Wanting to do a 1031 Exchange on Income Property, Help!

Multi-Family and Apartment Investing
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Wanting to do a 1031 Exchange on Income Property, Help!

Alysa PhalenPro Member
Denver, CO · Member since 2017 · 14 posts · 8 votes

Good day!

I wasn't sure which category this applied to (1031 exchange, real estate sale, or property manager) but I will start in this category for now.  

I inherited a 9 unit multi-family in Fla in 2009 with no mortgage that I would like to do a 1031 exchange to Denver (I know, Denver is a tough market!) but I live in Denver and I am not making money on the Fla income property due to all the flood, hurricane, wind, commercial insurances, taxes, property manager, etc.  

So I was researching around at different real estate agents to list the property and found one just yesterday, and when I called my Property Manager he was very upset (he has been the property manager for the whole time I have owned it, 9 years) and kept saying "Why don't you give me/my broker" a chance??  and "What about my commission?"  I was very confused for I knew his wife was a real estate agent but never knew he was.  (I know that seems unbelievable!).  And he just signed with a new brokerage firm at the end of last year but I didn't think that changed anything.

My question is, I don't see anywhere in the listing agreement or Management Agreement by the new broker about having to use my property manager to sell my apartments?  After having talked with an extremely smart, aggressive (maybe more assertive) but "definitely on top of things" real estate agent yesterday who emailed me all the different marketing materials she uses (I was really  impressed!) and how she is going to talk to each tenant about their lease and fix things up, etc, I just know from experience with working with my property manager that all he would do is put it on the MLS without any marketing (in fact, that is what he said on the phone) and I know for a fact he cannot offer me what she can .  He probably would be able to offer me reduced commission though, so their is that.

Any advice from anyone who has been through a transaction like this or has an opinion on what is best would be greatly appreciated!  

Feel free to PM me if you prefer.

p.s. I apologize in advance for not being more educated, I am in the process of learning but it helps me so much to get feedback here.  It was hard for me to research this topic as I didn't find any matches or similar situations.

Thank you!

Alysa

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y

@Alysa Phalen, It doesn't sound like your current property manager is much of a go getter.  Unfortunately all professionals aren't created equal.  It's understandable that any property manager would also like to be the listing broker for sale.  And normally they would be the best person to do so.  That's a reasonable hope and goal.  But it's not an entitled right unless that is spelled out in your management agreement.  And the professionals you want to work with are those who view your business as a privilege not an entitlement.

In your case I think there's even more background than that.  I'm guessing there's a reason you didn't approach them first. And I'm guessing that it's probably their lack of proactive communication and response that had you look elsewhere.

The issue that muddies the water is that he is your manager and the one who is supposed to be the point of contact with your tenants.  It could get ugly real quick if you've got a realtor talking to tenants, a grumpy manager, and confused tenants being subjected to all.

If you want another realtor to handle it then fire that manager now - get your keys back pay whatever you need to but get them out of the picture.  Maybe that new realtor will take it on while being sold.  But make sure that the realtor you're thinking of is really up to the task and can walk the walk.

Otherwise, a reduced commission in exchange for less hassle isn't a bad trade off.  a 9 unit in St. Pete isn't going to last long.

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  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    8y
    Alysa Phalen I would say do what is best for you. If the agent has demonstrated the value to you then use them. I doubt there is anything in your contract obligating you to use the property manager to sell. It’s a business decision, so if you believe the agent will earn you the best price for your property, that’s who you should use.
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Alysa Phalen, It doesn't sound like your current property manager is much of a go getter.  Unfortunately all professionals aren't created equal.  It's understandable that any property manager would also like to be the listing broker for sale.  And normally they would be the best person to do so.  That's a reasonable hope and goal.  But it's not an entitled right unless that is spelled out in your management agreement.  And the professionals you want to work with are those who view your business as a privilege not an entitlement.

    In your case I think there's even more background than that.  I'm guessing there's a reason you didn't approach them first. And I'm guessing that it's probably their lack of proactive communication and response that had you look elsewhere.

    The issue that muddies the water is that he is your manager and the one who is supposed to be the point of contact with your tenants.  It could get ugly real quick if you've got a realtor talking to tenants, a grumpy manager, and confused tenants being subjected to all.

    If you want another realtor to handle it then fire that manager now - get your keys back pay whatever you need to but get them out of the picture.  Maybe that new realtor will take it on while being sold.  But make sure that the realtor you're thinking of is really up to the task and can walk the walk.

    Otherwise, a reduced commission in exchange for less hassle isn't a bad trade off.  a 9 unit in St. Pete isn't going to last long.

