Tuesday, November 29, 2011

Real Estate Trading

In good economies and bad, real estate exchanging is where it’s at. A real estate exchange or trade expands your opportunities and has everyone thinking outside the box. As a seller, you could take a smaller property in exchange as partial payment for your larger property (unless the smaller property has little or no mortgage and your larger property is heavily leveraged you could still exchange but balancing the equities will be a requirement). Just think of it, if the buyer has the cash or gets a new mortgage on your property as part of the closing, you will most likely get most of your sales price in cash and there are many more buyers for the buyer’s smaller property than for your larger property, making it easier to cash out. You will have substantially increased the depth of the market for your property because now, instead of just looking for buyers with cash, you are also including a much larger audience of “buyers” who have cash and/or equity in a smaller property. If you are a seller with 20 acres to sell and no one is biting, maybe you are not a seller at all. Maybe, you are a buyer…especially if you have a little cash (or a cabin cruiser, a stamp collection or auto, race horse, diamonds, i.e. “boot”) to throw into a deal. Why not trade your “equity” in your 20 acres plus some cash and boot for that half empty shopping center that you know you can “do something with”? But the owner of the center is thinking… “I don’t want 20 acres, five houses and a stamp collection”. Well, if he gets the majority of his purchase price in cash, he can cash out the equity and boot at a discount and still have accomplished all of their goals. (Often, the party trading up will through in paper (an I.O.U.) to balance the equities.) How about an example… Terry Trader owns a 20 unit apartment property that is worth about $1,500,000 and he has paid his mortgage down to $300,000 over the years. Terry also has a $600,000 six unit apartment property that he owns free and clear. His liquidity includes $400,000 in cash. Terry’s broker has buyers lined up for the two apartment properties and also has found a $5,000,000 Walgreens store property under a 20 year triple net lease into which Terry can trade. Terry has $1,800,000 in equity plus the proceeds from a new $2,900,000 first mortgage that he will get on the Walgreens property at closing. That adds up to $4,700,000 to which he adds $300,000 of his cash to balance the equities. I’ve seen transactions where there have been four or even five parties trading up in the same transaction with one of the brokers accepting the equity in the smallest property as their commission! Also, let’s not ignore the tax benefits to the party(ies) trading up (“buying”). If the transaction is structured properly under the requirements of IRC (Internal Revenue Code) Section 1031 – caution, consult your professional tax advisors – there will not be taxes due on the parties’ transaction. The taxes that would have been levied had they sold outright and then repurchased are deferred, possibly forever. This tax savings can also benefit the seller because a “buyer” trading up will be able to pay more for the trade-up property due to their tax savings! Think outside the box. It is amazing the types of transactions you can actually pull off with some creative thinking.

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