All Forum Posts by: Jon C.

That's not quite how a 1031 exchange works. IRC 1031 exchanges are "tax deferred" exchanges on capital gains taxes. 

However your colleague owns the property that he is selling, is how he would have to take title to the new investment property (most likely as a tenant-in-common with you). If he owns it with a spouse, then the spouse will likely have to be on the new deed as well. When you refinance the investment property and pay him back he will have to remain on the deed of the investment property. If you convey title to just yourself as part of the refinance then he will have to pay the capital gain taxes on his sold property at that point because there is no replacement property for those funds and thus the tax deferment has ended.

There are strict time limits and qualified intermediary (QI) requirements with a 1031 exchange. You should read up more on the process, perhaps consult a CPA, and check out some qualified intermediaries. I'm actually closing a deal on Monday using a QI for a Reverse 1031 exchange. There are a number of great QI services out there that have very informative websites. Look up Asset Preservation Inc., IPX 1031, etc. (not an endorsement or advertisement).

@Greg H. You are also from TX, where the subject property is, and where I have never closed a deal. Perhaps rules are different there. I have closed several hundred commercial and residential deals in the northeast, and I have seen people who have closed without clear title then have serious restrictions as to who will refinance their properties, and ultimately have to accept less than market rate offers when selling because the pool of buyers with the appetite for the chain of title issues is much smaller when they resell.

In the matter of this post, a chain of title defect is a serious defect. Once the Seller gets their money there is no longer an incentive for them to continue the effort to provide the documents required to properly  clear title.

As for your "guru's" comment, I'm not sure who the guru, gurus, or "guru's" you're referring to are, so I cannot address same. Perhaps for the best.

I do agree with what you said (and what I said in my prior response) that there is not much an attorney can do for him at this point unless he wanted to pursue costly litigation. The attorney could have potentially provided him better protections if he had been represented by one in the contract negotiation process.

I think you've learned the lesson about why you should always have an attorney. You're making a large purchase and the cost of the attorney representing you is nothing compared to what litigation can cost. 

Respectfully, I completely disagree with what Russell wrote. You should NEVER EVER close without clear title. When you go to sell this property the next Purchaser's title company may ask to see your policy to clear title. Good luck explaining why you don't have one (and when the prior conveyance was out of trusts, they will ask). Further, if they decide the prior conveyance left a gap in coverage and may result in a defect in the chain of title, then they won't insure the next Purchaser either. Even if you were buying for cash and planned to hold, you would not be able to refinance because any Lender would want a Loan policy and a title update and would quickly realize that you don't have clear title. NEVER, NEVER, NEVER close without clear title!

I don't know what Texas law states, but what does your contract state? What is your attorney saying? You should have your attorney serve them with a TIME IS OF THE ESSENCE Closing Notice stating that they must close by a certain date (usually 30 days from notice) or otherwise return the down payment and be subject to whatever damages at law or in equity, as your contract provides for. It doesn't seem like it's a willful default so trying to enforce specific performance would be useless and costly.

Whenever you buy from a Trust there are a lot of documents required. Organized Seller's should be able to obtain them without issue. How long have they been trying to clear title?

Alternatively, you may want to see if your title company's underwriter is being too overly cautious. Is it a national insurer (ie., Chicago, Stewart, Fidelity, Commonwealth, First American)? Perhaps a different underwriter would be willing to insure based on the documentation that Seller has provided, or is willing to take some sort of undertaking and/or affidavit. (These are purely speculative ideas, having no knowledge of the specifics involved in your title clearance issues.)

As a lesson for the future - when I am the purchaser I always include a contract provision to the effect that if Seller is unable or unwilling to close beyond any adjournment rights they must promptly return my down payment and reimburse me for the costs of my appraisal, inspections, survey and the actual costs of my title commitment and searches. If they give me push back I agree to a cap on such monetary expenditures.

Before you do any of the above, always seek the advice of your local legal counsel.

Institutional lenders (most Banks) don't want to see that you owe them and someone else money, especially if your income cannot meet those debt obligations and still have a comfortable cushion. Bringing the investor on as an equity partner may be your best bet. 

If you want the property long-term, but not the equity partner, then try to work out a side agreement that gives you buyout options at certain intervals (i.e., every year, every 3 years, at the 1st, 3rd and 5th anniversary of the Closing on the property) based on some metric (i.e., then current appraised value or 3% per annum increases over ARV), so you can do a cash out refinance down the road, based on the increased equity value of the property. Hopefully you can qualify for the mortgage in your own name at that point and use the proceeds to buy out your partner and do a simultaneous deed conveyance of the property out of your joint names and into your name alone.

Again, speak with your local legal counsel and CPA about how to structure this and plan for the taxable consequences. 

If you're buying a property with co-investors then they should be on the deed in order to be equity participants. If you were buying a commercial property under an LLC then the LLC would be the borrower and fee title owner, and the co-investors would be members of the LLC, although you, as the Managing Member (and perhaps your deepest pocketed investor(s)) would be the Guarantors.

In the residential setting, where you have to buy under your own name to get preferred rates and lower down payment requirements, the people on the deed typically have to be on the mortgage as well, unless one person has the vast majority of the funds and the bank is willing to move forward with only that person on the loan. 

If your investors are not equity participants then they are either giving you a (typically unsecured) personal loan at an expected rate of return, or they are providing you a private lender portfolio mortgage on the property (based on your municipal restrictions for such loans). 

You have to figure out how you want to structure the deal and it may require that you wait a bit in order to save up more. That said, equity investors in the deal usually are willing to share the risk and the reward, not just the reward. How you split the disbursements is something you may need to negotiate in your Tenancy-In-Common Agreement, assuming your acquire the property as Tenants-In-Common.

Speak to your local legal counsel about your options before moving forward.

I agree with what was said above. It sounds like you want this deal and you're looking for reasons to justify it when the numbers speak volumes for you. Secondly, a horse barn and paddocks require daily maintenance, and if your tenant is not taking care of it properly, you're going to have significant repair costs when they turnover. That aspect seems like it needs to be run more like a business than a rental investment.

Just remember that a bad deal can set you back. Be patient and wait until you've found the right deal.

Most contracts state that they are selling you fee title, but in any regard the Deed provision should explain the type of deed to be conveyed (warranty deed, bargain & sale deed, etc.), and I always make sure a sample deed which is "substantially similar in all material respects to that which will be conveyed" is attached to the contract. Obtaining a Deed is different from obtaining simple title (which may not be a deedable fee interest - i.e., life estate). Your title insurance is likely for a fee simple deeded title. Without knowing more about what you're in contract to buy, I'm unsure why you think you're buying anything other than fee simple title. Is it a leasehold interest? A cooperative unit? The easiest way to get your answer is to speak with your attorney or title clearance officer. Make sure your title is underwritten by a national insurer (i.e., Chicago, Commonwealth, Fidelity, Stewart, First American).

I'm not a wholesaler, but what part of NJ are you in?

Congrats! How long between your purchase and sale?