Is a buyers offer with a 1031 good or bad?

12 Replies

When a buyer makes an offer with the hope of doing a 1031 exchange is that considered a solid offer from a sellers perspective? What are the pros and cons of making an offer in this scenario? Personally, I would take that offer as more serious than another offer because they are obviously working on a dead line, but, on the other hand, they would have to sell the original purchase also in order to do this. I have a cash buyer for a sfr that I own in the county and we are in the process of looking at replacement homes for a 1031 and I am curious as to how competitive we may appear purchasing through a 1031.

I don't think the 1031 necessarily matters, if they have the funds and approval and don't need to sell the other property for the loan it wouldn't matter to me.  I'd consider it a solid offer.

It is normally considered a serious offer- since you know there is at least some cash ready to purchase and the person is not a novice real estate investor. But it does not mean much more than that. The Buyer is on a 45 day deadline to identify and 180 days to close, but your property may have been one of several the buyer may have identified so it is hard to say 1031 means anything more than what I said above. 

@Jon A.

I actually had this happen last year. I was selling a property, doing a 1031 Exchange, and my Buyer was also doing a 1031 Exchange into the purchase of the property that I was selling.

I can tell you that it was more comforting to me knowing that he was a seasoned and serious Buyer/Investor. I was confident that he had the funding, had done his due diligence and therefore knew that he really wanted the property I was selling, and was unlikely to back out at the last minute. I can’t say that was all due to the 1031, and probably more so that he was an experienced Investor as well. But knowing that he was also doing a 1031, had the experience to do a 1031, had a deadline, etc, did help with my confidence.

In the end, it was a great and easy transaction.

@Jon A. , It's actually a very good thing as long as there are not any extra stipulations requiring you to allow extra time for them to complete their sale that starts the 1031.  You can require that they show you proof of funds in the exchange account.  That will speak volumes!  Because those funds cannot disappear for any other use than the purchase of real estate.

All of these are great points to consider. On the one hand, the offer is more attractive because it's a fairly seasoned investor making it, and on the other hand, they may have identified other similar properties for the same transaction. I am finding it very hard to keep the money and pay the capital gains, but it may be even harder to find the property that fits correctly at this time. Thanks for all the replies. 

@Jon A. , That's a great point you make when the shoe is on the other foot.  You're not just examining an offer to purchase your property.  You're looking at a potential 1031 yourself.  

Here's a tip hot off the press.  Just got off the phone with an investor processing this exact issue today.  Your buyer wants to know that they'll be able to complete their 1031.  You want the time necessary to find your replacement property.  That's a win-win match made in heaven!!

Go into contract with them so they feel good that they'll actually complete their 1031 with your property.  But include in the contract terms an extended or floating closing date so you can identify and get your replacement property under contract.  They have 180 days flexibility in total which should be plenty of time for you to find the right "next" property.  

Both 1031 investors working together to make sure each succeeds - and gets rid of those pesky taxes!!!!!

@Dave Foster , I suppose I should clarify where we are at in the process. I have a buyer that wants to buy one of my rentals in the county and he wants to pay cash. He owns almost all of the adjoining property and I don't believe he is trying to 1031 exchange at all. He has always mentioned to me that he would like to purchase it if I ever wanted to sell it. But recently he approached me in a way that was a little more serious and I am considering his offer. We have agreed on a price verbally based on an appraisal from last year when I refinanced. I don't think he is any hurry and I am sure his main concern is that I don't sell it to someone else. Given that the home is not on the market and does cash flow a couple hundred dollars a month I am poking around to see if I could put that equity to better use to generate more cash flow than this rental is. I guess I am not sure how to start the process. I am also not sure at all that we will be able to find anything that would be a better investment with the proceeds from the sale. So, I am not sure if I should be talking to a QI before we even start looking or if we should be using this time to look and then secure the QI and start the process because this buyer is fairly flexible. My concern is that we would find something we like and haven't started the process of the sale already so an offer would just not even be considered. I want to use his flexibility to our advantage and use that time to shop but am not sure if an offer would be considered at all in this competitive market based on this circumstance. 45 days really isn't a lot of time to find a needle in a haystack which is exactly what I think we may be looking for. 

@Jon A. , that makes perfect sense.  And fortunately the exact same scenario can apply.  He really wants your property and seems willing to cooperate with some reasonable requests to ensure he gets to purchase it.  So I would encourage you to get a mutually agreeable contract together and either make the contract assignable or put in an addendum of cooperation with the 1031 in the contract (you and I are DMing so I can provide you with one that we use with our clients periodically).  

Once you've got this contract in place with a floating or extended closing date then get serious finding your next property.  When you find it get it under contract and tell your buyer that you're ready to execute.  This will almost eliminate any 45 day angst you might have.  And while a seller to you might like it better if you had already completed your sale, you can always show them the contract and put some serious earnest (even non-refundable if you want) money down.  That might sway a seller your way.

As far as the QI engagement I can't speak to every QI but for us we always like to get involved  when the contract for sale is executed and goes to the title company or attorney to set up escrow.  The QI must be in place prior to the closing of the sale.  And there are documents that need to be produced for that closing.  But they're not time sensitive.  So from my perspective I'd always much rather hurry up and have everything ready for the closing and then wait for it.  I think your title company would appreciate that as well.

@Dave Foster Thanks for the clarification and that makes perfect sense. Of course, I have more questions and will be in contact soon. Thanks very much for your response. 

@Jon A. a buyer doing a 1031 exchange is more desperate to close than your typical buyer. They are on a strict timeline and need the deal to happen. You could use that to negotiate a better price. I read somewhere that a study showed there was something like a 19% premium paid for 1031 transactions versus traditional sales. 

And then there is karma ;) Good luck.

@Thomas Rutkowski , this is exactly what I was wondering last night as I was going to bed. If the seller would use that as leverage against a buyer that was using a 1031 exchange. Thanks for the input.

@Jon A. , and the answer to that dilemma when you're the buyer is to not reveal that you are in a 1031.  You can't avoid your own self imposed angst and fear.  But if the other side doesn't know that you're doing a 1031 then at least they don't gain an advantage in the negotiations because of the 1031.

All parties must be notified that a 1031 is happening.  But it can be anytime during the process.  We provide documents at closing that suffices so you don't have to reveal the 1031 until closing when it's too late for them to take negotiation advantage.