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(your email address) - where the real estate investor market is always hot. With real estate credit virtually non-existent, facilitating a direct 1031 exchange between property owners is a great alternative. is the oldest, most trusted, and fastest-growing online exchange website for the trading or property swap of commercial real estate properties.

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When -   A “dealer in real estate” can often do well working this formula over a period of years.
Situation -   Jones, a real estate agent, owns a $10,000 lot F/C in another state. It’s not really doing him any good.
How -   Jones exchanges this lot for a $50,000 run down house offering to get a new $40,000 loan giving the proceeds to the seller. Proposal is accepted as seller wants the cash and will take the lot to get it. Jones gets the house, repaints and does a little “clean up” work with new landscaping. He then offers the house out for $60,000 and will take a little lot as a down payment. He is offered and accepts a little 5 acre parcel valued at $10,000 and carries back a $10,000 2nd at 10% interest, $100.00 payments, due in 10 years.
Results -   Through some clean up, fix up and his ability in marketing, Jones can keep this up indefinitely. He can acquire a considerable amount of “paper” doing this over several years. It works best in periods of high inflation but will also work during recessions as you can usually make better “buys”.

When -   You own a property too long - need paper - wish to change position.
Situation -   Jones owns a F/C 440,000 lot. He wants to generate cash but can’t sell the lot or borrow against it!
How -   Jones finds an owner of another lot, bare land, or similar sized property. An exchange is made and each party carries back a $25,000 1st mortgage or trust deed at identical terms. After exchange the carry back trust deed or mortgage can be sold for cash at a discount, kept for income, or traded.
Benefits -   Cash generated or new position requiring some action.

When -   A professional man or perhaps a person who has fixer-upper qualities does not have the cash to use to acquire property but still wished to acquire some real estate.
Situation -   Jones is a young attorney just getting started. Jones does not have any cash., However, his business is in the process of building and the future looks bright. Jones would like to acquire some real estate for investment purposes, but does not have the cash at the present time.
How -   Jones offers to exchange $5,000 in professional services to a party who wishes to move out of a duplex. The party owning the duplex can use the professional services or perhaps exchange them to someone else at a later time. They also may be able to sell the services at a discount.
Results -   Jones was able to obtain a duplex with no down payment and has the added benefit of securing new clients.

When -   When a person sells or exchanges out of the property if he can retain an option to repurchase the property at a modest inflation rate, he can sometimes do extremely well.
Situation -   Jones is selling a parcel of ground at the edge of town for $100,000. As part of the terms, he negotiates an option to repurchase the ground within 5 years for $150,000. Later the land increases at a much faster value than anticipated and the property becomes worth $200,000.
How -   Rather than exercise the option and acquire the property and then resell the property, Jones merely sells his option for $50,000. It has suddenly become quite valuable. He can also exchange the option for property that he would prefer. Caution: an option is not considered real estate so it would not be “like kind”.

When -   In almost any type of an exchange.
Situation -   Jones has a $60,000 note which he has held for some time and needs real estate for tax shelter. He finds a situation where Smith owns a $75,000 duplex with a $50,000 equity.
How -   Jones offers Smith a $60,000 note for his $50,000 equity and asks Smith for $10,000 cash to equalize. Jones has over traded Smith by $10,000 asking for cash back.
Results -   Jones has the real estate to depreciate plus $10,000 cash. Smith now owns the $60,000 note.

When -   If you are going to buy a mortgage, trust deed, or contract that has a balloon payment or a long term pay out, the discount can be extremely heavy. This often makes the seller reluctant to sell. In many instances, however, the purchaser can purchase a 3 or 5 year income stream just buying the payments for that length of time at a lesser discount and get a greater yield giving the seller the balloon payment or long term payment to repay.
Situation -   Jones was interested in purchasing Smith’s note which was written for a 10 year period with a balloon at the end of the tenth year. Payments were $100 per month, interest only, at 12% with the entire balance due at the end of the tenth year. Jones wanted to buy at a yield of 24%. With this kind of a situation, Jones would only pay Smith $ _______ for the note.
How -   When Jones finds that Smith will not sell the note for the above amount, he refigures his offer just offering to buy the $100 payment for a period of 10 years leaving the $10,000 balloon for Smith. He can now pay Smith $_______ for the income stream leaving Smith the benefit of the $10,000 balloon and still retain the same yield.
Results -   Smith now is interested in selling the income stream and will obtain a great deal more for the note overall then he would just selling the entire note.

When -   When you’re selling a property that has a very low interest first mortgage on it.
Situation -   Jones owns a four-plex which has a $40,000 8% loan which has been on the property for some time. There is no due date. Jones wishes to sell the property.
How -   Jones takes a $20,000 cash down payment and carries back an $80,000 wrap or contract around the existing $40,000 first at 12% interest. The payments on the wrap are $800 per month interest only all due in 10 years.
Results -   Jones will be paying out $3,200 interest on this $40,000 loan and receiving $9,600 on his $80,000 loan. This means that Jones will effectively be securing $6,400 on the $40,000 equity that he has. This is a 16% return on his $40,000.

