A Real World 1031 Exchange - Part 4: Acquisitions

A Real World 1031 Exchange                                   08/01/15

Part 4: Acquisitions.

As I said in an earlier post, I had 45 days to identify properties up to double my 1031 amount of $1.2M.I wanted to get my favorites under contract before the deadline.I had four good properties in Kansas City suburbs plus one that my agent felt was too inner city.We submitted offers on the four suburban properties ( 3 4-plexes and a duplex).All were accepted, and we went into escrow.

My agent in St Louis sent me a list/map of all the multifamilies for sale at that time.A St Louis local helped me to pick out neighborhoods.The agent was more used to working with buyers who loved the kitchen but were not sure that 3rd bedroom was large enough.I felt handicapped as far as investment expertise. He was not able to recommend investment properties or even point out deficiencies, but by the time I figured that out, I had used him to make offers.I believe that he is a friend of the PM owner, and her recommendation was more to help the agent than to help me.

I identified 8 4-plexes that looked like they would have a decent CAP rate and started making offers.I couldn't come to terms with one, two were in a bad neighborhood, two failed the inspection, and one had a very iffy CAP rate.So I went forward with only one property in St Louis.

During this same time frame, I was purchasing five SFRs in Birmingham from a rehabber.After I had made my initial round of offers, I took a weekend to see all of the properties - Kansas City on Saturday, St Louis on Sunday, and Birmingham on Monday before flying back to L.A. that night.

Because so many St Louis properties had been rejected, I went back to my Kansas City agent, and after some investigation, we made an offer on the 12-plex near downtown.Then one of the KC-area quads fell out due to no clear title so I went back to St Louis to re-open on the property with a low CAP rate.I was now getting close to my 180-day 1031 completion deadline.The replacement St Louis quadplex was my last acquisition.

The night before I was to sign the papers, I got an email from my 1031 accommodator saying my cash funds were $24,000 short.I freaked out.I had not planned to use any of my personal funds for acquisition because I might need them for repairs, etc after the purchases.Rather than dig into my own funds, I cancelled the sale.Not only did I loose my deposit, but, as I figured out a couple of days later, by being $140k short of my 1031 goal, I was adding about $35k to my 2014 tax bill.After doing all this work to avoid taxes on $300k, I was still going to be taxed on about half of that.

It turned out that in deleting and adding properties to my spreadsheet, one cell was not being totaled for the cash funds needed.

It was too bad that the 1031 exchange ended on a sour note, but now I needed to concentrate on our new properties.