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Six Ways to Ensure Your 1031 Exchange is Successfully Completed

Whether you are an investor or a real estate broker, selling investment or business real estate can be an expensive venture unless you are prepared to conduct a 1031 exchange.

Section 1031 of the federal tax code dictates that no gain or loss shall be recognized upon the sale of a real estate property held for business or investment purposes, as long as the seller purchases a replacement property of equal or greater value. This can be a solid opportunity, potentially, to preserve the gain and accrue additional wealth. However, the 1031 exchange can be a tricky process that has frustrated many amateur and professional real estate investors alike.

So, to help potentially avoid having your 1031 exchange blow up, here are six steps to consider as you advise a client on undertaking and entering into a 1031 exchange:

Step 1: Know the applicable deadlines. The IRS requires an investor to identify a replacement property within 45 days, and to close on the target property within 180 days of selling the relinquished property. That doesn’t leave much time to hunt for the right deal, but it’s enough time. Working with an expert 1031 exchange investment firm like Kay Properties can help investors successfully complete their 1031 exchange within these timelines.

Step 2: Get educated about acceptable types of replacement properties. The IRS requires an exchanger to reinvest in a “like kind” property. However, “like kind” does not necessarily mean the same type of property. There are a variety of options available. For example, if you are selling a duplex in San Diego, that doesn’t mean you need to replace it with another duplex. The 1031 exchange allows investors to replace relinquished real estate with a variety of asset types. It can be a medical building, single-family home, multifamily apartment building, raw land, self-storage facility or any other investment real estate. The type doesn’t matter as long as it is held for investment or business purposes. Ideally, investors should know what they are looking for in a replacement property well before going into escrow on the property they are selling. Again, working with a 1031 exchange investment firm like Kay Properties can greatly reduce the stress and confusion surrounding 1031 exchanges.

Step 3: Narrow down the options while in escrow. I cannot tell you how many times I have seen 1031 exchange investors in a desperate panic once they hit day 30 of their 45-day window with not a single replacement option identified for their exchange. This is an extremely stressful position. But don’t worry, this article should help spare you the anguish.

One good strategy is to locate five to 10 potential replacement properties as the closing date of the property you are selling gets closer. But be prepared that as you move through escrow, many of the new properties you have identified will likely be acquired by other buyers or will not prove to be satisfactory under the scrutiny of some due diligence. That’s why developing a short list of potential replacement properties prior to relinquishing the original asset can be one of the most important strategies for preventing having your 1031 exchange blow up!

Step 4: Make sure your financing is lined up ahead of time. Investors will often call me in a panic because they’ve located their replacement property, but they cannot access the financing necessary to purchase the asset. It is important to make sure that they have the financing lined up before closing on the property being sold to spare themselves from a stressful and potentially expensive predicament. That’s one reason fractional ownership structures for 1031 exchanges can be attractive for investors wanting to complete a 1031 exchange. For accredited investors, a Delaware Statutory Trust (DST) investment may be a suitable option. In addition, DSTs have a non-recourse financing component baked-in to each investment so the investor does not need to sign for a loan. A DST may be an ideal opportunity for an investor looking to a 1031 exchange to be a passive, turn-key solution with required financing already established.

Step 5: Have a backup property identified just in case. The IRS code allows investors to identify replacement properties using different rules. The most common rules used are to either identify three properties for their 1031 exchange or identify real estate valued at up to 200% of the property that’s being (or been) sold. This means there is room for back-ups. Take advantage of the opportunity. An exchanger should never leave an empty space on their ID form, which is submitted and filed with a qualified intermediary. More often than not, the exchanger’s primary option won’t work out … even if it looks like a sure thing! Also, I have often seen unscrupulous sellers exploit the buyer’s 45-day time clock in order to press their back against the wall, forcing the exchanger into an inferior negotiating position. Backup property options can strengthen the exchanger’s negotiating power by providing additional options.

For accredited investors, a DST can be an excellent option for a backup strategy. DST properties are already purchased, stabilized, and can potentially provide monthly distributions to investors. There is no negotiating and the due diligence is already complete. Additionally, an exchanger can often close on a DST in three to five business days. I often recommend my clients use a DST as a backup ID if there is room in their exchange and it is appropriate for their situation.