    The 1031 Investor5137 Reviews
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  • Peter Sanchez
    Real Estate Investor · Washington, DC · Member since 2014 · 236 posts · 328 votes
    8y

    Just because he was a good property manager, doesn't mean he will be a good broker, especially if his plan is to just put it on the MLS and see what happens. He was your property manager for 9 years? So what? You paid him for his services those past nine years, right? You don't owe him anything.

    0Reply
  • Matt Popilek
    Kansas City, MO · Member since 2017 · 144 posts · 148 votes
    8y

    We have a clause in our property management agreement that gives us the right to list all the properties we manage for 90 days.

    If he doesn't have that clause in you agreement it is free game!

    0Reply
  • Kevin Grinstead
    Realtor · Denver, CO · Member since 2016 · 499 posts · 129 votes
    8y

    Hi Alysa, welcome to BP. I would check with the 1031 exchange about the rules. I believe that you would have to exchange for a like property. Depending on the sale price, it might be hard to find an apartment building in Denver for that price point. Also, have you found a commercial agent to assist you in Denver?

    0Reply
  • Henri Meli
    Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
    8y

    @Alysa Phalen very interesting thing I picked up from your ... and maybe it is slightly off topic.

    You said, you have No mortgage, but you are not making money?. Where in FL is this? Are you getting market rents?

    Do you have the T-12 and P&L for this property? Since you are selling it, can you give us details on what you are asking for? Since you are planning to do a 1031, the timing of sell and replacement property are key. Maybe working with a buyer here could actually fit better ? Maybe you don't need the hassle of going through an agent? 

    Please provide more info on the property, if that's ok.

    0Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    8y

    @Alysa Phalen so what you wrote is a bit confusing to me but here are some thoughts. 

    1) Your agreement with your current property manager governs that relationship. Read it and understand it. Perhaps you need to fire them in order to hire the agent you like.

    2) Make sure the broker you are hiring, knows what they are doing. You got a nice dog and pony show with all their efforts they are going to do to market the property. Have they done the before several time and what was the out come? Get references for similar properties and similar owner situations. Call and check those references. Call some other brokers in the area and see what they have to say about the broker you are considering hiring. It's easy to have a slick listing presentation (what you saw) but harder to deliver especially on the property you have described.

    3) Pricing is key. The price of a 9 unit property is almost 100% on the income potential of that property. You get a higher price for the more income it produces. If in the last 9 years it has made you no money, then it will bring you a very low sale price. You would be better off to shop for a new manager to increase the income from the property prior to the sale. If you want to go quicker and don't have too much money. Fix up 1 or 2 units and rent them out at higher prices to show buyers "potential" that the property has.

    4) I think your currently property manager is more of a problem than the property is. Consider firing them and finding a new one. You will take a huge beating selling it and trying to find something here in Denver.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Kevin Grinstead, You're right about Denver being a much escalated market from St. Pete.  Florida as a whole is still lagging nationally and behind it's peak in 06.  But that's as much fear of the boom and bust nature of FL as anything.

    But @Alysa Phalen does not need to purchase another apartment building in CO to satisfy 1031. "like kind" in a 1031 is any type of investment real estate for any other type of investment real estate.  So she can stay in MF or go to SF or commercial or vacation rental or any other kind of productive investment real estate.

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  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by :

    But @Alysa Phalen does not need to purchase another apartment building in CO to satisfy 1031. "like kind" in a 1031 is any type of investment real estate for any other type of investment real estate.  So she can stay in MF or go to SF or commercial or vacation rental or any other kind of productive investment real estate.

     This.

    Our market is extremely tight right now. If I were you, I'd have an idea of your replacement property here in Denver before you list in FL. Talk to the broker down there to see what they are seeing for days on market down there.

    On-market multifamily is priced high here in town. I'd be best to put some feelers out for off-market or even vacation rentals. A client of mine is easily grossing over 6 figures up in Breck. There are a few different options, but you should have an idea of what you want before you start the 1031 process. 

    1Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Alysa Phalen

    Hi Alysa

    What does your gut tell you?  If I owned a property with no mortgage and I was not cash flowing, I would also be upset. I understand the weather has been disruptive, but maybe they could have cut their fees in order for you to cash flow a bit.

    I would vet his company to see how they perform on the sell side.  Remember, you get what you pay for. I would rather work with a top rate agent and pay more than work for a slug who is going to charge me less.

    My biggest piece of advice is to try to separate emotions in a deal like this. Higher emotions lead to lower intelligence. Try to remove yourself from the situation and look at it as an "innocent" bystander.

    I wish you luck and hope you find a property in Denver

    Gino

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