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What's an exchangor?
How many people really know what an exchangor is? Why would you call yourself an exchangor? Does BP need a category dedicated to exchangors? How do exchangors make money? Anyone out there that focus on being an exchangor?
An exchangor is a principal or agent that improves a client's or personal situation by exchanging current property ownership benefits for an improved set of benefits, as defined by them, to be realized from the process.
So I own a free and clear vacant residential lot that gives me a certain set of benefits. One of which, its holding my equity in pretty safe spot. That's a good benefit...I not loosing equity. However, I have to pay taxes every year and I'm not a builder.
Is is possible for me to improve my benefits with my equity? Sure. Especially if I am an exchangor. I want to get a little more than its worth, not pay taxes, and not pay real estate commissions.
Go find a builder and start making offers WITH THE LOT to buy a house. So builder gets cash and a lot. The builder needed cash....and a lot. He is a builder. The benefits of equity in the lot to a builder was greater than my benefits I gave up.
So....What are the benefits that I gained now that I own a house?
Ohhh, OK, I get it that was a rhetorical question to set up your answer :)
I'm hoping someone else can answer. Anyone? Anyone?....Beuller?
I hope so too, your definition is rather vague.
I asked the Google to get a less vague answer: The owner of the investment property looking to make a tax deferred exchange. The taxpayer who is completing the tax-deferred, like-kind exchange transaction. An exchangor may be an individual, partnership, LLC, corporation, institution or business.
#2 1031 Exchanges Contributor
- 1031 Exchange Qualified Intermediary
- San Diego, CA
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#2 1031 Exchanges Contributor
- 1031 Exchange Qualified Intermediary
- San Diego, CA
It depends on how you are using the term.
The taxpayer structuring a 1031 Exchange is often called an Exchangor. These investors are deferring the payment of their taxable gain through a 1031 Exchange.
However, there is a small niche industry where investors, often called Equity Exchangors, exchange or "swap" properties based on equity values in the property. These are not tax-deferred exchanges, but equity exchanges as described above. Equity Exchangors often use a 1031 Exchange in conjunction with the Equity Exchange, but not always. Equity Exchanges can be a great way to solve challenging real estate transactions or get deals done in a difficult real estate market.
Example of an exchange I helped the OP with.
He built many brand new homes in a lakefront community but the larger more expensive ones were not selling as fast. The OP wanted to sell and move on to the next project. I found a 24 pad townhouse project that was already platted out. The seller of the townhouse project wanted to get cash. The house had more potential cash buyers and the OP would have a new project to work on. So they exchanged as an even swap. The transaction was not about the numbers it was more about the benefits to each party. The Townhouse project owner would have more potential cash buyers. The OP would have a new project with much more upside potential.
Another example:
We bought a house subject-to the debt, paid back payments plus let the owner live there for 5 more months. We had $15,000 of cash in the deal. It needed another $60k to rehab. The profit potential was around $70,000 cash. Instead of investing $60k more, waiting on the rehab, waiting on the sale, and worrying about the market changing in 6 months, we exchanged our position in the deal for a $50k 1st position note on a $100k house at 8.75% over 15 years at $500 a month. So essentially we bought a $50k note for $15k. The benefit to us is that we did not have to wait and we lowered our risk. The benefit to the note holder is that they cashed out their note a par.
This transaction was only possible because we did not need the cash. However we could borrow against our note or sell it at a discount to raise cash. We can also use it as a down payment.
In exchanging everything is money. It just comes in different forms with different durations.
These types of transactions happen on wall st all the time. They are just not something most people in Real Estate use.
A simple transaction:
We had a house for sale seller finance. A guy came to us and said I don't have the cash for a down payment but I do own a lot. We took the lot as a down payment and financed the house to him.
A transaction I have not closed on yet but is in process.
I am helping someone sell 2 mobile homes. They want 100k, based on 2 months on the market is too high. We have had offers at 70k. They settled at taking $80k if we could get it. We had many owner finance offers. One in particular had a large down payment of $20,000, finance $80k at 9.99% at $800 a month with a 5 year balloon. We can discount the $80k note to $60k to get the seller the $80k they settled on (20k down plus 60k.) I am not going to just sell off the note. I am borrowing the $60k that is needed to buy the note from an IRA holder at 12% interest only. That means my payment to the IRA is $600 a month. And the payment I get from the $80k note is $800 a month ($200 mo. cashflow to me.) I owe the IRA $60k in 5 years, and the $80k note owes me $69,626.17 in 5 years.
