Biggest 1031 Misconception - "1031 Buyers Over Pay"

[Mike Auerbach]

Almost everyone within the commercial real estate investing realm shares a common misconception involving 1031 exchanges. Care to take a guess at what it might be?

"1031s cause you to overpay for your properties" or "I love 1031 buyers, they pay they most for properties"

Both are emphatically FALSE.

It is true that some 1031 buyers overpay for their properties because they are unorganized and undisciplined -

BUT 1031s aren't structured in a way that "Makes an Investor Overpay"

Here is our advice to clients so you don't "overpay"

Before the 45 day identification clock even starts you can do the following:

1. Have your broker shortlist 10 properties for you
2. Identify your replacement property or properties
3. Enter into an option contract to buy your replacement property
4. Put your target property or properties under contract (assuming you are not going “hard”)
5. Do a Reverse Exchange

Plan ahead - Plan to win!

#1031exchanges #taxes #capitalgains #planning #myths

[Arn Cenedella]

I’ve done dozens of 1031 exchanges over my 46 year career in the RE industry - both for myself and for my investor clients.

The main advise I would give is as follows:

Be realistic about your buy options and the market value of these options. To the degree, one is realistic, the probability of finding a replacement property increase.

Say you want to sell a fourplex to trade into and buy via 1031 a 20 unit apartment building.

And the market cap rate is 6% but you want to buy something that offers a 6.5% cap rate, you probably won’t be able to find it.

@Mike Auerbach  suggests a reverse exchange and while possible in theory, its practical application is more limited. There are a few reasons for this: 1) They are costly and the Exchange intermediary may require a whole host of inspections including environmental reports etc and 2) One has to come up with the cash to buy the new property without getting the equity out of the first property - not everyone can do that - add in having to get a loan while still being obligated to the loan on the “sale” property. I don’t believe a reverse exchange is a viable option for many investors. Reverse exchanges may be possible for experienced well capitalized investors but for most, I would say it’s not really a practical option.

Mike’s suggestions of being prepared and proactive is a good one.

I encourage 1031 investors to start looking ASAP - get to know the market - identify potential buys - and start making offers - before one has sold their existing property.

The issue becomes will a seller especially in a strong market accept your offer “contingent upon the sale of your property”? I would day often NO.

So it’s a tricky process - trying to thread the needle.

Best advice is to work with a broker who has been there and done that and can guide you thru the process. 1031s are not rocket science but there is a skill and knowledge component to successfully get one done.

Also pick an Exchange intermediary and trust their advice and counsel. They will help guide you thru.