Selling an investment property, using 1031, any advise?

Question

Hi, have a condo with enough equity to buy a single house or duplex as next investment. How do I go about?

Do I contact the 1031 company?, real estate agent, or rehab first?

I’m concern that I won’t have enough time to buy the next property on time.(45 days)

I’m in the Seattle area and is very competitive and would like to buy within the Eastside area.

I appreciate any advise.

Thanks!

Mark H. Porter · Answer

1031’s have helped me move from 4 unit properties with 300k equity into 1.2M properties with double the net cash flow. If you can plan it right (target property identified prior to your sale) why not do this?

Monica Diaz · Answer

Thank you @Dave Foster, this is super useful info! I'll touch base.

Dave Foster · Answer

@Monica Diaz, I was just having this very conversation with another client today. The problem with the 1031 exchange is that what you benefit from on one side of the transaction becomes a hindrance on the other side. The very best time to sell a property and start your 1031 is generally the worst time to find a good bargain and complete your 1031. Conversely the worst time to sell is the best time to buy. So what do successful 1031 investors do?

1. Get time on your side as much as possible - Shop well in advance of your sale. your purchase or sale. If you're unsure of your desired type or location of the replacement then work with a number of professionals till you're the smartest kid on the block in each of those markets. If you can, get your replacement under contract even before you close your sale (more about this in a sec). If you can't you'll still be so immersed in an area that you'll know a good deal instantly in the 45 day identification period and can act swiftly.

2. As I said you can get your replacement under contract before you close your sale. Try and use contingencies either direction - as the seller to have the buy wait until you've found the right replacement. or as the buyer if the seller will go under contract with a date to accommodate your sale.

3. Be prepared to change location. You may have a preferred area and that's great. If so then you're probably a savvy enough investor to find those deals that more casual investors can't. Honestly, good investors can always find deals. You just have to be prepared to work at it. But also many times by just changing a few zip codes you can find a whole different investing market that suits your needs.

4. Change price point. If there's a price range that's more competitive than others then stay away from that. Sell a more expensive property and buy cheaper properties. Generally this increases NOI dramatically. If cheaper properties are too hot then look for more expensive properties where the leverage can give you a better ROI.

5. Change type. One of the most powerful advantages of the 1031 is the ability to change types of real estate to get into something that either makes more cash flow, has a better return on investment, is more correction proof, or allows you to advance your investing goals where you want. Selling a singe family? Don't be scared to look at Multi family. Muti families gone crazy? Take a look at commercial. Can't find long term rentals you like? Is it time to look at a short term rental or vacation rental that you can use some yourself?

6. Always leave yourself a fail safe fall back on your 45 day list. DSTs and TICs are good for this. They are generally more available and their closing is a little more predictable and controllable. A lot of folks are finding that these are perfectly acceptable alternatives given that returns are getting compressed in a lot of areas like yours.

Of all the professionals you'll use, the 1031 accommodator is probably the one whose location matters least. You want realtors who are experts in the geographies you're interested in of course. But 1031 is a federal statute that is applied the same nationwide. So most full service qualified intermediaries have a national footprint and can take care of you wherever you are. Demonstrated experience with good referrals are important. There are several here on BP and you can check references on their profiles. Finding a good QI is kind of like Goldilocks. Local but too small and you may pay more for less knowledge and experience. Large and national may give you scale of price but be harder to talk strategically with. and you may find that your experience is still determined by the quality and experience of sales person you are assigned to.

There's a lot of moving parts but as you can imagine, if the IRS is going to give you an incredible gift like the 1031 to leverage your portfolio it's going to come with some hoops and strings :)

Rob Pecha · Answer

@Monica Diaz if you do a 1031 you absolutely need a QI to custody the funds in escrow. I highly recommend Dave Foster, who is very active here on BP. As for the 45 day ID crunch, please keep me in mind. That is one of the areas I specialize in. Best of luck! 😎

Rob Pecha · Answer

@Monica Diaz yes I am based in NYC. Certainly appreciate your sentiment for the face to face but if you find yourself in need of some remote options I am happy to help out.

Monica Diaz · Answer

Thank you @Rob Pecha, appreciate the referrals.

I would like to work with somebody in the Seattle area and talk in person as possible.

I understand you are in the NY area?

Monica Diaz · Answer

Thank you @Bill Exeter, I appreciate the guidance.

Do you have any referrals for exchange qualifier in seattle and a good real estate agent in the area?

I agree I want to start interviewing and learning more about the process

Could you also advise what is the difference if I don’t do the 1031 exchange? I own that property since 2014.

Thank you!

Bill Exeter · Answer

Hi @Monica Diaz,

Your question is right on point. The key to a successful 1031 Exchange is all about planning and timing.

Real Estate Agent

It is always good to choose a good real estate agent that specializes in the property type, geographic area and rental or investment property where your relinquished property is located. They can be a good resource in estimating the value of your property, deciding what rehab to complete (and what not to complete) in order to maximize the value of your rental property for sale. A good real estate agent can act as your "quarterback" through your transaction.

Rehab

You can't sell your rental property until your rental property is ready for sale, so once you have decided on what rehab to do get started on the rehab project. However, it does not mean that you put everything else on hold. You can start the planning for your 1031 Exchange.

1031 Exchange Planning

The planning and timing are everything in a 1031 Exchange. You should discuss your transaction and potential strategies with a Qualified Intermediary. You have time since you still have to complete the rehab project, list and market your property, and then 30 to 60 days to close on the sale. Once the sale of your relinquished property closes you have exactly 45 calendar days to identify the property that you intend to acquire and an additional 135 calendar days after the 45 day ID period to actually close on the purchase of your new replacement property (a total of 180 calendar days). So, proper planning is critical to make sure that all of the moving parts come together.

1031 Exchange Qualified Intermediary

Make sure that you are dealing with a Qualified Intermediary that has some type of government oversight. Less than 1% of Qualified Intermediaries are actually licensed, regulated and audited by a government agency. You should also make sure that the Qualified Intermediary is not going to try to sell you replacement property solutions in order to earn additional revenue. You need a Qualified Intermediary that is looking out for your best interests and not trying to get paid on the back-end also.

Replacement Property

I would not wait to start looking for replacement property. I would recommend that you start looking for your new replacement property right away. There are numerous ways that you can lock up or control a property if you find one that you want before you are ready to sell. You can (1) enter into an option to buy, (2) enter into a lease with an option to buy, (3) you can go under contract with an extended closing period, or (4) you can go under contract with numerous options to extend closing should you need additional time to close on the sale of your relinquished property.

Summary

Talk to lots of people. Interview real estate agents, exchange companies, etc. Discuss strategies with your local real estate investor clubs and meet-up groups. Then plan.

Selling an investment property, using 1031, any advise?

Selling an investment property, using 1031, any advise?

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