Creative Financing with 1031 Exchanges
| December 15, 2023
With real estate prices and interest rates continuing to climb, it is becoming increasingly difficult to sell a property and get financing to purchase a property. With the growing challenges in the real estate market, buyers and sellers are turning to alternative financing options to facilitate transactions.
Seller Financing
One of the most popular methods is to utilize seller financing (Owner-carry notes). Including an owner-carry note as part of your tax-deferred exchange is actually very easy. In order for it to be included in the exchange, the installment note and corresponding documents need to be drafted with the Qualified Intermediary listed as the beneficiary or owner (example language: “ERG as QI for John Doe”). The note and corresponding documents will then be sent to the Qualified Intermediary and held until the buyout. Prior to the purchase of the replacement property, the exchanger will need to buy the note out of the exchange account. The exchanger will send funds in the amount of the note plus any payments that have been made, and then the note will be assigned back to the exchanger. This will leave cash in the exchange account to be reinvested and the exchanger being able to directly receive the payments on the note.
Seller financing is also an option when purchasing through an exchange. It is much simpler as it is treated as a loan for the acquisition of the replacement property and can be a great option for covering the debt replacement that is a part of the reinvestment goal.
Loan Assumptions/Wrapping a Loan
Another method of financing a transaction that can be used for a sale or a purchase is assuming a loan that is already in place. This is often referred to as wrapping the mortgage as part of a closing. Some loans are written with clauses that allow them to be assumed by a third party in the event of a sale, leaving the current mortgage (and interest rate) in place for the buyer. With loans that don’t have this clause, there can be challenges with utilizing this method. Many lenders have due on sale clauses in the mortgage so when the property is sold, they must receive the payoff of the loan. This method will be dependent on the mortgage and the requirements of the lender, but if successful, can save the buyer a lot of money.
Want to learn more about these and other financing techniques? Reach out and schedule a consultation with one of our exchange consultants to learn more.