Reverse 1031 Funding Question

[David Edelstein]

Here is the hypothetical scenario. The exchanger owns a property that is worth $1.4m with a $300k mortgage. Upon sale of the property the exchanger walks away with $1m. The goal is to perform a reverse 1031 exchange. A suitable property is located and an offer to purchase is accepted at $2m. The question is: What happens in terms of funding the deal while the transaction is still in the intermediary stage:

1. I'm assuming the seller of the replacement property will require a good faith deposit. Is this a correct assumption? What is a reasonable amount that would be expected?

2. I'm also assuming, for the seller of the replacement property, he would want some guarantee in the form of cash held in escrow during the time the transaction is in the intermediary stage. Is it to be expected that the full purchase price worth of funds need to be held by the intermediary? In this case $2mill? For potentially 180 days. If not how much of the purchase price needs to be held by the intermediary? Also, what happens if the exchanger doesn't sell the property at the end of the 180 days, what is at risk?

3. If the answer to #2 is yes additional funds in excess of the good faith deposit are required, then what are the options for the exchanger to obtain these funds before the sale of the existing property? Assume the exchanger has no other funding to cover the $2mill other than the proceeds from the sale of the existing property.

4. Is it a standard thing that a bank will provide a loan to cover the intermediary $2mill dependant on finalizing the loan value once the existing property sells? i.e. the final load amount would be $1mill.

5. Is it even possible for the exchanger to attempt a reverse 1031 deal if he has no other money other than the funds that will be received from the sale of the first property?

Thanks for the feedback!

[Mark Creason]

Originally posted by @David Edelstein:

Thanks Dave, quick response and great answer. When the time comes, I will go for an extended 1031 and as a last resort use the reverse, if left with no options and can get the financing lined up.

I am assuming by extended 1031, you are referring to a long escrow on your purchase.  Once you close, you will still have 45 days to declare and 180 total days to close on the new property.  As a lender, we would look for a typical down payment on a loan in order to do a reverse exchange.  The issue for most is that they do not have 25% of the 2 million dollar purchase (in this example) to make the reverse work.  Another option would be to get short term financing on your current property to use as your down payment on the reverse exchange purchase.

Mark