I’m selling some single family homes and would like to 1031 into a park, but as I look through the timelines, it seems impossible to make everything work on a park purchase. Anyone have any input on how to order things to make them more manageable?
Since the right park seems hard to find, It seems wise to find a solid park first, do some diligence first to confirm that I want to pull the trigger, and then proceed with selling the rentals (Since I have 45 days to select the new property after i close on the first property).
Here’s the way I figure the events have to go to not have to either eat a lot of rent for vacancy in the process or sell too far ahead of finding the right park:
Day 1: Select a MHP, Put in contract, begin DD (Generally 90-100days to close on a MHP, right?)
~Day 14: I should pretty solid on the park by now. Give 60day notice to tenants once I’ve done enough DD on the MHP to commit. (2609 Only one rental would require 60days. The others have been tenants <1yr, so 30 days will do.)
~Day 30: Apply for financing on MHP (60 day process?) - It seems like this is our first tight spot: The MHP bank would probably require cash in the bank at this point. Not sure if they would tolerate the homes being in process of closing
~Day 44 Tenants are out of First property. List it for sale.
Day 74-ish: Last tenants are out of the last property. List it for sale.
Day: 125 Last property COE (The properties would likely sell quickly because they’re in a good area with low inventory).
Worst case it all turns to a taxable sale, which is not terrible, but I’m wondering if I could rearrange things to make this flow more quickly? Thank you, everyone!
Great questions. There are firms out there today that specialize in 1031 transfers that should be able to give you quality advice on how to execute such a transaction. That said, you hit the nail on the head when you were worried about finding a proper park/piece of Real Estate to exchange for. I think that’s the true hard part of a 1031 transfer. Another thought is what Capital Gains Tax rates will be in the future. They are higher now than they’ve been in 20 years and there’s better odds they’ll go down before they’ll go up.
Thank you for your insight, Kurt. The bottom line is finding the right investment without the pressure to “make it work” because of tight timelines. I hope you are right about Capital Gains heading downward in the future. That would be a welcome sight!
The way around a timing issue is to never let it start in the first place.
I use options to skip the entire 45-day issue.
I presume your SFH’s are easier to sell than finding a suitable MHP.
Find a park. This is the hard part. See Frank & Dave’s Boot Camp.
Write an option to purchase said park. Your RE attorney should assist here. Don’t close until all your DD is satisfied.
(I am not an attorney and can’t / won’t give legal advice / write your options)
When you are certain the park is one you’ll want - close.
At the same time give an option or lease/option to your SFH buyer - but don’t allow them to close until you’re ready to close on the MHP.
I’ve done this with SFH’s and apartment buildings. I explained my intentions to the apartment building seller, broker and the SFH buyer. Everyone understood the 45-day timing issue.
Mike,
This is the most creative solution I’ve seen yet for my scenario. It seems like it may work. Thank you for taking the time to help.
It seems that the only challenge is in sweet talking the SFR buyers and the Park seller to sign on to an option contract. What challenges did you see in that process?
I’m sure they’d understand the timelines due to 1031 restrictions, but did they put up much resistance for fear of you not following through or not being able to sell your properties? This seems especially relevant if you find a standard deal that is being posted online and getting lots of offers. Seems like you’d be at the bottom of their list of offers. But an off-market deal would be more likely to work out.
There is also a reverse 1031 where you buy and then sell, that might be worth looking at for your purposes as well. Asset Preservation i believe is Stewarts spin off for 1031s and are very knowledgable. If you send them an inquiry, they can answer most questions for you.
Thanks for the input. I have touched base with a qualified intermediary and my big hesitation is that he indicated that hard money lenders are often the way the park is initially purchased, then traditional financing is applied for after the SFR homes have been sold. The big question is what happens if for whatever reason, you can’t get a bank to finance it? I don’t like the idea of a long-term hard money loan.
I was a hard money lender for years. I can’t imagine you would find any hard money that would go over a 50% LTV on a really nice park. Back in the day, hard money was 12 -13% plus some points thrown in. Now you might find 8-9% if you are lucky. Ask your intermediary if he can provide you with the contact info on any hard money lenders who lend on parks. I would not be surprised if he can’t.
Answering the question posed in this thread’s title:
It is possible but damn near impossible. I’ve done four 1031s and hatted every minute of every one. And had to seriously compromise on my acquisition requirements.
Like most good things, its simple in its execution. But you MUST take the time to explain the tax issue to all involved parties. Without their cooperation – deals die. And Uncle Sam gets his piece of flesh.
In the past, I’ve written strong option offers. Make the seller comfortable with your willingness and ability to close. The option is used as a pre-timing device. Not as a delay.
Actually, talking the SFH buyers into a lease/option is the easy part. It’s basically a long escrow.
The park seller KNOWS about tax issues. Or should. If not, make them aware. That’s all part of the process.
Closing an exchange is part art, part science. Art in communicating your intentions to the MHP seller and science in not getting caught in the 45-day trap.
One last point, there is no such thing as a standard deal. Every seller has a story. Find theirs and get them interested in yours.
Find a seller you can work with and they’ll give you the keys to the kingdom.