Newbie- 5 acre flip- offering owner financing- 1031 exchange

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Newbie- 5 acre flip- offering owner financing- 1031 exchange

James Greenwood
Chilcoot, CA · Member since 2017 · 17 posts · 1 vote

Hello!

Seeking any advice from the pros on owner finance and 1031 exchange. Thanks in advance!

I purchased an inexpensive 5 acre property out of state (1000 miles) for two reasons. 1 to gain experience and confidence in RE investing. And 2 to make a profit. I have never physically been to the property.

I purchased it for $6,000, listed it for $19,000 with an option for owner finance. Today I received an offer for $13,000. $10,000 down with three $1,000 payments at 6% interest over the next three months. My agent is suggesting a trust indenture over a deed of trust.

I'm happy with this offer as its the first in 6 months. Are there any red flags, warnings, tips etc that anyone has for me in regard to the owner financing?

My second question is... can I do a 1031 exchange with this property?

Is it worth it on such a small deal?

If so, how do I set up a 1031?

Do I need to hire someone to file it for me?

If I 1031 it but don't find a new deal in time, will I default back to paying capital gains taxes? Or I am I obligated to find a deal?

I have been actively looking and preparing to purchase a $50k-$60-range single family rental in my local market. It would be great if I could pull off a 1031 early on in my experience so that I will be more familiar with it for bigger deals in the future.

Thanks

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y

@James Greenwood Love you're approach to the learning curve.  Jump in feet first but in the shallow end of the pool.  I like that!!

There's a couple of problems with a 1031 on this property.  

1. It sounds like you did not buy it with the intent of holding for productive use.  Rather you bought it with the primary intent of resale.Property eligible for 1031 are properties you bought with the intent to hold.  And while there's no statutory holding period if you bought it and then listed it you're pretty much demonstrating your intent to sell right there.

2. You're not making a ton of money.  A great return for the size of the asset but the tax overall isn't going to be that much - figure a couple grand?  So if an exchange costs you $750 you're only saving a grand or so.  And while that's nothing to sneeze at when you couple that with item 1 above it kind of says may forgo the 1031 on this one.

3. The owner carry is problematic as well.  There are ways to combine a 1031 with owner carry but there is some extra expense.  And you're already not saving that much in tax.

1031 is not a DIY thing.  You have to use the services of a qualified intermediary.  They set up the exchange with the closing company, handle the transfer of funds, and consult with you to keep you on the straight and narrow.

You are correct.  There is no penalty for starting and not completing a 1031 exchange.  If it fails you simply pay the tax.  

There's a ton of ways to use 1031s to mitigate your taxes and boost your returns.  So you're right to start getting introduced to them now.  But on this transaction.... probably not.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @James Greenwood Love you're approach to the learning curve.  Jump in feet first but in the shallow end of the pool.  I like that!!

    There's a couple of problems with a 1031 on this property.  

    1. It sounds like you did not buy it with the intent of holding for productive use.  Rather you bought it with the primary intent of resale.Property eligible for 1031 are properties you bought with the intent to hold.  And while there's no statutory holding period if you bought it and then listed it you're pretty much demonstrating your intent to sell right there.

    2. You're not making a ton of money.  A great return for the size of the asset but the tax overall isn't going to be that much - figure a couple grand?  So if an exchange costs you $750 you're only saving a grand or so.  And while that's nothing to sneeze at when you couple that with item 1 above it kind of says may forgo the 1031 on this one.

    3. The owner carry is problematic as well.  There are ways to combine a 1031 with owner carry but there is some extra expense.  And you're already not saving that much in tax.

    1031 is not a DIY thing.  You have to use the services of a qualified intermediary.  They set up the exchange with the closing company, handle the transfer of funds, and consult with you to keep you on the straight and narrow.

    You are correct.  There is no penalty for starting and not completing a 1031 exchange.  If it fails you simply pay the tax.  

    There's a ton of ways to use 1031s to mitigate your taxes and boost your returns.  So you're right to start getting introduced to them now.  But on this transaction.... probably not.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @James Greenwood:

    Hello!

    Seeking any advice from the pros on owner finance and 1031 exchange. Thanks in advance!

    I purchased an inexpensive 5 acre property out of state (1000 miles) for two reasons. 1 to gain experience and confidence in RE investing. And 2 to make a profit. I have never physically been to the property.

    I purchased it for $6,000, listed it for $19,000 with an option for owner finance. Today I received an offer for $13,000. $10,000 down with three $1,000 payments at 6% interest over the next three months. My agent is suggesting a trust indenture over a deed of trust.

    I'm happy with this offer as its the first in 6 months. Are there any red flags, warnings, tips etc that anyone has for me in regard to the owner financing?

    Doing an owner finance for $3k on a $13k deal sounds like a lot of risk for no reason. 

    If they can come up with $10k they can come up with $13k. 

    Options: 

    $13k cash 

    Or

    $19k with owner financing. 

    Why let them have their lower price AND their terms. Screw dat. 

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  • James Greenwood
    OP
    Chilcoot, CA · Member since 2017 · 17 posts · 1 vote
    7y

    @Dave Foster Thanks so much for your concise advice and encouragement; your response was most helpful.

    I will skip pursuing a 1031 on this one. Its good to know that the 1031 is not a DIY thing.

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  • James Greenwood
    OP
    Chilcoot, CA · Member since 2017 · 17 posts · 1 vote
    7y

    @Natalie Kolodij

    Great advice!

    But I should add that upon thinking about it more its been over 9 months and this is the first offer. 

    I was planning to counter-offer today at $14,000. $10k down, with four $1,000 payments at the same interest rate. For me its a "bird in hand is better than two in a bush" scenario. If this offer came 30 days into listing I think I would take your advice and stay at $19,000 but I don't want to blow my only offer. 

    What are your thoughts?

    Maybe come back at $15,000 and five months of payments?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @James Greenwood, I'm so curious.  What kind of land is it?  There's a whole sub culture dedicated to simply buying whatever little bits of land they can anywhere and turning it based on volume and the "allure" that someone might have for a certain geographical area.  I find myself looking at mining claims in the west.  Not because I want to mine.  But just because they're so cheap and offer access to BLM and National Forest.

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  • James Greenwood
    OP
    Chilcoot, CA · Member since 2017 · 17 posts · 1 vote
    7y

    @Dave Foster 

    So, its 5 acres in Montana seven miles out of a town with 60,000 population. Its pretty much mobile homes here and there on 5-20 acre parcels around it--all gravel roads, little hobby farms, people that work in the city but want to live out of town for a little cheaper etc. Its buildable but the home location would need to be built up on a mound out of the flood plain; all the other homes around it have the same issue. 

    I have a friend there that was shopping for a house. His realtor mentioned this cheap 5 acre property that he needed to sell for a woman who obtained it when her brother passed away. So, my friend told me (in passing) and a few days later it dawned on me that I could buy it. I called his realtor and after a month of deliberating I purchased it for $6k.

    My biggest hangup....I asked my grandpa who used commercial real estate for retirement what he thought of the deal, fully thinking that he would give me an "atta boy, go for it". Instead he told me he would never buy something that far away that he couldn't manage. I determined that he was investing in a totally different era with no internet, long distance phone call charges, and a 1970 international truck for travel. He's also thinking in terms of managing commercial warehouse buildings. It was hard to go for it, but I did and he never asked about it again. 

    I countered at $15 today and it was accepted!!!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @James Greenwood  Well done!!  Its a small world nowadays isn't it?  And folks are more than ever able to find their own little piece of heaven.  5 acres in MT sounds awful good to me on days :)

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