1031 exch. buying new construction 4plex & seller won't do repair

[Maggie Vineyard]

My father and I are in a 1031 exchange and under contract to buy a fourplex in San Antonio. (We are already way beyond our identification period so cannot buy something else).

This fourplex is brand new construction and after having an inspection, we have discovered some major issues with the construction. The seller had agreed to do all the work, per our contract, but after re-inspection, it was not done properly, and sounds like it could result in some major problems down the road. Now he is telling us it’s been done already, but is a terrible "half-assed" job.

I have requested we extend the closing date until the repairs are done properly OR go ahead and close but hold back money in escrow so we can do the work ourselves. He is refusing to do this.

I’m not sure what my options are now..if we don’t buy it, we are going to have a tax issue. But we do not want to buy a property that is poorly built and have problems later when we are trying to resell it or our tenants complain.

I feel like the seller has all the leverage now since he knows we are in an exchange. Any advice on my options at this point or how to get him to allow a holdback for repairs? 

We were going to buy multiple properties from him (which I was using as leverage to negotiate), but now that seems out of the question..

[Dave Foster]

@Maggie Vineyard, This kind of thing is uncommon (thank heaven) but that doesn't make it less painful for you.  Situational ethics by the other side of the transaction can cause you trouble in a 1031.  Yes, they now have leverage only because they know you're doing the 1031.  You could threaten a specific performance suit or void the contract.  

But apart from the nuclear options, the only thing you can do now is to either count your cost and not close (call their bluff) after doing a full analysis of the potential damage vs tax on the gain from a busted 1031.  Or offer them a premium if they'll try again.  A premium may be less than tax.  The amount this harms you doesn't make them a less bad or more bad person. Their character (or lack thereof) is no longer in question.  The only question is how you can minimize the negative impact to you.So gritting your teeth and smiling may be the best answer.

Going forward you may want to consider using assignable contracts with no advance indication that you are in a 1031 exchange.  The eliminates any leverage they may have by stalling or thwarting your purchase.  The required notifications can be made at closing with no risk of early disclosure.