How to best purchase with a 1031 exchange timeline

Question

We are soon listing our first property for a 1031 exchange. Upon closing, we will have 45 days to identify 3 replacement properties and then 180 days to close on one of those 3.

This seems like a concerning setup. What if all 3 of those identified replacement properties sell to other interested parties during the 180 day closing period and we never get any under contract? Can I put one of the 3 replacement properties under contract before the 45 day period ends and identify another 2 as backup properties?

How soon should I begin sending out LOI's on properties? Should I have agreed LOI terms with all 3 properties and sort of "lie" that we intend to use them for our contract even though we are only choosing one of three? I assume we wouldn't want to use one of our three selection properties on a property that could sell to someone else soon once the 180 days begins.

What if I get a property under contract and the 180 day closing window begins, then the seller backs out? Do I then have to try desperately to get one of the other 2 properties under contract and closed by the end of the 180 days?

This is stressful and makes taking the tax hit look appetizing.

Dave Foster · Answer

@Alex Sarnoff. This Is a common concern for people doing a 1031 exchange. The best way to look at the 45 day period is to try getting one of those properties under contract prior to the end of the 45 day period if you can. Naturally your relinquished property will have to sell prior to taking title to the replacement, but this would put you in a better position for a successful exchange. It's better to have a list that would cause you the least amount of complications on the closing process. There are no penalties for an incomplete exchange so if you don't already have a solid list of potential replacements, don't worry about listing anything and let your exchange die. At that point you would just pay the tax as you normally would. We see well over 95% of our clients complete exchanges with properties they like.  The time frames are tight.  But they can be managed effectively.  You just need to be bold and proactive.

Bill B. · Answer

1) Make sure you understand you don’t have 45 days and then 180 days, you have 45 days, and then 135 days, 180 TOTAL days, unless that’s a holiday/sunday, then you have less than 180 total days.

2) Yes, you can do everything but close on any of the 3 replacement properties before you sell your existing property. You can also obviously do that anytime between the day you close on your existing property and day 45. I personally didn’t want to make any offers contingent on my current property closing (they would be ignored.) So I had 4-6 properties I’d been watching for 10-20 days before my closing. The day my property closed I made 3 offers with obviously strong down payments (from my exchange.) 2 countered and one accepted, so I went with the accepted offer. I then closed 38 days later. If that deal had fallen out I still had 7 days to list any 3 properties I was interested in. The 180 day limit was never a factor, even the 45 day limit didn’t come in to play.

I don’t know why a seller would ever back out. Short of you asking for changes/repairs/a price change. Again, it won’t matter because you’ll have a signed contract before day 45. You can make offers on 2-3-4 whatever number of houses, but don’t put down deposits on homes you don’t plan to buy.

Connect with someone like @Dave Foster. I used him for my 1031 last year. It was smooth as butter.

Alex Sarnoff · Answer

Thanks, great info. I think I will take part of your advice and start sending out LOI's 3-4 days before the downleg closes and see the responses. Then try to put the best one under contract on day 1 of the 45 day period for a 30 day escrow. It gives me at least 15 days if something happens in the contract negotiations. Does this sound reasonable?

My biggest concern was that I have no bargaining power when its under contract on splitting repair expenses with the seller because I have to close on it. It sounds like that won't be the case though.