove away. Nobody ever saw him again. Efforts to find relatives turned up one niece who lived in Laramie, Wyoming.

The following spring, the niece listed the property with a local salesperson. The lookers were mostly summer people who did not want to deal with the cost of converting the outhouse into a real bathroom with a toilet and shower. They knew that the chances of obtaining a drain field-system permit from the county were marginal because of topography of the property. There was not enough waterfront land below the road to accommodate a drain field once the proper setbacks from the water were measured.

Additionally, the steep uphill portion also had its challenges, meaning any system that might receive county approval would be expensive – and probably dug by hand. Using the lake water as a primary source of drinking water was another issue. Although residents had tapped into the lake for years while the county looked the other way, it was not an officially sanctioned method. Lake-water permits were now held to an annual quota and distributed equally among all areas of the lake.

The property, with 188 feet of waterfront and a skeleton dock, sat on the market for months, then years. The listing price came spiraling down from $170,000 to $149,000 to $129,500 and finally to $99,500. Desperate for some cash to renovate her Laramie home, the niece contacted an auction house that specialized in recreational property. The property was placed in the company’s spring catalog for $79,500 because the auction company required any its offerings be priced at 80 percent of the last listed price.

Jim and Sue Coleman, both 42, were well acquainted with the property. They were certain that a friend could design and install a septic system and drain field on the small, southwest corner of the uphill property. The problem was funds – they didn’t even have enough for a down payment. And if they borrowed the down from another family member, how could they afford the monthly payments given the financial demands of their young family?

What they both had were IRAs. Sue had a mutual fund that was not performing well and Jim had some high tech stocks that were high flyers at the time. The approximate value of Jim’s was $37,000 while Sue’s was about $35,500. They had heard about a real estate IRA from a college classmate, and then telephoned a small community lender to inquire about the possibilities.

The auction company then sent a title report and the Colemans were intrigued to discover how Al Lambert’s property was divided. The spread had six, separately deeded lots – the three on the waterfront side below the lake road and three larger lots comprising the uphill portion. The trust officer at the bank said she felt confident that there was sufficient value in the land to justify at least a $70,000 purchase price. In order to fulfill a “due diligence” requirement, she requested a market analysis from the salesperson who originally listed the property for sale. That analysis was returned with a $129,000 value.

The trust officer suggested the couple purchase the property by contributing a total of $70,000 from their IRA accounts. Jim would pitch in $37,000 and take three lots while Sue would contribute $33,000 and govern the other three. That way, the property was purchased for all cash.

The couple had their assets sold and transferred to the community bank. The trust officer provided the couple with compliance documents required by the U.S. Treasury and FDIC for self-directed IRAs. However, the service was not inexpensive – the bank would charge a 1 percent of market value annual fee with a $500 minimum fee on any balance. Because the market analysis had shown the market value to be $129,000 – the couple had to pay $1,290 per year for the service – or $645 per account. In addition, there would be the usual property taxes and association fees.

The offer - $70,000 all cash in 30 days – was quickly accepted by the seller. The couple soon owned 188 front feet of waterfront on a lake they had enjoyed all of their lives. A professional was successful in designing a septic system and drain field on the top portion of the land. In a few months, they conducted a lot-line adjustment that gave them two, 94-foot wide buildable waterfront lots (the county minimum was 90 feet) that would share the same drain field.

By doing their homework and using their real estate IRAs, the couple landed a terrific long-term investment.