1031 Exchange Problem With Builder

In the middle of 1031 exchange. Trying to find replacement property. I like to buy new in Phase 1 Filing 1. Only problem is this builder is asking for $40,000 ernest money on a $200,000 property. I only have $20,000 from the exchange, and was planning on putting 10% down- already approved with lender. Builder requires only $2,000 ernest money from non-investors. This property has great potential for fast equity, and I really want it. Any ideas?

Comments(3)

  • feltman1st August, 2004

    I assume you are talking about a residential development, right?

    Guess you could be moving? how about wanting your mom to live a little closer? with a 20% earnest money d/p; this builder is obviously working hard to avoid investors - the only type of situation that would attract my interest!!!

    If you can't get around the 20%; then I'd put up the entire 40k - but work hard to try to buy without the investor status as anyone who succeeds in getting around the investor status will be your competition at sales time.

  • NewKidinTown1st August, 2004

    cdstarkie,

    If you have $20K in exchange funds available now, put all $20K into your earnest money deposit. Offer the builder a contract on your terms -- $20K down now, balance at settlement, no financing contingency (you said you were already approved for a 90% loan, right).

    I suspect that the builder will be more flexible if you also request a quick settlement date, though if the property is still under construction you may not have this option.

    I had a similar experience with a new construction developer. The agent told me that they require 10% earnest money. I offered 1% with settlement in 26 days, no financing contingency. They accepted.

    Another approach if you strike out with your other offers, give the builder your $20K exchange funds and a promissary note for another $20K (redeemable at settlement).

    Since you are trying to do an exchange, be careful about trying to purchase as an owner-occupant. As Bill Exeter will tell you, an owner-occupied property is not eligible to participate in a 1031 exchange.

  • cdstarkie1st August, 2004

    Thanks,
    I had already offered the $20K- and to close in less than 3 weeks- as soon as construction is completed. Haven't tried the promissory note... Was thinking of holding as a primary residence, then quickly refinancing another property to get the funds to switch to investor buyer before closing... Other thing I was thinking is to have husband purchase the property as primary outside of the 1031 and then him selling to me to use the 1031 funds- just don't want to have to pay for 2 closings. I'll call my exchange company tomorrow and see what they suggest...

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