You hear it all the time— in endless blogs, books, and articles. The most important part of a successful real estate investor is the team behind you. When investing with your self-directed IRA, your custodian is an essential part of that team, one that can help or hinder depending on the company.
Is your provider helping or hindering?
Can you get ahold of them? Are they worth the cost? Do they make your transactions easy and process with speed? With so many alternative asset custodians available to choose from, it can be hard to find one you can trust to handle your account with care, without overcharging you, and with an efficiency that allows you to relax.
Conducting Due Diligence on a Custodian
To invest in real estate with your retirement savings, you must establish a self-directed IRA with a custodian or trust company that handles alternative investments. The company holds title of your assets for safekeeping and annual reporting of your account. It may also do the account administration of your assets. Like any banking or financial institution, they are regulated through state and federal agencies.
Custodians are audited and held to specific guidelines based on written policies and procedures. During these audits or reviews, auditors do a thorough examination of the books, records, funds, policies and procedures of the company.
Because all custodians and trust companies are held to similar rules and regulations, how is one to determine how to choose the right one? Here are 3 important factors to help you determine if a self-directed IRA custodian is worthy of your business.
“Trust, but verify…" - Ronald Reagan
What do you know about the individuals running the company?
Sometimes getting to know who the company directors are can provide insights as to how the custodian handles business. Researching a company’s background and its principals should be one of the first things to do.
A good self-directed IRA custodian:
has reputable and industry knowledgeable individuals leading the company
trains their staff and continues to educate on industry rules and regulations
has a team knowledgeable in real estate IRA transactions
holds internal compliance audits and review of policy and procedures
staff holds designations such as the Certified IRA Services Professional (CISP)
Companies that invest money and time in their staff’s training are worth considering. Asking the right questions while speaking to staff can also lead to determining if a company is worthy of your business.
What designation do your employees hold?
Are your financials audited regularly?
Does the entity, regulator, or auditor reviewing accounts understand self-directed IRAs?
“Beware of little expenses; a small leak will sink a great ship…" - Benjamin Franklin
Are you overpaying for your self-directed IRA?
Before deciding on a custodian, you might want to check out their fee schedule. Some custodians charge based on value of asset and others per investment, or both. It is important to take this into consideration, because you could be overpaying as your assets grow in value. Recently, we spoke to a client that held a Real Estate Deed of Trust with a bigger competitor, where her annual fee was $1,700— because it was based on the value of her asset. By switching to a per-asset fee schedule, she is saving $1,500 annually. Assessing fees prior to making this very important decision can save you lots of money. As your assets grow in value, you should not be paying more in annual fees. That defeats the purpose of saving for retirement.
Here is a template that can help with your research:
Download the Custodian Comparison Cheat sheet
This template covers questions like:
What is the annual record keeping fee?
How often do you bill?
What is the termination fee?
How much is it to purchase a real estate asset?
Do you charge extra for an Earnest Money Deposit (EMD)?
“Lost time is never found again…" - Benjamin Franklin
How long does it take to process a transaction or request?
Servicing times are very important in choosing a self-directed IRA custodian. You can lose a deal if your transaction is not funded in time. You can also incur late fees if your bills are not paid as they come in.
For your transactions to be completed in a timely fashion, the custodian must have systems in place to help expedite transactions and processes that are focused on meeting the client’s need. Asking about these servicing times won’t help. You will get a positive response, they’ll tell you what you want to hear.
The best thing you can do is to learn from existing clients. Clients that are extremely frustrated will post negative reviews— very seldom do happy clients post positive reviews, these usually come to the company in an email or letter… sometimes, they even come with flowers. But beware of overly positive reviews, as sometimes companies are hired to do the ‘dirty’ work of cleaning up a company’s rating. You can tell if you’re looking for it— there’s usually a pattern to the reviews and most don’t make sense.
A true source for company reviews is the Better Business Bureau (BBB). But don’t let the A+ rating fool you. Here’s what to look for:
Read the reviews. These are not always positive.
Read the complaints. Usually there is a pattern of bad service.
Read how complaints were handled. Ensure you will be treated with the respect you deserve.
Whatever your retirement investment strategy, you will always need a custodian for your self-directed IRA, per IRS rules. Make sure that the company you chose is worthy of your business. If you have a self-directed IRA and are not satisfied with your custodian, or if you’re interested in opening an account to invest in real estate, do the research. You will be glad you did.