1031 exchanges chase hot market, in reverse

"Seize the day" That's the driving force behind reverse 1031 exchanges.

It's not the only one, says Craig Chagnon, a qualified 1031 exchange intermediary and division manager with Asset Preservation Inc.'s Reno office.

But it's a powerful one.

The 1031 exchanges tax-deferred exchanges of real estate or property can be simultaneous.

That's the typical timing.

For example, an exchanger puts a house on the market, finds a new house, makes an offer on it, accepts an offer on the old house, and escrow closes the two properties on the same day, moving the money out of the old and directly into the new.

But in a fast-moving market, often exchanges are delayed: the exchanger sells a property before identifying a new property to roll the money into.

Having sold the old property, the seller needs to hustle, seeking a new property before time runs out.And the clock is ticking.

Exchangers have just 45 days from the sale to identify a new property, and just 180 days to close escrows in the exchange.

A reverse exchange allows the exchanger to buy a property first a key point in a seller's market then identify and sell the property that will be rolled into it.

The 45- and 180-day rules still apply.

Reverse exchanges are appealing to investors in a variety of scenarios.

For example: The sell side of an exchange falls out of escrow part-way through the process.

The property must be sold again.

Meanwhile, on the buy side, escrow on a juicy new duplex is moving forward on schedule and the seller of that property refuses to extend the closing date for the exchanger.

The exchange switches into reverse mode.

Or: An exchanger trolling the market sees the perfect multi-unit investment, feels the urgency to lock an offer in on that one knows that the sell side of the exchange will be easier to control.

So she sets it up as a reverse exchange from the beginning.

The scenarios run the gamut, says Chagnon.

The factor in common: the need or desire to buy first, sell second.

The ability to buy before selling alleviates the pressure of the 45-day identification period, says Chagnon.

For most exchangers, the sell property is easy to identify and that sale easier to control through marketing and pricing.

Reverse exchanges are becoming more popular, says Kandas Myer, a qualified intermediary and regional manager of Starker Services Inc.

(All 1031 exchanges require a qualified intermediary to marshall the funds through.) Myers estimates that her reverse exchange business, typically about 10 percent, has doubled over the last year.

Why now? The simple answer is that real estate is a sellers' market these days, and a hot one.

Investors wanting to exchange into a property can easily succumb to the frenzy of a sellers' market find that hot buy, make an offer, get a signature on the bottom line.

Then worry about the other end of the exchange.

Powerful, says Chagnon, but there's more.

Underlying the whole move into reverse is the Internal Revenue Service's Procedure 2000-37 reverse exchange guidelines published in 2000.

It gave qualified intermediaries IRS-blessed procedures.

Before that, reverse exchanges, though done by many, went forward without the absolute assurance of tax deferred results that official guidelines provide.

Over the last five years, qualified intermediaries have been educating the world around 1031 exchanges about the reverse possibilities.

As the word's gotten out, the number of reverse exchanges has increased.

It's a matter of it finding its way into the market, says Chagnon.

Trickling down.

Now, five years after the guidelines were approved, the market has had time to embrace the process.

Reverse exchanges are not for every investor.

"They're a more complicated approach," says Myers.

They require more paperwork, more fees.

In each exchange, the costs are weighed against possible tax consequences incurred.

"But the real stopper," says Myer,"is that you have to have the money for the buy side before you get the proceeds out of the sell side."

And if the sale side of the exchange fails, then the exchanger is left with a newly purchased property, along with the one intended for sale on the exchange.

Many of the buyers Myer sees in the region come out of the Lake Tahoe area, she says.Most are invested in residential income property of four units and under.

They're optimizing and shifting their investments.

The increase in reverse exchanges is helping keep the market in the seller's ballpark, adds Myer.

Investors are heavy players, and reverse exchanges give them one more ball to play.

The market for residential investors is still moving fast.

For instance, says Greg Cook, an agent with RemCor Real Estate, Reno, a residential, multi-family property in the Reno/Sparks area listed below $500,000 is averaging about 10 days on the market, up from just hours on the market a year ago.

In Carson City, too, says Bob Ford, of Coldwell Banker Commercial Premiere Brokers, time on the market for the same type of listing went from an immediate sale last year to 10 days now,with property over four units staying on the market for up to 30 days.

Even if the market slows down, says Chagnon, there will be investors who need to make reverse exchanges.

But it's this kind of escalating market prices moving up, inventory still low that's especially prime for reverse exchanges.