Executing the Sale (1031 exchange series - Part 3)

If you’ve been a regular follower, you know that one of my major 2020 undertakings was the completion of a massive 1031 exchange. I sold three properties, then bought three new properties. This process allowed me to defer all capital gains from my sales, plus improve my cash flow by around $1,500 per month.

I completed this process in late October 2020, and now I’m ready to share some details about my experience. Because this is such a massive topic, I’ve decided to break up the talking points into separate articles and group them together as a blog series. Hopefully this will make things easier to digest for you, dear reader, and also make it easier for me to put together.

In Part 1 of the series, I outlined some basics about 1031 exchanges. If you missed it and aren’t knowledgeable about 1031 exchanges, check it out before continuing on.

In Part 2, I outlined the following:

• - The market conditions of the middle of 2020 and why it was the perfect time to sell
• - A definition and discussion about the Return on Equity % metric
• - How and why I decided which properties to sell

In Part 3, I'll summarize what it was like to sell 3 properties as part of a 1031 exchange.

Sale #1: Indy Hipster House

This house was bought as a BRRRR/turnkey in Indianapolis in 2017.  This was my first BRRRR and everything about the execution of the BRRRR process was a hot mess.  I learned a lot of lessons and ended up with a lot of money in the deal.  In late 2019, my property taxes went up by $230 per month on this one property, and it immediately went on the chopping block.  I decided to wait until the tenant moved out in mid-2020 to list it for sale.

Despite COVID concerns, we stuck to the plan to get this house sold after a tenant turnover.  I paid to have some minor repairs taken care of (although the costs added up to thousands of dollars #facepalm).  I even had a few conversations with my property manager and flipper to talk about potentially doing a full rehab and selling for way more.  Ultimately, I decided not to try to undertake a major rehab at a distance.  My property manager told me he thought I'd be lucky to get $120k on the sale and "be prepared to take a bath".  

Then we listed it for $135k and got a full price, cash offer on day 1 with no inspections.

Immediately after getting under contract, I contacted a 1031 intermediary that was recommended by my attorney.  They informed me that their fee was $1,250 per sold property, and that included all misc. wire fees, doc prep, as well as unlimited consultation/advice.  Sounded like a sweet deal (and it was).

The 1031 intermediary stepped me through the process and got in touch with the title company in Indy.  After closing, the intermediary informed me that they had $30,450 in an account for us, ready for redeployment.

The house sold in 2 weeks with no issues.  I believe the buyer was planning to flip it.

It was then that we realized the time was ripe to cut out the rest of the portfolio fat (as explained in detail in Part 2).

After this one sold, I immediately began searching for replacement properties (I'll detail that out in Part 4) while I concurrently began listing my other two "dog" properties.

Sale #2: Indy Rancher #1

The next dog on the list was another Indy property.  This was (supposedly) a true turnkey property purchased in 2016.  Immediately after purchase, and throughout my entire ownership, I was hit with major repairs (including many issues with water in the finished basement) every year.  I had purchased it for $83k and prices in the area just never appreciated...until mid-2020.

The realtor I used for Indy Hipster House told me we should list Indy Rancher #1 for $110k as a tenant occupied, turnkey rental.  Showings were more difficult with it being tenant occupied (plus COVID) but in 5 days we had a sight unseen, cash, full price offer with an inspection contingency and $1000 earnest money deposit.  

I accepted, but had a bad feeling about that inspection contingency.  I was right, but the buyer's agent, and the buyer, completely bungled it.  They performed an inspection, but then they missed their inspection response period, and informed us they were terminating the contract (reason unknown) and that I could keep the $1000 earnest money! That was cool, but now I was under the gun because I was closing on 2 REPLACEMENT properties in 3 weeks and needed this one to sell PRIOR to purchasing the new properties.

Luckily, I had a great realtor in Indy, who understood my timing and my situation.  He found another buyer within 48 hours who offered me $100k cash, no contingencies, close in 2 weeks.  I gave up $10k on the sale, but was willing to sacrifice it to get the deal done and keep it from creating a domino effect on the closing of my replacement properties.

This property sold about a week before I bought my first replacement property.  If you think this one was close, wait till you hear about the next one...

Sale #3: Central PA Townhouse

I listed this townhouse around the same time as Indy Rancher #1 (early August 2020).  This was also a tenant occupied listing.  This was the 2nd rental property I ever bought, and I just was not aggressive enough with my buying criteria at the time.  It's an A+ class townhouse that doesn't even come close to the 1% rent-to-value rule at the price I paid.  I paid $176,000 and it was rented for $1295.

So, imagine my surprise when an "investor" paid my full asking price of $199,900! They're pretty much guaranteed to lose $100-$200 per month at that price...

The buyer was obviously a noob, considering the price they were willing to pay plus their lender was a large, national, online mortgage broker (i.e. not investor friendly).  This combined with an environment where appraisers were swamped and booked up 4-6 weeks in advance caused some delays (and frankly some pretty terrible miscommunications).  We literally had three false starts where we thought we were going to close in the morning, only to find out 1-2 hours before closing that the lender wasn't ready.  

This house sold at 3 PM on a Thursday, then we drove to another title company at 4 PM to buy our first replacement property.  Whew.

Final Thoughts and Summary

Although I experienced some drama, overall I had a good selling experience with these three properties.  I sold them all for way more than I ever dreamed I could, and everything was sold in a matter of 6 weeks.  All of the buyers were investors, and you kinda have to wonder what they were thinking paying these kinds of prices, but again, I'm not complaining.

Since they all happened at once, my 1031 intermediary advised that I group them all together into one big 1031 transaction.  Essentially, all the capital got lumped together from the sales into one account, then got disbursed out for each replacement property.

The intermediary was awesome to work with.  I was in constant communication with them, the title companies for the sales, and my title company for the replacement properties.

Knowing that I was under a time restriction to buy my replacement properties, I began looking at multifamily properties right after Indy Hipster House got sold in early August.  In my next and final 1031 series post, I'll describe the selling/buying timeline, searching for, negotiating, and closing on my three replacement properties.