Multi-family 1031 Chicken? Egg? Conundrum?

8 Replies

Sold commercial office. Now in a 1031.

I have a few weeks left on my identify period. After years to think about it, I have just a few weeks to get a deal in place.
The years of thinking about it process, strongly persuaded me to head in the direction of out-of-state multi family with professional management, when the time came. And here we are.

Without getting specific about the amounts, it's quite a bit more than one's first duplex. So what i have in exchange money could become quite a number of units, depending on how much leverage I would want, and dependent on securing such a loan.

The issues i am having, are this:

1.) Even though I am an experienced small business person,  and an experienced commercial property owner, I apparently can't necessarily run around with my down payment money, call it 25 percent down and expect the deal to be pushed through. So far lenders seem to want to know that there is some level of experience level in that specific sector, and if not then other factors have to considered and maybe concessions made. The size and/or quality of the deal seem to be at stake.

2.) Chicken and Egg: I can't seem to (so far) get a lender that will work through the scenario with me, so I don't otherwise waste everyone's time. The lender says " Show me the specific deal, with a viable offer that is already in striking range of acceptance and we'll run it by the underwriter. The Broker says: Bring an offer with proof that you can get the deal funded.

3.) I'm not feeling a whole lot of motivation from the parties I am contacting to take me seriously. Admittedly, I am not connected, not part of the good old boys network. My money is real. My need to push through this 1031 is real. I'm sincere and ready to go on a rational deal that can get funded and close and meets my goal which is a priority on income.

Thoughts?

Where are you looking to purchase? Try to see if you can find a mortgage broker in that area that can help you instead of going direct to a lender. The broker will likely have better knowledge of which lenders have an appetite for a first time 1031 borrower from California, for example.

Another thing to consider is to buy a smaller property that you will not have to borrow money at all. Then later on refinance out to get your leverage up on it and then use the extra money to go buy something else.

I believe you can identify up to three properties. One of the reasons is the IRS know not every deal will go through so you have some alternatives if one doesn't go through

@Michael Klinger Do you have a local credit union or local community bank or have you exhausted all options? I would definitely have a backup in place in case you can’t obtain financing. Possibly a property that doesn’t require you to finance or if you have significant tax liability (so you don’t blow your Exchange opportunity) you could choose to invest in a Delaware Statutory Trust (DST) which is sold through a financial advisor. You are a passive investor and typically receive a monthly distribution. It qualifies for like-kind IRS treatment so it can be a great backup option. You’d have to fit suitability requirements but once it liquidates, you can take the funds and do another 1031 back into a property that you can actively manage. I’m seeing a lot of Multi-family offerings available through various sponsors. I’d be happy to connect you with a financial advisor if you want to learn more, see what’s out there, or are nearing your 45th day and don’t want a failed exchange.

@Michael Klinger Congrats on (hopefully) successfully exiting your deal. I think you can, with some work, overcome the objections that you'll face with lenders by coming to them with an established property management company, and other team members already in your corner.

This week I'm flying to a Mid-West market to meet with multifamily brokers and lenders, but I've already lined up two management companies that I like, and I have a 15 pg business plan for how I will approach the market and my criteria.

And....I already own multifamily, but in Texas, not this market. So I'm borrowing the local credibility of the management company, so to speak...

Originally posted by @Michael Klinger :

The issues i am having, are this:

1.) Even though I am an experienced small business person,  and an experienced commercial property owner, I apparently can't necessarily run around with my down payment money, call it 25 percent down and expect the deal to be pushed through. So far lenders seem to want to know that there is some level of experience level in that specific sector, and if not then other factors have to considered and maybe concessions made. The size and/or quality of the deal seem to be at stake.

2.) Chicken and Egg: I can't seem to (so far) get a lender that will work through the scenario with me, so I don't otherwise waste everyone's time. The lender says " Show me the specific deal, with a viable offer that is already in striking range of acceptance and we'll run it by the underwriter. The Broker says: Bring an offer with proof that you can get the deal funded.

Hi Michael, as mentioned by others, if you're having issues with working with lenders it might be a good idea if you're an accredited investor to consider investing in a Delaware Statutory Trust (DST).

By reinvesting in 1031-qualified DSTs, you purchase ownership interest in multimillion dollar properties in multiple growing markets in different states that offer long-term income - and don't require you to be a landlord. Whether your exchange is $100,000 or $1 million, DST investments can be sized to fit your exchange. Happy to answer any questions.

"I have a few weeks left on my identify period."

For multifamily this is just not really enough time to properly evaluate selections and go into a 1031. I see this so many times from 1031 buyers. Those days go by real fast!

If you are buying say a NNN STNL type property then funding and selection can be easier in the time frame left you have.

With your 1031 have you been showing your funds letter to parties when you speak to them? Often I find through 1031 buyers poor planning they are overly rigid when they have 45 days or more and property expectations and then as the days wind down they swing way over to the other side of what they will accept. At that point for many panic sets in and they buy a piece of crap to avoid tax penalties. Had they been realistic to start they would have had time to properly set 3 quality choices. I see it over and over again which is why if buyers are not laser focused with a plan then I do not work with them. The flaky buyers tend to not be able to make a decision and waste time.

You need to figure out with your accountant what the tax penalty will be. If it is minor then you might want to wait and buy something later.

DST money can be trapped for a long time so think carefully. It is a solution in some cases but fees tend to be heavy to buy into them.

No legal advice given.  

@Michael Klinger , Your experience is a bummer but also part of the unintended fallout of the latest round of protectionism of the "consumer". I have friends who are have been commercial bankers at FDIC chartered banks public and private for decades who are leaving because they cannot push loans through. The conventional home buyer loan is still pretty easy to get. But what you're describing is exactly the reason they're leaving. Solid credit, solid financial, solid business plan.... mysterious blocks to underwriting.

Private B2B loan underwriting is a cresting wave.  Seek the private money.  I'm told that refinance after a period is easier with better terms.  So maybe the extra cost of private money needs to be factored in to your business plan proforma initially.

Sorry for delay. I was in tax extension black hole scrambling to extension deadline. Thanks all for input on my hen house.

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