Step 6: Make sure to start to negotiate a 1031 contingency in your purchase and sale agreement. Many buyers are willing to allow a 1031 contingency that will permit the seller to extend escrow on the property being sold if the seller can’t find a replacement property. For example, try to negotiate a clause that extends escrow for you by including an additional 30 days if you are unable to identify a suitable replacement property. This can be a quick and easy way to buy additional time should you have difficulty locating the right 1031 exchange investment.

Bottom Line: a 1031 exchange can be a potentially great tool for building and preserving wealth, but it can be a daunting process if not properly prepared. If you decide to do a 1031 exchange, make a point to start early, get educated, narrow down their options, line up financing, have a backup ID, and negotiate for more time in case they need it. When appropriate and if they qualify as an accredited investor, use a DST as part of your 1031 exchange strategy. There are no guarantees in real estate, so it is always best to plan ahead when considering a 1031 exchange.

Position Realty
480-213-5251

Five Red Flags You Can’t See In A Tenant Background Check

Consider the consequences of renting your property to someone with a history of evictions for non payment of rent or a habit of writing bounced checks. Or the effects of allowing someone who has a criminal record or several collection accounts to live on your property. What about a terrorist or sex offender?

It only makes sense that a conscientious landlord would want to know everything possible about a prospective tenant before renting to them. But sadly, there are many property owners who do not take the time to properly screen their applicants. If they choose to rent based on feelings rather than facts and don’t run a tenant background check, they risk paying the price in the end.

In addition to the information revealed on a person’s background check for tenants, there may be red flags that become apparent as you meet with the candidate and go over their application.

#1 The applicant can’t or won’t give you contact information for their current landlord, employer, or personal references. What are they trying to hide? Perhaps these people have negative information or experiences with the candidate that could negatively influence your decision as to whether you’ll want to rent to them or not.

#2 The applicant provides suspicious pay stubs. If your applicant has not supplied employer contact information, you should ask for their most recent pay stubs to verify their employment. It is imperative that you check all the basic information on the pay stub closely and look for any discrepancies in the numbers, formatting and overall quality. This is a long-used scam that has become more popular with the rise in the number of websites that offer fraudulent pay stubs. Self-employed applicants should supply a tax return document with proof of earnings and income.

#3 The application omits information or is inconsistent. Carefully review the application for omitted information or inconsistencies. The profile on the reports should match the person who filled out the application. Make certain that the date of birth, employment history and most importantly, the Social Security Number match the person’s profile.

#4 The deposit check is greater than the amount you are asking for. Always ask for a cashier’s check or money order in payment for the security deposit and first month’s rent. When an applicant wants to pay the deposit or even their monthly rent in cash, it might be an indication that they run a non traceable business or have an illegal occupation.

Be suspicious if they ask you to accept a deposit check in an amount greater than you are asking for with a request for you to refund them the overpayment. Never accept more money than the specified rent for your property and do not accept an out-of-state cashier’s or paper check, especially if it is for more than you are due. This is a well-known scam that will leave you without your money and without a tenant.

Someone who wants to pay the deposit in installments probably lacks the income to rent the property. It may also be that they are not planning to make those additional payments at all. Do not sign a lease until you know that you will receive the security deposit in full before the move-in date. Keep in mind that there are a few cities that have passed “Renter’s Choice” bills which may allow tenants to pay their deposit in payments, but you can still incentivize tenants to pay the deposit in full.

If they are allowed to postpone paying the full security deposit, you may never see that money or the rent for the following months. Should you begin the eviction process, they know that it will be several months before they must vacate the premises. In the meantime, they are living in your property rent-free.

#5 The applicant insists you use a copy of the credit report they provide. Beware if the applicant tries to give you a copy of their “credit report” rather than have you order your own. This could be an attempt on their part to keep you from seeing their true financial history. With today’s technology available to anyone, it is surprisingly easy to create a favorable credit report that will lead you to rent to someone who is not a reliable tenant. Note, New York has recently allowed tenants to furnish their own credit reports, but that still doesn’t mean you can’t pay for and run a credit report yourself. Always verify.

Position Realty
480-213-5251

How to Save for a Down Payment While You’re Renting

Rent prices continue to rise throughout the U.S., which creates a disheartening and discouraging scenario for many people.

As of February 1 2022, median rents for one- and two-bedroom units are up 26% since last year.

