1031 Exchange Stories / Strategies

[Edit B.]

Any 1031 exchange success stories in today's markets?  If so, what strategy did you use to best safeguard your profits considering the small time frame (45 days to identify a property)?

I've read things like look at multiple markets, or include a 1031 contingency whens selling. I get the multiple markets as a cooler market would potentially be easier to find a better deal in, but the contingency on the sellers side doesn't make sense to me. If i'm selling with a 1031 contingency, what kind of buyer would perform inspection and appraisal, while there is a 1031 contingency and potentially lose that money. If they don't perform them, and are just waiting, then they are not really in contract due to their own contingency(inspection, appraisal). 

Any thoughts welcome

[Dave Foster]

@Edit B. You raise a very interesting question. Right now the fear of the limitations of a 1031 exchange is much greater than the reality. Our clients haven't had any problems finding replacement properties that fit their needs. From highly appreciated CA, HI and WA properties into multiple turn keys in the midwest to a large sale of oil interests (yes that counts as real estate) into a fractional TIC with a national corporate tenant.

Lots of folks wanting to go from SF to MF.  I'd say that's 100% of the 5 failed 1031 exchanges our clients have had to date - not finding the MF they want.  So in certain markets and sectors there is some risk, but it's a huge brisk 1031 field out there.  Many long term investors are starting to defensively position themselves by selling off sometimes dozens of their longer term holds in a year and placing them where they feel they'll be less exposed.

So what's a 1031 investor to do in a heated mature sellers market, when finding good replacement properties is hard and no seller wants to give you a contingency to sell your old property???  Exactly what you suggest.  Use your power as a seller to demand a sale date contingent on your finding suitable replacement properties.  A lot of buyers don't mind extended closing dates as that just means they're locking in a price but not having to pay for a bit.  That's free appreciation!  

But I'm sensing that you may be taking a contingent closing a little farther than the norm or what buyers would be comfortable with.  As I mentioned before it's really not all that hard to find good replacements depending on your type and parameters.  And what might be challenging to do in 45 days following a sale is going to be infinitely easier if you can use your seller power to get 60-90 additional days prior to close when you're sure of your sale but not closed yet.  So that is a great strategy.

But I doubt if there are many buyers who would buy in this market with no fixed date.  That leaves way too much to chance.  They don't know you or how serious you are to sell.  It could feel to them like just another person talking about selling but not able to pull the trigger.  You're absolutely right - a buyer's going to be reluctant to move the sale forward with any financing or appraisal or inspection work unless they're sure of close - even if delayed.

So while a sale contingent on the seller finding suitable replacements is a great idea.  I think you'll have difficulty getting it agreed to by buyers unless there is a date certain that they can rely on.  So shop hard and fast.  the worst case of a failed  exchange isn't any worse than the consequences of not attempting an exchange.