Sunday, March 15, 2009


One of the things I do is “fix” property, that is to say, I put my clients in a position to have marketable title. Often one of the issues with a marketable title is the competency of the Seller. One of the fixes I deal with is incompetence. As an example I have clients whose parents are older and have periods of not being lucid and are generally considered incompetent.

Know this, it doesn’t matter what you think, your brother thinks and to a degree, what your parent’s doctor thinks. The only person who can declare your parent incompetent is a judge. Period. Meaning it takes a legal proceeding where medial testimony is heard to declare someone incompetent.

Having assisted numerous clients with this, also know that the standard is fairly high to have someone declared incompetent. As an example, your parent may be reasonably aware in the mornings and become disorientated in the evenings; that’s not incompetence. It’s the judge’s opinion, but as I said, experience tells me your parent will need to not be lucid for several days at a time (say 3-5) and have a doctor that is willing to testify to such.

This often puts the child/client in a difficult spot because often what is best for their parent is to sell property, often their home, to satisfy medical bills. There are several ways to accomplish this but know that as far a real estate transactions are concerned, we’re looking for the legal definition of incompetence, not the piratical one.

Monday, March 9, 2009

1031 Tax Free Exchange - A Pratical Guide

In earlier postings I laid out the statutory workings of a 1031 Tax Free Exchange (aka Like Kind Exchanges). Having assisted my clients in completing several of these, I want to tell you in piratical terms how it happens.

The key to remember is that time (days) is always of the essence.

Generally, my client that ends-up completing a 1031 Exchange has a parcel of real property for sale. Before we even have an offer, I ask my client what they want to do with the money. And to be straight with you, I don't really need to know what they are going to do, but I do want them thinking about it.

In coming to the decision of what they want to do [and why, as I discussed in earlier postings], it will benefit them to know as soon as possible if they are going to be looking for a 1031 Exchange Property (or Replacement Property), because they will also need to decide what type of property they will want. No surprising, my clients like things like, commercial sites, industrial buildings, ranches and income producing properties. These type of properties take time to find and view.

As an example, on a good day you can see three ranches but two or even one are the norm. And Texas is a big place, do you want an Central Texas Ranch, South Texas Ranch or well, like I said, Texas is a big place. For that matter, the United States is a big place, because any property in the U.S. is suitable exchange property.

Do you want to buy a Burger King in Amarillo or an Auto Zone in Georgetown? What is the cap rate? How long is the remaining lease. All important things to consider.

So lets get started, we just received a contract on your parcel and a 1031 Exchange is what you want. We contact the Qualified Intermediaries [QI] and get conformable with one. We then let the title company [or the closing attorney] know to send the closing proceeds to the QI [remember, the key here is that the proceeds stay out of your possession]. Once your property closes, we have 45 days to identify three potential properties. The Sellers of these properties don't need to know that you have 1031 money and that their property is one of the three you've chosen and in fact, in terms of negotiating, it is better if they don't.

Once identified, you have 180 days [most likely less because you've spent some of this time identifying potential properties] from the date of Closing to negotiate, contract and close your replacement property. When you consider negotiation time, feasibility periods, surveys and the other numerous elements it takes to buy non-residential property, that is a really really tight schedule. Even once you agree to terms with the Seller, they may not be able to close in a timely manner to fit your 1031 timetables and you have to keep looking.

Once you get your exchange property under contract, you'll tell your QI, with the proceeds they are holding, to place the earnest money into escrow for the new purchase. Then presuming you elect to close the property during your feasibility period, you'll instruct your QI to send/wire the funds to buy the property on the scheduled closing date [presumably within 180 days of closing].

There, done. You have your replacement property.

With my clients I take a all hands on deck approach. Even when they are knowledgeable enough to go through the 1031 process by themselves, they're going to need all the help they can find. I use my experience and contacts to identify and find potential replacement properties. I have a lot of clients with different abilities, but generally I am in a much much better position to do this than my clients. It takes time and effort, but this is exactly what they are counting on me for. When my clients go in the 1031 clock, I go on the 1031 clock.

Many times I am the one viewing the properties when my client can't make it. I evaluate it and report back to my client. I also help in the feasibility process. Often I am more familiar with what questions are prudent to have answered during the feasibility period. I have professional relationships with engineers, architects and environmental specialist that I can a call upon to ensure my client gets drawings or reports timely.

I suggest when completing a 1031 Exchange to enlist an experienced commercial real estate broker. I know that I have at all times a working knowledge of what properties are on the market [and some that are not, but can still be bought]. I also have an open line of communication with my fellow brokers. I often can get information more timely from them than my clients can by going directly to them. Also know that most Buyer's Brokers are compensated by the Seller, mean that they are more or less paying for my services, which most of my clients think is a real benefit.

Friday, March 6, 2009

Reverse Offers

What I'm see in the commercial market right now is a stand-off. Sellers know it's a soft market but find it difficult to lower their list price, which may not be smart, but it's understandable. And the Buyers are looking for really good deals, which also makes since. But Buyers are a little punchy too because they're looking for the bottom of the market and wondering if there are going to be better deals in six months. And thus, the classic stand-off.

This may sound silly, but I have a couple of contracts in the title company right now because of reverse offers. I'm finding that Sellers will take less, and sometime a lot less, but want to avoid getting taken to cleaners. The lack of communication is slowing transactions.

