Planning before or after

[Ash Patel]

In Feb of 2016, I would like to sell 1-3 commercial properties and 1031 them into 1 or more properties.  With only 45 days to identify the next prospects, do most people already have these lined up prior to their 1031 sale?  I know you have 180 days to close but that 45 day identification period seems tight.  

I guess in reality you have the 30-45 days from the time your sell contract is signed till close.  That buys you some time.  Again just curious if people have things inline before their sale.

Thanks - Ash

[Dave Foster]

@Ash Patel  It's very common to go shopping and even go into contract on your replacement properties before you close on your sales.  You've correctly identified the crunch issues of the 45 day window.  But remember that contracts can overlap in any way.  Only the closing of the sale must precede the closing of the purchase.

A couple of things you can do to extend your window.

1. Contingency contracts or 1031 cooperation contracts on either sale or purchase that give you some freedom.

2. Start shopping as soon as you have a contract for sale and negotiate as long a closing of the sale as possible.

3. If you want to roll three properties into one large purchase you may want to consider a reverse exchange to make sure you buy exactly the right property and get some extra time to sell the old properties.

[Ash Patel]

Thank you @Dave Foster 

[Kathy Stewart]

Ash:
I enjoyed your podcast with Joe Fairless and look forward to connecting with you!

[Ash Patel]

Thanks @Kathy Stewart!  I very much appreciate that.  I actually visited San Ramon in 85!  I used to have family out there.  Best of luck to you!!!

[Jeff B.]

1.  But remember that contracts can overlap in any way.  Only the closing of the sale must precede the closing of the purchase.

There's also a Reverse 1031 allowing the purchase to proceed before the sale.  Check with the 1031 Exchange Agent for instructions

[Mark Creason]

Ash,

I would recommend getting your property under contract and check your due diligence as quickly as possible as I have seen a deal or two blow up during the contingency period, but then have nowhere else to go.

Mark

[Bill Exeter]

@Ash Patel  

Hi Ash,

There are a number of possibilities when structuring a 1031 Exchange transaction.  They include using contingency clauses in the Purchase and Sale Agreements, locking up the property through a lease with an option to buy, cooperation clauses where the other party agrees to cooperate with you, and Reverse 1031 Exchanges where you can buy and close on your Replacement Property first and then you have 180 calendar days to sell your currently property. 

Each of the above strategies has its own unique set of planning issues.  The key is to plan ahead and "get your ducks lined up in a row" before pulling the trigger. 

[Ash Patel]

Thanks @Bill Exeter , @Mark Creason and @Jeff B..  I have had the sell property under contract for a month now.  The closing date will be 3/31, which will be one year and one day from my purchase.  I have been anxiously looking but deals are no where near as prevalent as just one year ago.  If I can't find something in the next three months, I may just bite the tax bullet.

[Ash Patel]

I do have a few 1031 questions and thank you in advance for the answers:  

Lets assume I get close to my sale and don't have a replacement property picked out but am optimistic that in the following 45 days I can pick out three potential properties.  

• How much time before my sale closing date should I get the qualified intermediary involved? 
• If in the following 180 days I am unable to close on a property, I would assume that I am out just the fee's to the intermediary.  All of this would go down in one tax year.
• I am assuming the fees are under a few thousand dollars (assuming a typical transaction)?  If that's the case it would definitely be worth rolling the dice to buy 45 days.

Thanks again!  Ash

[Dave Foster]

@Ash Patel, 

1. The 45 day identification period of course starts with the closing of your sale so that really doesn't impact your selection and involvement of the QI.  The QI you select can be a valuable source of counsel for planning and strategy.  But the requirement is only that the QI be involved prior to the sale.  So the answer is in enough time for the QI to coordinate some document preparation with the title company or attorney closing your sale.  Weeks aren't necessary, Days are great,  Hours can be made to work.  The QI shouldn't be a hold up at all to your transaction.

2.  Yes, The time limitation for a 1031 exchange is the earlier of 180 days or the date of your next tax filing.  The purpose is to place the entire exchange under one tax year.  

3.  The fees for a normal straight exchange should be much less than a few thousand.  650 - 1000 is  a pretty normal range.

[Ash Patel]

thanks @Dave Foster  that was quite helpful.   

[Robert Hetsler]

The only thing I would add is that you are correct that the exchange fees you would incur, even if the deal did bust up and the contingency clauses etc... all are certainly plausible ways to protect you.   However, as the market picks up, Sellers are less likely to sign deals like that so what I have found, as an investor, is to move forward by finding some off-market properties or start formulating some relationhips with the bankers who head up the division of the special assets.  They always have something on the market that will qualify and which typically also has a huge profit built in from day one.  Jumping back to off market opportunities, I have a guy that I use who specializes in the student housing sector and he builds about 20 million in assets each year in that space and keeps about 80% for himself and sells the remaining through 2 or 3 small channels and they are always at about 98% occupancy so I say that to say that it is really not that difficult to find a property that qualifies and then you always have the fail safe options if you are pushed up against a wall.  Bottom line, is that I invest quite a bit and I will shop as far in advance as possible with all my attention focused on the off market properties because I am finding emails solications all the time whih are pitching off market properties and also groups on linkedin that do the same.  I have gotten down to wire a few deals but am always able to pull something out that works well and within my criteria of 8-12 % cash flow within aoub 4-6% appreciation so keep on doing what you are doing and it will happen.  Call me and I can make some instroductions if you need it.