I can hold until the end. Or I can wait for the $80k note to get seasoned and sell to an institution for a slight discount. Or I can trade the $80k note into another deal and bring my $60k lender with me. I have many options once I have the note.
What do you mean "trade and bring my lender with me"?
Originally posted by @Jason Dillard:
What do you mean "trade and bring my lender with me"?
If the lender likes the new asset as well or better than the one I am selling they can move their security for the note I pay to the new asset. Or they can convert their note to equity in the new asset and we can be partners. It all depends on what I want to do and they want to do.
OK, I'll help the group. "So....What are the benefits that I gained now that I own a house?"
I can depreciate a house.
Houses are 1 step away from cash...they sell.
Banks are more likely to lend on a house. Leverageablity(is that a word?)
Cash Flow. I can rent a house pretty easy compared to a lot.
Appreciation. Now I have 5 times the value compared to my lot...it's going up more because it's bigger.
Place to live.....with a roof....compared to the lot.
That's more benefits. It's rented. Ok now what? I'm done. Hold it forever.
Wait a minute, I don't like dealing with tenants. My equity is stagnant...again.
What would an experienced exchangor look to do with the equity held by this rental?
Just keep in mind when you trade that it doesn't relieve you of the tax burden, unless you do a 1031 exchange. In other words, trading land to a developer is the same as selling land to a developer and using the cash towards buying one of their properties. You have both agreed on a cash value of the land and they reduced the house sale price by that amount. That is your sale value of the land for tax purposes. Same on the receiving end, the contractor realizes profit equal to the land value. Sometimes people intentionally under estimate the value in a trade to avoid taxes. IRS is pretty aware of that, so just be careful if that was the purpose of the strategy.
I am not a fan of holding vacant lots, unless you are in a very high appreciation area. Holding farm land or timber land would be better because it produces income. Vacant lots are usually a liability, because you need to maintain them and pay taxes, yet they produce no income. Bottom line, good for you trading up to a rental property.
As far as the term exchangor, I don't usually hear that term used, although people do this type of thing all the time. They may trade real estate or even other goods towards real estate. When I built my current home, I gave my contractor a four wheeler in exchange for the deck. A friend sold a property and took a Jeep on exchange towards the property. You just have to be a little careful on these arrangements due to the tax ramifications.
"What would an experienced exchangor look to do with the equity held by this rental?"
OK, I tell you what he/she might do:
Anticipate that a buyer that needs seller financing would buy the house. Knowing this, start making offers with Paper to buy a larger property. What paper? The paper you are about to create when you close. It's kind of like Chess. One move sets up the next move. Find a seller that would take 1st mortgage cash flowing paper and the rest cash for his property. If the new property has income, then a bank would lend 75%. So make offers on property 4 times greater. (Make sure you trade the house first and let the new owner take back the note and mortgage so you exchange is compliant). Sellers are very likely to take 75% cash and a 1st mortgage that has good cash flow. How do i know this? We just took a house/paper for a piece of a deal we sold yesterday. I was the seller. Now I have a 150k 1st on a house. 8.75%. That's pretty good.
I will just hold it. Keep that payment I'm done. Wait a minute...........I'm an Exchangor. Now what? I have to ask myself this morning, just like I do every morning, with everything we own....."Is there a way to get more benefits"
I will ask you:
What can I do to increase my benefits with the paper I have had for a day?
Originally posted by @Joe Splitrock:
Just keep in mind when you trade that it doesn't relieve you of the tax burden, unless you do a 1031 exchange. In other words, trading land to a developer is the same as selling land to a developer and using the cash towards buying one of their properties. You have both agreed on a cash value of the land and they reduced the house sale price by that amount. That is your sale value of the land for tax purposes. Same on the receiving end, the contractor realizes profit equal to the land value. Sometimes people intentionally under estimate the value in a trade to avoid taxes. IRS is pretty aware of that, so just be careful if that was the purpose of the strategy.
I am not a fan of holding vacant lots, unless you are in a very high appreciation area. Holding farm land or timber land would be better because it produces income. Vacant lots are usually a liability, because you need to maintain them and pay taxes, yet they produce no income. Bottom line, good for you trading up to a rental property.
