Qualified Intermediaries - Any good or bad experiences?

Question

Hello BP Community!

I have a client in Columbus, Ohio who is doing a 1031 Exchange for the first time and wants to get started with a Qualified Intermediary.

Is there anything that my client should look for or be careful of? Are they all more or less the same?  Any interesting experiences?

Thanks!

Bill Exeter · Answer

Hi @Ben Lindquist,

The 1031 Exchange Qualified Intermediary is a crucial part of any successful 1031 Exchange transaction. Investors should therefore exercise significant care when choosing their Qualified Intermediary because of the critical role the company will play in the administration of their 1031 Exchange transaction.

It is extremely important to note that 1031 Exchange Qualified Intermediaries are generally not required to be licensed, regulated, audited or otherwise monitored by any regulatory body.  In addition, 1031 Exchange Qualified Intermediaries are generally not required to be bonded, insured or maintain any other form of minimum equity capitalization.

In short, anyone can start a 1031 Exchange Qualified Intermediary and begin administering 1031 Exchange transactions.  It is therefore extremely important for you to know how to properly evaluate and choose a SAFE 1031 Exchange Qualified Intermediary for your 1031 Exchange transaction.

You should always perform a careful and thorough due diligence review before making your final selection.  You should never pick your 1031 Exchange Qualified Intermediary based solely on their 1031 Exchange fees, costs and charges or the size of the institution.  Choosing the wrong 1031 Exchange Qualified Intermediary to administer your 1031 Exchange could be a very expensive mistake due to the Qualified Intermediary's critical fiduciary responsibilities and obligations through out your 1031 Exchange transaction.

You may focus all too often on issues such as size of the Qualified Intermediary, 1031 Exchange fees, interest rates paid, turn around times, branch office locations, and the like, when interviewing potential 1031 Exchange Qualified Intermediaries.  While many of these issues are important considerations and should not be ignored or overlooked, there are other more crucial criteria that you must question and evaluate first.

The critical risk criteria that you must review and evaluate prior to making your final decision on which 1031 Exchange Qualified Intermediary to retain includes, but is not limited to, the following areas:

• Technical capability of the 1031 Exchange Qualified Intermediary
• Internal processes and audit controls to safeguard your 1031 Exchange funds and assets
• Use of Qualified Trust Accounts or Qualified Escrow Accounts
• Decision criteria and guidelines for investment of your 1031 Exchange funds
• Protection from potential errors or omissions by the Qualified Intermediary (E&O Insurance) 
• Protection from potential theft or embezzlement of 1031 Exchange funds (Fidelity Bond)

An experienced and professional 1031 Exchange Qualified Intermediary will understand these concerns and should be happy to discuss these crucial issues with you.  And, well managed institutional 1031 Exchange Qualified Intermediaries will have already evaluated the applicable risks, addressed the critical issues and implemented appropriate safeguards to protect your 1031 Exchange funds to ensure the successful completion of your 1031 Exchange transaction.

Bill Exeter · Answer

I thought that I should post a follow-up to this thread.  Investors should be extremely cautious with Qualified Intermediaries that also represent (and get paid on) replacement property solutions or Qualified Intermediaries that refer clients to their "associates" or "friends" for replacement property solutions so that they can get paid a referral fee or those that actively put replacement property solutions together in order to make money.

Qualified Intermediaries should focus on doing one thing and doing it well - successfully administering the clients' 1031 Exchange.  The client should not have to worry about whether the Qualified Intermediary is also "trying" to get paid on the back end at the expense of the clients' 1031 Exchange funds.  I have seen this time and time again over my 36 years in the 1031 Exchange industry where a Qualified Intermediary puts making money over their clients' best interests.

You can ask the Qualified Intermediary directly when they refer you to someone whether they are getting paid for the referral or merely referring you in order to help you.

Dave Foster · Answer

@Ben Lindquist, I understand.  I used to think all realtors were more or less the same as well :)

Of course there's good and bad and shades in between.  Their demonstrated experience and reputation in the industry will speak volumes.  What I'm seeing in the industry as a cautionary tale for you is that simply the reputation of the company is not going to necessarily carry the day.  Your 1031 will ultimately be only as good as the individuals directly assigned to your exchange.  The best and largest QI firms in America can have less than stellar regional or local representation.  So again it goes back to know exactly who you're working with and not just the ticker symbol of their company.

Fee wise there is a range but not a huge one.  Of course everyone wants to avoid the most expensive but usually for the wrong reasons.  The most expensive exchanges are typically "one offs" done by an an attorney with no economy of scale which is a direct result of little direct experience.

However I'd also counsel that you not simply look for the cheapest "fill in the boxes" internet intermediary either.  They may have economy of scale but the consistency of delivered product is not always there. I don't know if it's counter intuitive or not but your best intermediaries are going to be in the cluster of the middle range of fees.  Start there.

Jonathan Klemm · Answer

Hey @Ben Lindquist - I used Midland IRA and things went fine.

My experience was pleasant and helpful.  They did a good job and helped answer any questions I had about the 1031 exchange I did here in Chicago.  If you are looking for a contact, let me know, and I can make an intro.

Account Closed · Answer

Hi Ben!  Like anything involving holding of funds, your client should do his own due diligence and you should refer several to him if you are going to refer any. He should call each one and get a feel for how they do business by asking them all the same set of questions.  Some good questions for him to ask each potential company are:

- how long have you been in business

- what is your fee (be specific on the number of properties involved and if it's forward, reverse, etc)

- where is your operations staff located (ie where will be funds be)

- what type of account will my funds be held in?  Is it segregated (only my funds in the account)

- do you have an attorney on staff that reviews exchange docs and keeps them current

- what is the typical time for your staff to complete an exchange ( you want to get a feel for if they are understaffed and can they get the work done on your time frame)

- how many exchanges do you do a month

- what is your errors and omissions insurance through, can I get a copy

- what is the amount of your fidelity bond - for each occurrence

- what protections are in place to prevent wire fraud

- will my funds be used by the company for outside investments (goes back to the type of account funds are held in)

- who will be my contact during the exchange (goes to customer service, you want one contact who you can reach by telephone)

Investors should keep in mind that it is their money they are placing with a QI to hold for a short period of time and be sure they feel comfortable with the company they choose to perform this role.  If a QI can't or doesn't want to answer questions, move on to another.

Robert Ellis · Answer

Best thing you can do is go to a large title company like Northwest or Amerititle and find a 1031 intermediary. Should run between $600 and $1000 from my experience. They can tell you everything. Plus nice that they don't have to touch the funds. We've done them at least 4 times this year and can recommend those two local companies as great ones to work with.

Qualified Intermediaries - Any good or bad experiences?

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