The 1031 Exchange Buyer Advantage

Parkview II, 333 Cypress Run, Houston

Everyone knows having money gives you a big advantage when you try to make money. But think about the advantage already owning real estate gives you when you’re trying to buy real estate.

Imagine a buyer bidding against a crowd of competitors on a pair of fully-leased West Houston office buildings—say, Parkview I and II:

“They’re not active buyers and they had a specific need with 1031 exchange money,” says Marty Hogan, associate director in Houston for Holliday Fenoglio Fowler LP. Texas is a non-disclosure state so he won’t discuss the sale price of the 333 Cypress Run properties, but local experts confirm that similar class B buildings are trading for $110 per sf to $120 per sf.

Hogan says the assets attracted 10 offers, with a partnership from Greenwich, CT ending up with the deal because it offered a short due diligence and certainty of close. “The buyers also had a large amount of equity and the purchase wasn’t contingent on financing.” Hogan tells “Given the market at this time, they weren’t high-leveraged buyers looking to get 80% to 90% of the purchase price financed so that was appealing.”

Sure, a lot of cash in the transaction is going to be pretty attractive to a seller. But other aspects of 1031 exchange requirements—if the buyer knows that’s what you’re doing—give like-kind-exchange buyers a decided advantage in any market: The seller knows you’ve got time constraints to complete the deal. And that you’ll likely have to pay a lot of taxes if you can’t pull it off. You look like a sure thing.

Of course, if the seller knows that you have no other 1031-exchange options available and the terms of your deal aren’t fully worked out yet, that’s another story.

Photo: Parkview II