There are a lot of rules with 1031 Exchanges but there is ONE Huge rule that many people don’t talk about and it could disqualify your entire 1031 Exchange…
“The Best Way to Predict the Future is to Create it.”
Thinking that Holidays and/or weekends don’t count–THEY DO COUNT SO GET YOUR CALENDAR OUT! The IRS does not care that you don’t know how to count 45 days or 180 days or that you were sick or it was a weekend…or even Christmas!
Not making sure that you can close on the right amount of properties in time.–AGAIN THE IRS doesn’t care that you found something in your due diligence that disqualifies all of your choices that you made in the first 45 days!! HINT: Get under contract while you are under contract to sell your 1031 Exchange Property, do your Due Diligence and submit your properties by the 45th day with confidence that you can close on time!
Deciding to File your Tax Return for the year you did your 1031 Exchange BEFORE YOU COMPLETE YOUR EXCHANGE!! — NEVER DO THIS! Why this is rarely talked about is beyond me! But, I think that unless you deal with 1031 Exchanges as a CPA and a Realtor (which I am both) you forget this little but VERY IMPORTANT RULE. If your 180 days starts around mid-October (again get your calendar out!) then your 180 days ends around April 15th of the following year. If you file your tax return before April 15th and you have not finalized your 1031 Exchange Closing you just BUSTED your 1031…trust me that is not a good thing!!! So be sure to extend and then be sure to file by the extended due date after you finalize your 1031 Exchange!!!!
Thinking you can decide you want to do a 1031 Exchange on the day or after closing of your property you are selling! OMG get your qualified intermediary figured out BEFORE you even put the property you are selling on the market! Know who your team is, Realtor, Title, and QI. Have conversations with all of them, know their qualifications ask questions and then keep at it until you have a game plan. Having bad representation is not an excuse for missing deadlines or doing the 1031 Exchange incorrectly. The IRS is very unforgiving on this, if you want to play in the big leagues of 1031 Exchanges you need to know as much as your representatives and be on top of it!
Not reading and knowing the HOA rules that require the property to be owner occupied for a certain amount of time before it can be rented. WOW, I have seen this one Bust a 1031 and/or cost the investor a lot in penalties because they had to keep the tenant and pay the monthly HOA fines. [Real Life Situation–Agent/Buyer did not read the HOA documents that said the Buyer needed to occupy the property for 2 years before it could be rented. The Seller didn’t disclose this information either. The Seller had a tenant with a lease in place. On the close of escrow the HOA sent a letter to the new buyer (part of the 1031 Exchange) we know you have a tenant, you must pay us $400 a month for violating our policy of not being owner occupied AND as you know you cannot terminate the lease as per the Arizona Revised Statues…have a nice day (ok maybe they didn’t say that last part–but it was a big mess, PS I was not involved in any part of that transaction!)
There are so many things that can be done with a 1031 Exchange like combining it with a Section 121 (and no I am not going to go into details-you need to talk to your CPA!!) Doing a 1031 Exchange is not for the faint of heart for any of the participants, lots of rules, unforgiving of mistakes, and a lot of money on the line if your 1031 gets busted!
Here is a YouTube Video about the 1031 Exchange Concerns
Some Questions to Ask Yourself When You are Thinking of Buying or Selling Your Next Home!
Do I love my neighborhood?
Am I ok with the time that it takes to get to the things I do daily or often?
What am I most dissatisfied with my current home that brings up the question in the first place?
Are any of the issues that concern me temporary?
What would my ideal home have, be located, include or not include?
Can you envision yourself in the new home and does it excite you?
If You Are Ready for the Next Step…Here are Some Questions to Ask Yourself to Have Ready for your Agent!
Where do you ideally want to be located?
How far in minutes from the things you do daily or often?
Single Family, Condo, Patio Home/Town Home?
HOA or No HOA?
How many parking spots do you need on a daily basis and for guests?
How many pets do you have or want to have and their size?
Is your family size changing in the near future?
Do you need a gas stove or is an induction stove your ideal?
Do you want a pool? Private, Community, or NO Thank you!
Guarded, Gated, or None of the Above?
