Is a buyers offer with a 1031 good or bad?

Question

When a buyer makes an offer with the hope of doing a 1031 exchange is that considered a solid offer from a sellers perspective? What are the pros and cons of making an offer in this scenario? Personally, I would take that offer as more serious than another offer because they are obviously working on a dead line, but, on the other hand, they would have to sell the original purchase also in order to do this. I have a cash buyer for a sfr that I own in the county and we are in the process of looking at replacement homes for a 1031 and I am curious as to how competitive we may appear purchasing through a 1031.

Chris Coleman · Answer

@Jon Arsenault

I actually had this happen last year.  I was selling a property, doing a 1031 Exchange, and my Buyer was also doing a 1031 Exchange into the purchase of the property that I was selling.

I can tell you that it was more comforting to me knowing that he was a seasoned and serious Buyer/Investor. I was confident that he had the funding, had done his due diligence and therefore knew that he really wanted the property I was selling, and was unlikely to back out at the last minute.  I can’t say that was all due to the 1031, and probably more so that he was an experienced Investor as well.  But knowing that he was also doing a 1031, had the experience to do a 1031, had a deadline, etc, did help with my confidence.

In the end, it was a great and easy transaction.

Steve Smithy · Answer

I don't think the 1031 necessarily matters, if they have the funds and approval and don't need to sell the other property for the loan it wouldn't matter to me.  I'd consider it a solid offer.

Dave Foster · Answer

@Jon Arsenault, and the answer to that dilemma when you're the buyer is to not reveal that you are in a 1031.  You can't avoid your own self imposed angst and fear.  But if the other side doesn't know that you're doing a 1031 then at least they don't gain an advantage in the negotiations because of the 1031.

All parties must be notified that a 1031 is happening.  But it can be anytime during the process.  We provide documents at closing that suffices so you don't have to reveal the 1031 until closing when it's too late for them to take negotiation advantage.

Jon A. · Answer

@Thomas Rutkowski , this is exactly what I was wondering last night as I was going to bed. If the seller would use that as leverage against a buyer that was using a 1031 exchange. Thanks for the input.

Dave Foster · Answer

@Jon Arsenault, That's a great point you make when the shoe is on the other foot.  You're not just examining an offer to purchase your property.  You're looking at a potential 1031 yourself.

Here's a tip hot off the press.  Just got off the phone with an investor processing this exact issue today.  Your buyer wants to know that they'll be able to complete their 1031.  You want the time necessary to find your replacement property.  That's a win-win match made in heaven!!

Go into contract with them so they feel good that they'll actually complete their 1031 with your property.  But include in the contract terms an extended or floating closing date so you can identify and get your replacement property under contract.  They have 180 days flexibility in total which should be plenty of time for you to find the right "next" property.

Both 1031 investors working together to make sure each succeeds - and gets rid of those pesky taxes!!!!!

Jon A. · Answer

@Dave Foster Thanks for the clarification and that makes perfect sense. Of course, I have more questions and will be in contact soon. Thanks very much for your response.

Jon A. · Answer

All of these are great points to consider. On the one hand, the offer is more attractive because it's a fairly seasoned investor making it, and on the other hand, they may have identified other similar properties for the same transaction. I am finding it very hard to keep the money and pay the capital gains, but it may be even harder to find the property that fits correctly at this time. Thanks for all the replies.

Dave Foster · Answer

@Jon Arsenault, It's actually a very good thing as long as there are not any extra stipulations requiring you to allow extra time for them to complete their sale that starts the 1031.  You can require that they show you proof of funds in the exchange account.  That will speak volumes!  Because those funds cannot disappear for any other use than the purchase of real estate.

Michael Skoczylas · Answer

It is normally considered a serious offer- since you know there is at least some cash ready to purchase and the person is not a novice real estate investor. But it does not mean much more than that. The Buyer is on a 45 day deadline to identify and 180 days to close, but your property may have been one of several the buyer may have identified so it is hard to say 1031 means anything more than what I said above.

Thomas Rutkowski · Answer

@Jon Arsenault a buyer doing a 1031 exchange is more desperate to close than your typical buyer. They are on a strict timeline and need the deal to happen. You could use that to negotiate a better price. I read somewhere that a study showed there was something like a 19% premium paid for 1031 transactions versus traditional sales.

And then there is karma ;) Good luck.

Is a buyers offer with a 1031 good or bad?

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