Once I know a potential Buyer has interest in my commercial tract [perhaps because they have asked for significant information], but is reluctant to bring an offer because they believe there is too much difference between the list price and what they want to offer, I have my Seller make the first offer.

Yep. Sometimes the prettiest girl at the dance has to get things started on her own.

With my clients, I'm really just looking to get the ball rolling. When you get two parties talking, good things can happen for both of them.

Thursday, March 5, 2009

FM 1460 Recieves State Funding

This is awesome news. FM 1460 is one of two major arterials to Round Rock’s Education and Health District, which contains Texas State University, ACC’s 27 acre campus, Texas State Nursing School, Texas A&M Medical School, Scott & White Hospital and Seton Hospital. Whew, and that’s still not everything.

This road, sorely undersized and in a state of deconstruction, represents one of the most important undertakings for the future economic health of Round Rock and Williamson County. This project has had the rug pulled out from under it once and was on the verge of having it pulled out again. Big thanks goes out to our state and local officials who went to bat for Round Rock, including our state representative, Diana Maldonado.

Proposed HB 2257 - Mandatory Sales Price Disclosure

Add ImageState Rep Giddings entered this bill yesterday and it's a really bad ideal. It requires the sales price of real property be placed on the Warranty Deed, which once recorded, is of public record. Texas is a non-disclosure state, meaning that real property sales prices are not disclosed. When a sales price is disclosed, it has been done voluntarily by one of the parties. [As a FYI, when a property is listed in MLS, by agreement with the MLS service, the sales price is required to be disclosed to MLS, but this is done by agreement, not statue. Typically, only residential property is listed in MLS.]

I know that I don't have a single client that wants to disclose the sales price of their real estate transactions. This will have a chilling effect on an already slow market.

My guess it that this is being pushed by the Appraisal Districts, who's appraisals have been very accurate, if not overly aggressive for my clients.

Wednesday, March 4, 2009

Bill Smalling

A sad note, Bill Smalling, Central Texas real estate developer, passed away yesterday. He was a caring individual and a good friend.

Monday, March 2, 2009

1031 Tax Free Exchange - The IRS Guidelines

As my Papa would tell me, there are no guarantees in life. Same is true for 1031 Exchanges. You "do" an exchange, declare it on your tax return and hope you don't get audited. And in the unfortunate event that you do get audited, you hope that it passes the auditor's muster.

When you read Section 1031 of the IRS Code (and you should) it will raise your blood pressure, because you'll find that there is very little in there that will help guide you in completing a successful 1031 exchange. It does however do a good job of telling you what doesn't work, which is only mildly helpful.

When the 1031 exchange law was first created, it was interpreted that you needed to acquire the "replacement property" at the exact moment you sold your original property. Yes, that's what I said. You executed the sale documents as you executed the purchasing documents. Yes, lets call that as a practical matter, hummmm, impossible.

Then the IRS auditors backed off their interpretation of simultaneous closings interpretation to mean that the transactions could occur during the same business day. That gave us the ability to drive across town to facilitate the closing, but it wasn't really much help. After a few showdowns at the federal courthouse, we have now some general guidelines, that if followed, the IRS has agreed in principal to not challenge.

That means declaring a 1031 Tax Free Exchange on your returns by some other method than the guidelines could be permissible, but also subject to challenge by the IRS. You win some, you lose some.

So these are the guidelines the IRS wants us to follow;

1) Close your original property and place your proceeds with a Qualified Intermediary (or QI). I'll explain who is a QI later, but the key here is that YOU or someone you can influence can not hold the funds. Many of my clients take issue with not being able to personally hold their proceeds and I don't blame them, but I didn't write the guidelines.

2) Now the fun begins. You have 45 calender days from the date of closing your original property to identify up to three (3) properties as potential "replacement" properties and I want you to know from experience, the 45 days will feel more like 45 seconds. I call this the Identification Period.

3) Lastly, we need to finish the exchange. You have 180 calender days from the date of closing your original property [not 180 after the Identification Period] to purchase one (or more) of the three (3) potential "replacement properties" you identified. You'll do this with the original property proceeds the QI is holding for you. You're done.

Now in the effort of full disclosure, there are a few other options that may fit your needs [such as increasing the number of identified replacement properties] but most exchanges are completed by following these guidelines.

You've undoubtedly noticed that I just introduced a new character into the plot, the Qualified Intermediary (QI). QIs are interesting people who have chosen this narrow alley of tax law in which to reside. I don't think QIs get many Christmas Card, I know I've never sent one.

A QI can be anyone who isn't disqualified. Who is disqualified is someone you could exercise control over, like your banker, your brother-in-law or me, your commercial broker/attorney, the IRS considers us disqualified. And since you're not going to turn your money over to just anyone to hold, there are professional QIs. But be careful. One more time with emphasis; but be careful.

QIs are not regulated. There is no test, no license, nada. They can be ANYONE and that can be a problem. There are QI professional organizations, but they're not mandatory and they don't regulate, but they are nice to list on letterhead.

And while rare, QIs have run-off with their client's money, declared bankruptcy and committed fraud. Are they liable to their clients? Of course, but you can't get blood from a turnip. The QI may go to jail but if the money is gone, it usually says gone.

So what do you do? Ask many, many questions of your QI, including references. The ones affiliated with title companies generally feel the safest. And lastly ask if they are insured or bonded, and then ask for documentation.