How to choose a self-directed IRA custodian for real estate

Search this question and you will get ranked lists. Most of those lists are affiliate content, the rankings follow the commission, and the fee numbers are frequently out of date. So here is the framework instead of a winner.

The firms that come up

The ones you will encounter most often for real estate include Equity Trust, Directed IRA, Alto, IRAR Trust, Strata Trust, Madison Trust, Pacific Premier Trust, and Entrust. Some are chartered custodians. Some are administrators working with a custodian behind them, which is a distinction worth understanding.

We are not ranking them, we have no relationship with any of them, and naming them is not a recommendation. They are the population you are choosing from.

The seven questions

Ask these, get the answers in writing, and compare the written answers side by side.

1. Are you the custodian of record, or do you place assets with a third party custodian? If it is the latter, who is it and what is their charter? Verify the charter with the chartering state's banking department. It takes two minutes.

2. How many real estate closings do you process in a typical month? You want a firm for which your transaction is routine. A custodian handling hundreds of property closings a month has seen your edge case. One handling six has not.

3. What is your turnaround, in business days, on a purchase direction and on an outgoing wire? Get a number, not an adjective. This number will determine whether you can compete for properties. Then ask what happens at month end and year end, when queues back up.

4. Send me the complete fee schedule. Complete means setup, annual account fee, per asset fee, transaction fees, wire fees, recording and document fees, late fees, and termination fee. Then ask directly: at my expected balance holding one rental property, what will I pay in year one and in a typical year after?

5. Is the annual fee flat or based on account value? This is the single biggest cost variable. Asset-based pricing on a large account can cost multiples of a flat fee for identical service. Flat fee pricing is usually better for larger accounts, and value-based pricing can be cheaper for small ones. Run your own number rather than accepting a characterization.

6. Who produces the annual fair market valuation, and what documentation do you accept? You are responsible for valuing the property each year. Some custodians accept a broker opinion of value, others want an appraisal. An appraisal every year is a real recurring cost that rarely appears in a fee comparison.

7. Do you prepare and file Form 990-T if the account owes UBIT, and what do you charge? Answers range from full preparation to none at all. If you are using leverage, this matters every year. Find out before there is a filing due.

What none of them do

Every self-directed custodian agreement in this industry contains language to the effect that the firm does not review, approve, or evaluate the merits, legitimacy, or legality of your investment.

Read that clause in your own agreement. It means:

• They will not stop you from buying something worthless.
• They will not catch a prohibited transaction before you commit it.
• A fraudulent asset can sit on your statement at its purported value for years, because the statement reflects what you told them to buy, not their opinion of what it is worth.

Regulators have warned about exactly this pattern repeatedly. The custodian is a recordkeeper and a processor, not a gatekeeper. Your due diligence is your own, and so is your compliance.

Comparing on total cost, correctly

Build a small table for your own situation. Three custodians across the top. Down the side: setup, year one total, typical year total, cost per purchase transaction, cost per wire, annual valuation cost, 990-T preparation, termination fee.

Fill it from the written schedules, not from the website's summary page. The ranking that falls out of that table is the only ranking that matters, because it is the only one built on your asset and your balance.

The tiebreaker

When two custodians price similarly, pick on operational competence, which is mostly about whether a knowledgeable human answers the phone.

Call each one before you open an account. Ask a moderately technical question, something like how they handle a partial in-kind distribution of real property. Notice whether you get a real answer, a transfer, or a callback that never comes.

You will be calling this firm during a closing, with a deadline, when something has gone wrong. That phone call is the product you are actually buying.