So you’ve found a borrower for your IRA funds. He’s a great guy and the purpose for him borrowing from you sounds great. He needs the money right now, but it will take time to get the proper agreements drawn up. You go ahead and advance funds without completing all of your due diligence. This happens all the time.
When I served as a commercial lender for a community bank, one of the board of directors (who had no banking or lending background), referred me a prospective borrower. Upon reviewing the application, I knew the loan was one that our bank should avoid and I passed on the loan. The director was furious with me. The bank president reviewed the file and agreed that I had made the correct decision. Not to be deterred, the director decided to lend the prospect the money from his personal funds. I implored the director not to do it, but he would not listen to reason. The director lost every dime of his one million dollar loan that he made to the borrower.
In a prospective transaction, everyone is all lovey-dovey…until they aren’t. When something goes wrong, everyone changes. It seems as if I shouldn’t have to remind everyone not to jump into a deal because the borrower or note seller is a “good guy”, but people do it all the time.
Doing your due diligence and drawing up the appropriate paperwork is critical to ensuring that your IRA performs the way that you want it to. You worked hard to build it up to this point. You should want to protect it. Unfortunately, many IRA owners lend money without solid agreements or because the borrower is a good guy. It usually ends in disaster.