First-Time Home Buyer Considering a 1031 Exchange Property — Good Idea or Red Flag?

Question

Hi everyone,

I’m a first-time home buyer looking to purchase a multifamily property and would appreciate some advice.

The property I’m considering is currently owned by a seller doing a 1031 exchange. One unit has been vacant since last spring, while the other unit is occupied by a tenant who would like to stay with the new owner and is currently on a month to month contract. If needed, the lease requires two months’ notice for the tenant to vacate.

My plan would be to live in one unit and rent the other, but I’m trying to understand whether buying a 1031 exchange property as a first-time buyer introduces additional risks or complications. Specifically:

- Does a seller’s 1031 exchange create more pressure, tighter timelines, or less flexibility during negotiations?

- Are there any financing, inspection, or appraisal risks I should be aware of?

- Would this situation be considered normal, or potentially a red flag for someone without prior real estate experience?

I understand I’ll still need to do full due diligence, but I’m curious whether experienced investors or agents think this is a smart move—or something better avoided for a first purchase.

Thanks in advance for any insight!

Abel Curiel · Answer

Hello Michael and welcome to BP!

Great questions here.

- Does a seller’s 1031 exchange create more pressure, tighter timelines, or less flexibility during negotiations?
Most of the pressure is on the seller to perform the sale and purchase within the timelines.
That said, if you have your own timelines to follow (i.e. lease expiration on your current home, other deadlines, etc.) it can be challenging.
As far as negotiations, you have someone who does not have a lot of time to 'test' the market or play 'hardball' with unrealistic expectations (i.e. price & terms).
Sellers who are doing a 1031 exchange are motivated sellers in a sea of unmotivated & unrealistic sellers.
For example, in my market: 57% of LISTED multifamily properties in New York City didn't sell this year. 37% of LISTED multifamily properties in the Suburbs (Long Island and Westchester) didn't sell.
The asking prices on these properties can be 10%+ above market value signaling unrealistic expectations and low desire/motivation to actually sell

Questions to ask yourself: Is their asking price realistic? If so, given current demand, how long will this deal be available? What could it potentially sell for

- Are there any financing, inspection, or appraisal risks I should be aware of?

Your lender and home inspection can answer these questions.
On the financing end, you want to make sure you can obtain a commitment letter in the timeframe specified on the contract. Failure to do so can result in you losing your deposit should you be unable to close on the property.
Inspection risks include issues with the foundation, flood risks, roof, mechanical systems, floors, mold, asbestos, termites, and 100s-1000s of other things. Your home inspector will outline the most alarming issues as well as point out low-moderate priority issues.

- Would this situation be considered normal, or potentially a red flag for someone without prior real estate experience?Normal.

All the best!

Abel

Lydia Winn · Answer

Well said, @Abel Curiel. Your point about 1031 sellers being motivated and time-bound is absolutely true, especially in a sea of properties where the seller is "testing the market".

Eric Fernwood · Answer

Hello @Michael Naval,

While I’m not a 1031 expert but we’ve completed over 80 successful 1031 exchanges. From a buyer’s perspective, purchasing a property that is part of a seller’s 1031 exchange usually creates little to no additional risk. A 1031 exchange is a tax-deferral strategy for the seller and does not change the fundamentals of the transaction for the buyer.

The main thing to be aware of is timing. Because the seller must meet strict IRS deadlines for their exchange, they may be highly motivated to close by a specific date. As a result, you may be asked to:

• Be flexible with the closing date
• Move quickly, which can compress inspection, financing, and due-diligence timelines

The purchase agreement will likely include a clause stating that the buyer agrees to cooperate with the seller’s 1031 exchange. This cooperation:

• Should not cost you anything
• Should not create additional liability for you
• Typically acknowledges the use of a Qualified Intermediary (QI)—a third party required to handle the seller's funds
• May involve signing a few extra, standard documents at closing

My recommendation: have your own real estate professional or attorney review the contract to confirm that the 1031 language does not negatively affect your rights or timeline. Also, even if the seller pushes for a quick close, take the time you need—do not skip inspections. Inspections are critical; you must understand the property's condition before you buy.

First-Time Home Buyer Considering a 1031 Exchange Property — Good Idea or Red Flag?

First-Time Home Buyer Considering a 1031 Exchange Property — Good Idea or Red Flag?

Most Popular Reply

3 Replies