Creative ways to fix up 1031 replacement prop prior to closing?

[Alan Brown]

Hey Y'all,  Im purchasing in a market that is quickly getting away from the 1% rule, and the only way I"m finding to get the cash on cash return I'm looking for is by buying slightly (or more than slightly) distressed properties.  But if I have to use my cash from the 1031 exchange to do some upgrading, it quickly eats into my c on c return!    So.  I'm thinking I could use hard money for the fix up,  then possibly raising the purchase price to cover expenses, and do my normal financing, (25% down) at closing, paying off that debt at closing out of financing, as the Seller would have to normally if they had used debt for fix up. 

That's if i can get the Seller to agree to let me do substantial work prior to closing.  There's also the not insubstantial problem of sinking money into someone else's property and risking them defaulting (not closing) on their newly sweet units.  

I know it sounds crazy risky... but it feels like it should be doable somehow or other.  

Any great ideas?

[Dave Foster]

@Alan Brown, Yah, I agree with @Joe Splitrock.  It's nothing but a bad plan waiting to blow up if you're doing work on your behalf before owning the property.  Secondly, the seller will have to fund the improvements somehow or they will be showing more profit than reality.  And now you've got not only issues of trust and follow through contractually but with real cash on the line as well.

Instead of doing your normal 25%. Get a private short term loan (IRA lenders will do this all the time and it's not that expensive) for the full amount over your 1031. Then do an immediate refinance at cost of acquisition. Get the extra cash that way and do your rehab. Still just one cost of finance plus whatever the private lending will be. But since it's a short time it shouldn't ding you too much.