1031 Strategy: Sell first or find replacement property first?

[Todd Young]

I first posted this in the Buying and Selling Forum, but I think it is better suited to this forum as ya'll are big multifamily investors. 

I'm ready for my first "Big" 1031 exchange. I've done several 1 for 1 exchanges, trading a SFR for a triplex or a duplex for a fourplex. But now I'm wanting to up my game, upgrade my clientele and get a 30-50 unit complex. This is uncharted territory for me so I would love some advice from people who have done this.

Here's what I'm selling - I have a portfolio of duplexes triplexes and fourplexes - 7 of them that I'm ready to sell. They are all value-add plays that I've improved, and increased income. They are mostly in the Everett area of Washington with one in Marysville one in Seattle. I've had two different residential multifam realtors give me CMAs for each property and the portfolio is worth about $6.3mil, of which I should net about $2.6Mil for my down payment.

So far, I've had a couple commercial brokers out scouting around looking for a deal for me in the 30-50 unit range in South Snohomish County in the $5mil - $10mil range. So far they haven't found one and I'm getting conflicting advice from the brokers about how to go about this.

One says I should wait until I have my replacement property identified - since that could take a while - and then list the small properties once i'm under contract, making the deal contingent on the sale of those properties. I'm pretty comfortable with this tactic. as I'm nervous about running up against my 45 day identification deadline.

One says I should list my 7 properties as a package deal, I might net a little less (5-10%) but the benefit of closing everything at once and being able to snag a deal on an upleg is worth it. Furthermore he says I should market and sell my properties first without having any replacement identified because no seller is going to take me serious, or want to tie up their property with a buyer's selling contingency.

When I did a 1 for 1 exchange it has always been kindof easy, I was usually able to find a buyer and a replacement property at the same time it seemed. But this twist of trying to sell 7 properties is tricky and stressing me out!

What have you done? Have you sold multiple properties to exchange into a larger one? If so, did you list and sell your properties first or wait until you identified a replacement? Did you sell your portfolio as a package? Or am I better off listing them individually?

Thanks! Todd

[Arn Cenedella]

@Todd Young

Excellent question, it’s one that investors have debated continually.

Here’s my two cents worth........

Given how hot the multifamily market is, I believe you will find it difficult to find a seller of a large property who will be willing to accept an offer contingent upon the sale of a 7 property package. There is so much cash looking for a place to land - if the property you want is a decent investment - there will be cash buyers after it. I don’t think your contingent upon sale of a 7 property package will be competitive.

So here would be my approach:

1. Identify a few markets you want to buy in

2. Learn the market there, understand market price, run the numbers to confirm the typical property in that market at the typical price for the market will produce the returns you want.

3. I agree that listing the 7 properties as a package is the way to go. I believe there will be many newbie investors looking for this kind of package deal.

4. List 7 property package

5. Get an acceptable offer and include in the contract your ability to extend close for up to 60 days. This will give you plenty of time to locate the new investment.

Here’s how the time table would work:

List package Sept 15.

Enter into contract say Oct 15 with 60 day close and ability to extend for another 60 days.

In this way, you will have up to 4 months and 45 days to identity up to 3 replacement properties. So that would be until April 1 to find a suitable replacement property. I humbly suggest if you can not find a suitable investment by April 1, your criteria is probably not realistic.

Of course while the sale aspect is moving forward, you keep looking....and the intensity of your looking increases every step of the way pending developments on the 7 property package sale.

During this process, your offer to buy would evolve as the sale transaction moved forward.

The strength of your offer would increase each step as follows.

1. Now, your offer would be contingent upon sale of 7.

2. Once you get a contract on the 7, your offer would be contingent on close of 7 sale.

2 is a stronger offer than 1. 

3. Your buyer completes due diligence and his EMD goes non refundable.

Now your offer would be contingency upon close of a firm contract on 7.

3 is stronger than 2.

Each step of the way, your offer becomes more attractive to your seller to be found.

As I have structured the transaction, you would have five and a half months from the day you sign a contract of sale of 7 to find your purchase property.

If you are realistic on your buy criteria, that should be long enough.

Of course, do not wait until the 11th hour to buy something, get it done as soon as you can knowing you have time.

42 years of experience and dozens of 1031s completed all over the US.

Hope this helps.

Arn