One-bedroom rentals are at an all-time median high right now.

High rental prices coincide with a housing market that’s overheated. Demand, inflation, and reductions in home construction have led to record-setting home prices. Potential homebuyers are being priced out, requiring them to stay in the rental market, putting pressure on rent prices.

For renters, it can seem like a difficult cycle to break—how can you save for a down payment when such a large chunk of your income is going toward rent? Homeownership feels unattainable for a large portion of the population.

It’s decidedly not an easy issue to work your way out of, but it is possible.

Figure Out What You Need

The first thing you can do is start to crunch the numbers. If you have a concrete number for the down payment you need, it will be easier to work toward your goals. If you don’t have a plan in mind or a set number to work toward, you’re going to feel scattered, and it will be much harder to get out of the rent cycle.

The down payment will depend on the type of loan you hope to get and where you plan to buy.

There are mortgages with a down payment as low as 3%, giving you opportunities to save up in a shorter period of time.

You may have to pay for private mortgage insurance if you don’t put down 20%, however.

You have to think about other costs that you’ll need upfront money for to buy a home. These costs include closing fees and the costs of moving.

Open a Dedicated Down Payment Savings Account

Once you have a concrete number in mind and have explored the mortgage options available to you, and know which you’d like to ultimately get, you can create a savings account. This account will only be for your down payment and nothing else.

It should be liquid but separate from anything else so that you aren’t tempted to spend the money in it.

Deal with Debt

You’re going to need to find ways to cut costs if you want to put more money aside to buy a house. Cutting your debt is going to be one way to do that.

If you have a balance on a credit card with a high interest rate, you might try to do a balance transfer. You can transfer the expensive debt to a card with a zero-percent interest period.

If buying a house is your goal, try not to add any more debt during this time.

To qualify to get a mortgage, you’ll have to meet the debt-to-income requirement.

Find Ways to Cut Back

It’s hard to give things up, but if you’re putting a fair amount of money into your rent, there’s not a lot you can do about that unless you’re willing to move.

You’ll have to find other ways you can cut your costs. That might mean skipping meals out or delivery food or going through your subscriptions to see what you can eliminate.

Think About Moving

We mentioned moving above, and you may not be willing or able to do it, but if you can, cutting down on what you’re paying for rent is one of the best ways to have more money to put toward a down payment.

If you can’t move to a smaller or less expensive home, you might try to renegotiate your lease with your landlord, or you could get a roommate. If you can move, along with getting a smaller place, another option is to move outside of the center city area, if you live there currently. Typically, the further out you move from the central area of your town or city, the lower the rent.

Explore Assistance Programs

Finally, many mortgage lenders have programs and loans for first-time homebuyers that cover part or all of a down payment. There are also grants, which require you to complete a homebuyer education course before you get the financial assistance.

If you work in certain fields, like as a first responder or teacher, homebuying assistance programs are often available.

A lot of lenders are looking to reach out to underserved communities to help them make homeownership a reality, so make sure to explore everything that’s out there.

Position Realty: 480-213-5251

What Sellers Should Know About Pets and Showings

Buyers and their agents need to feel welcome to look at the property at their leisure without danger or distractions. So while you adore your sweet-tempered pit bull rescue, he could turn territorial, barking and growling at potential homebuyers. And it could cost you the opportunity to sell your home.

Think of buyers as guests and work to make them feel comfortable as they consider your home for purchase. If you have a protective dog or one that isn’t well-trained, drop her off at doggie day care when you know your home is going to be shown. Or call a pet sitter on call who can take your pet for a long walk while your home is being shown.

If you must leave the dog at home, don’t expect real estate professionals to handle your dog. They are not dog trainers and should not be expected to risk a dog bite to show your home to buyers. This is where crate-training can be a huge advantage. At least your dog is secured and more inclined to relax while your home is being shown.

What you should not do is leave your dog loose in the backyard. Not only does the buyer not have access to part of the property, but your dog could bark so much that the din drives the buyer out of the house. Also, don’t leave your dog at the neighbor’s. It’s just as bad if the buyer believes a noisy dog lives next door.

Housecats can also repel buyers. Most homes aren’t designed with a convenient place for the litter box, so cat owners do the best they can. Owners get used to the smells of catboxes and fishy foods, which could be offensive to buyers who don’t have cats.

