Buy over priced Sfh now or wait

[John Patton]

I have a Sfh under contract to sell which I bought 10 years ago in C neighborhood. After purchase and 2 rehabs, roof and a/c. I will end up with about 50% appreciation.

Question is do I do a 1031 exchange with low inventory or pay about $8000 in capital gains. Or wait for the foreclosures to come in the next 4-10 months with cheaper home prices.

In other words pay taxes now get better prices or HOPE I get lucky and find 3 B+ home in 45 days that are reasonable priced. Thanks

[Dave Foster]

@John Patton, This is the $64K question everyone is grappling with.  There's no easy answer because you have to predict events that are uncertain but have certain consequences on today.  

The best time to start a 1031 exchange (a sellers market) is the worst time to complete a 1031 exchange (a sellers market).  I wonder about a couple of things you said (because I hear them from a lot of people).

"Being forced to buy an over priced replacement".  Most folks who think about it would also conclude that the property they are selling also must be "overpriced".  But what really does over priced mean?  A free market (when the govt can stay out of it) will reach equilibrium.  Which means Selling high is is great for you.  But you will be buying high as well in the short term.  So the equilibrium of the market is that all properties are... over priced - but compared to what??

I don't think it's an accident that decades ago the IRS set these time limits on the 1031.  a 180 day time limit prevents someone in most cases from selling at a peak and buying at a trough because they don't happen that fast generally.  And the exchanger can't just sit on the sidelines and cherry pick.  So the real benefit of a 1031 is that it gives you some other freedoms while still requiring you to stay in the fray.

1. "getting lucky" - We're still seeing less than 10% of our exchanges failing due to not finding inventory.  So I guess the question could be - If I sold you a lottery ticket for $850 that gave you a 90% chance of winning $8000 would you buy it???  I'd buy 10 of them.  Getting lucky is not unheard of.  And actually not really accurate.  Luck wears overalls and looks like work.  That's how you got to where you are today.

2. Moving away - I think this is one of the most overlooked uses of the 1031.  Everyone wants to run to the deal.  But there are far scarier things lurking that are worth running from - capital expenses, neighborhood quality, regional demographics, class of real estate altogether (commercial, industrial residential etc), stagnating appreciation.  All good reasons to 1031 "away from something".

3. The gift of patience.  Paying tax to release profit might be a great idea - until it's not.  And buying a property too high so you half to sell and lose everything is scary.  But why would you ever have to sell?  I work with a bunch of investors who are richer than Davy Crockett now because when their investments lost 80% in a year they didnt sell?  Why because they didn't have to.  The cash flow didn't change.  They were under leveraged enough that they could withstand the short term vacancies and rent drops that preceeded the rental demand increase.  They kept enough cash to keep the lights on.  And benefitted from it.  That's a long game - a game of patience.  

Tough decision.  I'm sympathetic and wish there was a cut and dried answer.