Everyone reading this is probably familiar with the lyrics and catchy tune of the song Don’t Worry, Be Happy. I have a little twist to that title. I say, “DO happy, don’t worry!” This is important when it comes to self-directed IRA lending. Do “happy-happy” loans, the ones where you are happy if they pay but can also be happy if they don’t because you know you will make more by foreclosing on the collateral.
Many of you will be shocked by the thought of self-directed IRAs making loans with the willingness to foreclose on the collateral. That is the problem with most people who are making loans from their self-directed IRAs. They are making loans to people with whom they feel “comfy” or with whom they have a “relationship”. While that is understandable, my attitude is that I am investing my IRA in an effort to grow it, which means I am going to make loans that are secure and profitable. I want a low LTV and a good interest rate. It also means that if my borrower defaults, I have enough margin and resources both in the loan and in my SDIRA account or IRA-owned entity to be able to foreclose if necessary.
When you approach a loan with the willingness to sue and foreclose upon your defaulted borrower, that eliminates the desire to do all the buddy-buddy, comfy-cozy loans that so many think they can do but should not do! It means you are doing arm’s length loans to legitimate, non-disqualified, disinterested third parties with whom you have no other ongoing business relationships. They are the ideal candidates for being borrowers.
Having the willingness to foreclose also means you are making loans in which the terms of the loan and the LTV are secure enough that default does not cause a handwringing event. Instead, it causes a shrug of the shoulders, a lawyer is hired to foreclose, and you move forward.
Have I ever been in that situation? Well, I’m teetering on the edge. I’ve made a loan from my SDIRA along with a co-lender and have had to retain counsel and instruct the Trustee of my IRA-owned trust to write an uncomfortable-sized check to a great lawyer to get the borrower’s complete and undivided attention. Fortunately, the borrower is back on track, and now we just need to negotiate what to do with the arrearage.
As my friend and mentor Dyches Boddiford says, “The best time to worry about a loan is before you make it.”