When -   When you wish to acquire a piece of property that can be split into smaller parcels and don’t have the cash to make the transaction. You know that the property will be worth a great deal more smaller sections.
Situation -   Jones finds a 5 acre parcel owned by Smith which can be divided into 4-1¼ acre parcels. Smith wants $20,000 cash for the property. Jones doesn’t have the $20,000 cash but know that each parcel will sell for approximately $15,000 as 1¼ acre parcels under good terms.
How -   Jones offers Smith the $20,000 on the 5 acre parcel providing Smith gives him the opportunity to divide the parcel into four smaller parcels. Jones arranges to sell or deed the parcels to a partnership he controls carrying back four $14,000 notes written at favorable terms. The partnership gets the property at no down payment, however, will have to make payments on the notes which will be against the property when they close. Jones then finds a buyer who will pay 60% to 70% of face for the individual notes. (At 70% this would indicate $9,800 on each note.) Total cash generated would amount to $39,200 from which will be paid the $20,000 purchase price and costs of the transaction. Profit should be substantial. The partnership now either puts the property on the market for sale at a existing loan or perhaps holds the property for development.
Results -   Seller received the exact terms he wanted on the property, Jones made a substantial profit, the partnership stands to make a profit, however, does have some risk. (Jones needs to be very sure of what those properties are selling for and under what terms and conditions the property will sell.)

When -   When you are able to lease a parcel of land or income property at a very reasonable figure.
Situation -   Jones is in the real estate business. He comes across a parcel of ground that Smith was interested in disposing of. Smith has had the property on the market for some time but has had no buyers. Smith is looking for income. The value of the property Smith has is $50,000.
How -   Jones offers Smith a 6% return on the $50,000 property in the form of a lease. Jones feels that the property can be used for a parking lot. Jones offers Smith his $3,000 lease with cost of living raises over the next 20 years. Jones then finds a used car dealer who is willing to pay the equivalent of 10% as a lease payment under the same cost of living increases.
Results -   Jones picked up $2,000 per year on the lease of the property in which he has no investment.

When -   When good properties are available through real estate foreclosure.
Situation -   Jones either has a good quantity of cash sitting in the bank earning very little interest or a good line of credit on which he may draw. Is interested in making good money in real estate and acquiring properties at bargain prices.
How -   Jones studies the foreclosures through the local newspapers and the “transcript” (a publication which gives all the recordings in a certain county, to see what properties are coming up in foreclosure). When he sees a likely property, he will order a “property profile” (a list of all recordings against a certain property over the past few years) in order to determine whether or not this is a first trust deed or mortgage or a junior lean. Once he determines that, he inspects the property if he feels this might be a “bargain situation”. As a rule, he will be unable to get into the property and may find the tenants to be uncooperative. Through careful study and checking to the best ability he may determine that this could be a bargain which could be purchased for anywhere from 1/3 to 1/2 of its market value if fixed up. He then makes arrangements to have the cash available at the sale.
Results -   Jones is able to pick up a property at less than 50% of value. It is a risk, however, due to the fact he may have to put in several thousand of fix up and have to employ an attorney to get the previous owner out of the property. He also needs to have a large amount of cash available, however, the return can be considerable.

When -   The primary reason that investors do not wish to be labeled with “dealer” is that this may preclude them from making Section 1031 tax deferred exchanges. Also, before the 1986 tax revision, dealers could not take capital gains on a real estate transaction. Under the 1986 revision, the ordinary income and the capital gains were taxed at the same rate. It is the author’s opinion, however, that this may change again shortly. For that reason, we want to be very careful about dealer transactions.
Situation -   Jones acquires a 20 acre parcel of land which he feels will be much more valuable if he splits it into 4 five acre parcels. If he does so, however, it will fall into the “dealer” category and he would be taxed accordingly. Not only that, he may be precluded from making 1031 exchanges.
How -   There are several ways that Mr. Jones can get out of the dealer situation. One would be to build on each of these parcels and retain the property as investment property. He could then show that he acquired this property for income purposes and investment purposes rather than for a dealer situation such as a fast break up and sale of individual parcels. A second way would be to split the property and then move out all four parcels at once under a land situation taking advantage of a portion of the increase in value, however, not selling off individual parcels. If Mr. Jones sells off individual parcels at a higher price this would fall into the “inventory” category and it would be a dealer situation. Also if he builds homes on the property and resells them immediately, this could make him a dealer in this particular situation. (Always check with your tax advisor.) A third way Mr. Jones could do this would be to form a “dealer corporation” which would take the property and the corporation would be retained solely for making dealer transactions keeping his other investment property “pure”.
Results -   In any of the above situations Mr. Jones would still be able to take his capital gains and be able to make Section 1031 tax deferred exchanges. This is going to become more and more important in the future under the 1986 tax revision.

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