While buyers aren’t afraid of being cat-attacked, cats can still be startling — they appear silently without warning and they jump on furniture and counters. And if you’ve taught your cat to jump on your shoulders, you can imagine what could happen to an unsuspecting buyer.

Exotic pets can be showing-stoppers, too. Birds are gorgeous, but a puffed-up screeching cockatoo can be intimidating and dangerous. Imagine a buyer bringing small children who can’t resist sticking their fingers in the cage and quickly get rewarded with a nasty bite from a very strong beak.

When you’re selling a home, keep in mind that the first two weeks on the market are crucial. That’s the time you want your home to be pristine and move-in ready. You don’t want any noise, smells or stains that could put buyers off.

Sell your home faster and for more money by making your home as inviting and accessible as possible, so that buyers have no barriers to overcome. Accessibility to your home is just as important as price, condition and location.

Position Realty: 480-213-5251

Seller’s Disclosures: What Does a Seller Have to Reveal?

If you’re making an offer on a house, one of the first things you’ll get as far as documentation is a property disclosure. This is also referred to as a property disclosure statement, a real estate disclosure form, and a home disclosure.

The specifics vary by state, but most states require some type of seller disclosure.

The goal is to add transparency to the transaction process.

In a disclosure, a seller provides written information about known things that could impact the property’s value, like termite damage or a leaky roof. The disclosure will also include details like the homeowners’ association fees and restrictions.

These documents are meant to provide buyers with a comprehensive overview of the property before buying it.

On the seller’s side, the disclosure has the benefit of helping them avoid a future lawsuit if a new owner discovers hidden information.

The Basics

A seller typically fills out a standard disclosure form with yes or no questions about their property. The form will also have space for more details and explanations.

Some states have multiple versions of a disclosure form that comply with state law.

A real estate agent should fully understand the legal requirements for disclosures. If you’re a seller, your listing agent will provide you with the right documents that you fill out. Your agent should help you go through the completed forms if you’re a buyer.

The disclosure isn’t a replacement for a home inspection, but it might bring to light issues that you have an inspector take a closer look at.

Disclosures only require sellers to share the issues with the house that they’re aware of. There’s still the potential for there to be hidden problems.

A purchase offer will have a deadline for sellers to provide disclosures and details on the number of days a buyer has to review them.

Then, the offer should also have details on the buyer’s right to change their mind or back out based on the disclosures.

What’s Included?

Seller’s disclosure requirements, as mentioned, vary depending on your state. Some of the common issues they often include are:

  • Leaks or roof problems
  • Previous flooding or water leaks in the basement
  • Foundation cracks or defects
  • Issues with the air conditioning, heating, or plumbing systems
  • Defects in doors, floors, walls, or windows
  • Sewer or septic system problems
  • Infestations by wood-destroying insects or damage
  • Unsafe conditions related to lead, asbestos, or radon
  • Boundary disputes

Federal Requirements

While most disclosure guidelines are set at the state level, under federal law, if you’re selling a home built before 1978, you have to disclose that paint may be lead-based. 1978 is the year lead-based paint was banned for consumer use.

A seller of a home built before 1978 would also have to give buyers an EPA pamphlet about protecting their family from lead in the house and give buyers ten days to do a paint inspection or risk assessment for lead-based paint.

What to Look for In a Disclosure

If you’re a buyer, you may feel a little overwhelmed by the seller’s disclosure, and again, this is where a good agent can help you. If you aren’t sure about anything, don’t be afraid to ask.

One issue to watch for is mold or water damage.

Termite damage is another red flag. If termites aren’t taken care of, it can significantly impact a home’s structure, and a homeowner’s policy often won’t cover this damage.

Some states require that sellers identify if their property is part of a FEMA-designated floodplain. If this isn’t required in your state, you should look into it independently.

What Does Caveat Emptor Mean?

Finally, caveat emptor is Latin for “let the buyer beware.” In real estate, this means that it’s up to the buyer to be fully aware of any issues with the home.

If the disclosure laws in your state don’t require the seller to mention something, you have to figure it out on your own.

The only times you would have recourse as a buyer is if the seller intentionally sought to defraud you.

In general, it’s up to buyers to have a home inspected and follow up on issues before the transaction goes through.

Position Realty: 480-213-5251

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