My earlier post on Southwest 1031 Exchange closing their doors and allegedly taking off with $83 million in investor funds prompted a call from a very nice gentleman in Texas who asked me some interesting questions. I'd thought I would share...
How does an investor prevent this from happening to them? Excellent question. First understand that with the exception of Nevada, there are no state or federal regulations for 1031 exchange accommodators or qualified intermediaries (QI). No bonding, licensing, or even segregation of funds is required. There is nothing to stop your QI from running off to the Bahama's and requesting citizenship.
I'm not an attorney and am not offering any legal advise, just common sense and experience. When selecting a QI, look for a well-established company (Southwest 1031 Exchange had been in business for 16 years, so age of business is no guarantee). Personally I would select a company with multiple locations throughout the country. IPX1031 has 44 locations nationwide (yes, I've used them and have always been very pleased by their service but I'm just referring to them for illustration here). IPX 1031 is a division of Fidelity National Title Group. First American Title has a 1031 exchange division. First American Title and Fidelity National are publicly traded companies (again no endorsement implied). Does this mean nothing can go wrong because they are publicly traded companies? Well, no (uh, Enron comes to mind). But hopefully if something does go wrong you will have more avenues for recourse.
What other things can investors do to protect themselves? Once or twice a week someone will call me seeking advice on a 1031 exchange that they are currently involved in. I love talking to people (I've been frequently accused of not knowing when to stop talking). The problem is talking to someone who has already established an agency relationship with a REALTOR. I am bound by a code of ethics which basically prevents me from discussing a transaction that I am not involved in. The reasons for this are many. The bottom line is, if you are already working with an agent, I cannot help you even though I might really want to help you. I can discuss theoreticals and possibly discuss the replacement property if you are still in the relenquishing stage. Just know I might not be able to say much.
What you need to do before you sell your investment property is assemble a group of people who are knowledgeable on 1031 exchange. You need a good tax advisor with 1031 exchange experience and you need a good real estate agent with a background in 1031 exchange. There are no education requirements for real estate agents in 1031 exchange. Any agent can be involved in a 1031 exchange and have absolutely no idea what the are doing. When I first became interested in 1031 exchange I was told to attend a one-hour class held at a title company and I would learn all I needed to know. Wrong. I learned very little but believed I knew a lot. Not until after my first 1031 did I fully understand I would need a lot of education and would have to travel to get it.
Anyway, ask your accountant and agent how many 1031 exchanges they have been involved with. This should elicit a stream of anecdotes on the many facets of the 1031's they have done. At least it does with me. Listen to what they have to say. Then decide if this is someone you want on your team. Investment properties are very different from residential. Just because your best friend has sold your last three homes does not mean this is the right person to guide you through a 1031 exchange.
I've rambled enough for today. You worked hard to earn what you have. Make sure those you trust with your money know what they are doing and will work hard to protect it.
Over the years I have spoken with thousands of investors who were considering doing an exchange. Many of them were very new to the concept yet very rarely did I receive questions along these lines. How long have you been in business? Where is my money held? Is your company bonded and insured? 1031 Tax law has many grey areas which can lead to risky tax decsions even with the purest intentions. The vast majority of qualified intermediaries are honest and reputable but questions along these lines are always a good idea.
Posted by: Jeff Johnston | April 23, 2007 at 09:37 AM