Approximately what do you want to spend per month? (not just what you qualify for)
Talk to your agent and let them know while you may qualify for a certain amount that doesn’t mean you want to necessarily spend that amount.
Also, it is important to separate your “wishes” from your “deal breakers” and let your agent know which is which. Sometimes, one persons wish is another persons deal breaker, so if it not a deal breaker, bring it up and then immediately say it is NOT a deal breaker.
When you get the list of homes, also ask for the criteria used to create the list so you can double check that there isn’t more or less than what you want! And Do NOT Hesitate to tell your agent you want to change the criteria if you aren’t finding what you want. Expanding a couple of blocks one way or the other, or being ok with a den instead of a bedroom can open up a whole set of options!
Here are some ideas on the Buying and Selling Decision!
If you are thinking that your only options on a low appraisal is to agree or get out, then you would be sadly mistaken! There are a lot of different options that I would consider (and so have my clients) as a win/win on a low appraisal. Let’s consider some scenarios:
Scenario 1-The Appraisal Is Just Not Making Sense! So you look at the details and the bedroom count is wrong, the square footage is wrong, the contract price you agreed to is wrong, the Loan Type is wrong (FHA instead of VA or Conventional), the comps are in an area so far away in another city that you are wondering what the heck is going on with this appraiser!! First of all go through everything in detail and make detailed notes and gather your back up to prove your side. Sometimes, an appraiser is going so fast that they miss a Counter Offer or maybe there is a discrepancy in the listing and the county records on the square footage or they just get your file confused with another. Stay calm and request a reconsideration and document all of your findings without using the words “the appraiser was wrong”. Saying the appraiser was wrong will not get you anywhere and they will read everything you submit. So start by saying that you appreciate the time and effort they have put in for your appraisal, but that you noticed that the Contract Price was for $725,000, however, the Counter Offer #3 notes the Contract Price agreed upon as $750,000. Or that you noticed that the loan was for a FHA loan, however, the Buyer will be getting Conventional financing. You get the idea, the more nuanced you can be, the further it will get you.
Scenario 2-The Renegotiation! So you have looked through the appraisal and either you agree with the appraisal or the time needed to get a reconsideration done isn’t enough to close on time, or you tried the Reconsideration to no avail; Now is time to Renegotiate! Have the Seller Offer to buy down some of the interest and ask the Buyer to put the down payment partially to the under appraisal portion of the home. This option can be done in conjunction with coming down on price as well, but first find out how much buying down the maximum amount of interest will cost and provide in a return on investment. You must know this FIRST before negotiating a further buy down. If an agent tells you otherwise, ask them about their previous experience doing this, my guess is never or they wouldn’t try to get you down on price first.
Scenario 3-Commissionectimy! So sometimes a buyer is only putting the minimum amount down and there isn’t anything that can be done to lower the interest. In addition this works on smaller appraiser issues like $5,000 or so. What I do is tell the Buyer’s agent that I am willing to match them dollar for dollar in reducing the commission to get the deal done, then depending if there is a short fall ask the Seller for the difference. A Seller will be impressed that the two agents are already doing their part to make the deal happen.
So in summary there are a lot of options and they are NOT mutually exclusive. I have done all of these on just one home in some cases and got the deal done! Sometimes, only 1 or 2 of the options get it done, and sometimes both parties have to part ways…but before you do that give it your best shot to get past a low appraisal!!
So when you are considering an Agent to help you in your next real estate transaction, what do you think is important to you? Write those traits down and then put them in order of importance. When you write down your order of importance, go from top to bottom and ask this question, “If this was the only attribute that they had would that be ok?” Probably not, but let’s put them in a group. Then look at the list again from bottom to top and ask this next question, “If this was the only attribute that they did not have would that be ok?” This will obviously garner a different result. You will soon find what is truly important to you!
What do I think is the top attribute? For me, I think communication a) Timing–maybe you have a job and you can only talk after 7pm does your agent understand that? b) Method–So you are super busy and you prefer texting but your Agent wants to email all the time and you daily get hundreds of emails so you don’t see it. c) Content–Is the information you need done concisely or is there a story every time.
