How to make a competitive offer to a seller doing a 1031 Exchange

Question

I am looking to buy a multi family and the listing agent noted that the seller is doing a 1031 exchange. Unfortunately we cannot offer the full asking price because we are not approved to do so. I would still like to make an offer and want to find other ways to make our offer more competitive.

From what I have read, providing a flexible closing date is the best thing you can do since the seller will only have 45 days to get into another property. Is there anything else I can do to stand out in my offer?

David Wallace · Answer

If you can't be competitive on price, be competitive on terms.

A flexible closing date is a good idea.

Your earnest money could also make you stand out. You could offer to allow earnest money to become non-refundable after certain hurdles in the escrow process (inspection, financing, etc).

When you present your offer, include proof of funds and a resume of real estate owned to show you're a serious buyer.

Bjorn Ahlblad · Answer

Make sure you have the money buttoned down and let the buyer know that it is secure and meets their timeline.

Gino Barbaro · Answer

@Gabe Capoferri

I would jump on a call with a 1031 specialist like @Dave Foster. It's amazing the knowledge that a professional who's been performing 1031s the past 20 years.

I've done several webinars with Dave and he is often used in our community

Gino

Bill B. · Answer

Prove you aren’t a wholesaler.  Offer a large non-refundable EMD and confirmation of secured funding and downpayment funds. All the flexibility in the world is useless if you can’t/don’t close. You think losing a $20k EMD when you don’t close sucks, but the seller might get hit with a $100k tax bill when you don’t close, on top of losing their own EMD.

You can also offer short contingency periods that start when the offer is accepted so they can be out of the way well before the closing period. Depending on what the seller is buying they may no need your flexibility anyway. (Hey may be buying new builds with lots of closing dates available, or they may have negotiated flexible closing on the property they ar buying.). What they need is a guaranteed close, not a flexible close. This is a situation where the cash buyer with no contingencies is going to have way more power.

Dave Foster · Answer

@Gabe Capoferri, being flexible on your closing date is probably the best thing you could offer a 1031 seller.  Good thought!!

Benjamin Aaker · Answer

I think it would make it more complex. Let's see if @Dave Foster can help us on seller financing of a portion when doing a 1031.

Seo Hui Han · Answer

Hey @Dave Foster, as someone who plans on selling on a 1031 exchange in the next 12 months, I have a question:  in the scenario for the buyer you outlined above, it doesn't seem particularly beneficial to the seller, because if they keep the note outside the exchange they're paying taxes on a boot that they wouldn't have if they got a different buyer who could meet their price, or they're having to replace with outside cash the note inside the exchange.

If I were the seller (and like I said, I will be in the next 12 months) I wouldn't like either of those outcomes.  Any reason the seller would do this, other than not having other qualified buyers?

Benjamin Aaker · Answer

Give them your price as option A. Option B is their price with the difference being seller financed.

Dave Foster · Answer

@Seo Hui Han, You're right.  But there is an advantage in carrying the note outside the exchange in that while they will pay the tax on that boot.  It will be spread out over the life of the note.  In that instance part of the tax is deferred indefinitely using the 1031 exchange.  And part is deferred in the note.   It's not a perfect scenario.  But might have it's uses.

Dave Foster · Answer

Thanks for those kind shout outs @Gino Barbaro and @Benjamin Aaker, ya know @Gabe Capoferri another middle ground kind of approach might be worth exploring as well.  If they've got their property priced right it's gonna sell.  Nothing you can do about it.  But if it's priced a little high or the listing is a little funky there might be a way to get them to look at your offer.

You might offer your price as cash plus a small second mortgage to them as owner financing.  If you're financing the new purchase then that loan will have to take first position.  But if the amount isn't huge the seller might not mind being in second position on a property they're familiar with.

They get the price they wanted.  You financed what you could.  And if the amount isn't too large they can either keep the note outside the exchange and pay some tax on it as boot doing a partial 1031 exchange.  Or they can put the note into the 1031 and replace it with cash of their own.  So they have the note outside the exchange.  But can still do a full 1031 exchange.

How to make a competitive offer to a seller doing a 1031 Exchange

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