As far as the term exchangor, I don't usually hear that term used, although people do this type of thing all the time. They may trade real estate or even other goods towards real estate. When I built my current home, I gave my contractor a four wheeler in exchange for the deck. A friend sold a property and took a Jeep on exchange towards the property. You just have to be a little careful on these arrangements due to the tax ramifications.
I am not an accountant so please consult your accountant.
It is my understanding that if you exchange (outside of the 1031 code which allows for cash to enter the transaction under certain rules) you can do a simultaneous exchange without tax consequences. Example: I have a $100k house and you have a $100k house and they both are legitimately those values. We can simultaneously exchange and the only thing that happens is we carry our basis with us to the property.
Equally, if I have a $279,000 house and someone else has a $22k lot for a down payment, they can give the lot as a down payment and I can carry back a mortgage for the balance. The value of the lot is exchanged but the income from the note and mortgage are taxed under the installment sale code.
Originally posted by @Jason Dillard:
"What would an experienced exchangor look to do with the equity held by this rental?"
OK, I tell you what he/she might do:
Anticipate that a buyer that needs seller financing would buy the house. Knowing this, start making offers with Paper to buy a larger property. What paper? The paper you are about to create when you close. It's kind of like Chess. One move sets up the next move. Find a seller that would take 1st mortgage cash flowing paper and the rest cash for his property. If the new property has income, then a bank would lend 75%. So make offers on property 4 times greater. (Make sure you trade the house first and let the new owner take back the note and mortgage so you exchange is compliant). Sellers are very likely to take 75% cash and a 1st mortgage that has good cash flow. How do i know this? We just took a house/paper for a piece of a deal we sold yesterday. I was the seller. Now I have a 150k 1st on a house. 8.75%. That's pretty good.
I will just hold it. Keep that payment I'm done. Wait a minute...........I'm an Exchangor. Now what? I have to ask myself this morning, just like I do every morning, with everything we own....."Is there a way to get more benefits"
I will ask you:
What can I do to increase my benefits with the paper I have had for a day?
You can also loan paper out.
Lets say someone has a dark commercial building that eats $40k a year while its dark. You loan paper out that has similar income to the $40k negative they are enduring. But, your deal with them is to get cash back on repayment. So you don't get your 30y term note back, you get cash back in 1 year. Now they must move quickly to get the building leased and sold/refinanced so they do not lose the building.
Your risk is that you get the building or paid off at auction, rather than getting paid off as agreed within 1 year. If you like the building then there is essentially no risk because in every scenario you get something you want.
What is Equity Marketing, Exchanging?
Let's look to Pro Baseball for an analogy. Let's say different positions are diff. types of real estate assets. I.E. pitcher is a sfr, catcher is a lot, first baseman a shopping center, and so on. Each provides diff. benefits. John is an RBI guy, Joe great defensive guy, etc...
The contract on a player is the existing debt on that player (real estate asset). The debt is to pay $1mm per yr for 5 yrs. Equity in that player is the diff. between his perceived market value (diff. to diff. teams) and his contract. Teams have more assets (equities) than they do cash. Teams needs change, and they are constantly acquiring and disposing, due to bad performance, injury, etc. to meet those benefits/needs.
The Cards need a starting pitcher. The Cubs have more pitchers than they need, and they need to cut their payroll. But, they do need a home run threat. The Cards may have (or have an option to acquire) that home run guy, or not. If not, maybe they can find, or bring in another team to make the deal (which is very common in Real Estate Exchanging).
If there are differences in equities, then that can be balanced with a team adding assets to balance equities. I.E. farm club players, future draft picks, cash, options on players, etc.
Teams are constantly doing this. And so are Exchangors/Equity Marketers.
A bit longer than intended, but maybe this will help someone to understand (especially a baseball fan).
Originally posted by @Joe Splitrock:
Just keep in mind when you trade that it doesn't relieve you of the tax burden, unless you do a 1031 exchange. In other words, trading land to a developer is the same as selling land to a developer and using the cash towards buying one of their properties. You have both agreed on a cash value of the land and they reduced the house sale price by that amount. That is your sale value of the land for tax purposes. Same on the receiving end, the contractor realizes profit equal to the land value. Sometimes people intentionally under estimate the value in a trade to avoid taxes. IRS is pretty aware of that, so just be careful if that was the purpose of the strategy.
I am not a fan of holding vacant lots, unless you are in a very high appreciation area. Holding farm land or timber land would be better because it produces income. Vacant lots are usually a liability, because you need to maintain them and pay taxes, yet they produce no income. Bottom line, good for you trading up to a rental property.
As far as the term exchangor, I don't usually hear that term used, although people do this type of thing all the time. They may trade real estate or even other goods towards real estate. When I built my current home, I gave my contractor a four wheeler in exchange for the deck. A friend sold a property and took a Jeep on exchange towards the property. You just have to be a little careful on these arrangements due to the tax ramifications.
In regards to vacant lots I see the other side of your theory. I for one don't mind the carry costs so long as I know/believe there's a deal on the other end. Here's a couple reasons why I have held vacant land. First off, I got it for practically nothing. I exchanged my commercial grade lawn mower for a 1.4 acre lot zoned commercial that had back taxes on it and a contractors lien. All I had to do was deliver the mower, it was a ten hour drive for me to do so. The benefit the seller sought was not my lawn mower but to get out of an encumbered property that was a "must take" when he bought the apartments next door and he didn't want to deal with the clouded title. I also like to think he wanted to help me in my efforts to get into property ownership.
The benefits I sought by this were to own property free and clear. This gave me instant equity that I could put on my financial statement so that when I went to my lender some of my debts could be offset and I "look better on paper". It also was a potential vehicle to me, like Jason said to find more/better benefits. When I went to take care of the back taxes I found out they weren't back but late. I only had the current years to pay. Lucky me. When I went to clear the contractor lien I found out that the ten year no contest rule had just passed and the lien legally went away. Lucky me again. So here I am now with a free and clear lot valued, turns out, at $55,000. Now I have paid the carry costs on it for three years without successfully improving the property or finding an exchange to increase my benefits. Was I deterred by what some call a negative amortization? Not really because I knew my value. I will gladly pay monthly on any property, in my budget, if it means there's a benefits along the way and a big enough payday at the end. Long story short I found a local investor who bought the lot from me on 100% seller financing for $48,000 and now I'm enjoying monthly payments for the next ten years. Will I trade this note? I could but probably not because it's enough to make my personal homes mortgage payment. I feel secure because I retained the right to sell my interest in the note and the buyer reserved the right to substitute collateral. Which he did almost immediately and I gladly said yes. Now my first position note is not secured by vacant land but a SFR valued at $70,000 with an owner/occupier making improvements and paying regularly. Oh and I still have a personal guarantee from the original buyer of my lot.
This deal is the power of exchanging to me.
"What can I do to increase my benefits with the paper I have had for a day?"
OK, I will tell you what I did, yesterday. I decided I wanted to increase my IRR on the paper and I knew that if my cash back we could buy more real estate. For these reasons, I borrowed against my paper. I allowed a private lender to slip into a first position and secured him with my mortgage. My mortgage was for 165k. I borrowed 120k against it. Since I had taken that lot (the one that made the down on house) as an assignment fee in another deal, I now have all the cash back it took to buy the house ....that allowed me to create the paper.....that I borrowed against. Hard to follow, I know. It took me a while to catch on too.
Result:
New buyer has a house with payment they can afford.
My private lender has a loan at about 60% LTV with a payment he is happy with.
I have my cash back and a cash flow of 600 a month. I started with a lot(I took in with nothing in it) and now I have increased my benefits.
Now I am really done. Can't get any better than that! I used my knowledge as an exchangor and created cash flow out of thin air. Stick a fork in me. Done. Wait just one minute. Today is today. That deal closed yesterday. I woke up...again and said to myself, "How can I increase my benefits or lower my obligations with the situation I have today?"
So I ask you. What can I do with my note(even though its encumbered with another underlying note) to get me more benefits?
Put up your cashflow in the note to buy a lot, solve a cash flow problem, or even buy personal property like a Truck or Boat. Its cash flow, it can be used however the otherside of the transaction agrees to. We are (hopefully) taking an F-250 and Scout 23' center console boat with 225 Yamaha as a down payment on a house we are selling. Depending on the terms of your leveraged note we might take that in exchange.
Everything CAN be exchanged, its just a matter of coming to terms.
There is about $6.6T of based money supply which is essentially cash or cash equivalent. There are over $100T of real estate, stocks, bonds, etc. So everyone cannot go to cash at the same time which puts a premium on cash or in other words cash demands a discounted price for non-cash assets. But, if you can exchange one asset for another there is less of a reason for discount because you do not have to go through the cash market. These transactions are also more efficient because there are less steps involved and less fees involved.