by Vena Jones-Cox

In almost every seminar I’ve ever attended, a lot of time has been devoted to teaching attendees how to find good deals. Because deal-finding IS so crucial to one’s investing success, I recently decided to look back and see which methods have generated the most deals and the best deals for me. In reviewing the 150 properties I’ve bought or flipped over the last 5 years, I was surprised to find that many of the “traditional” sources of great deals haven’t worked for me, while some less obvious methods have been great lead generators. I’d like to share with you the results of my little inventory.

Good: The Multiple Listing Service. The MLS is essentially a catalog of all the properties listed for sale by brokers. Needless to say, some of them are good deals for investors, and some aren’t. The trick is to ferret out which properties have motivated sellers without making offers on all of them. I’ve honed this skill through years of translating agent lingo like, “Handyman’s special” (looks bad, smells bad, has at least one major system that doesn’t function), “needs TLC” (ugly, but not smelly, and everything works).

Why it works: Properties listed in the MLS are for sale. This may seem like an obvious statement, but some of the other methods touted as great ways to find deals involve locating owners, then finding out if they want to sell. Properties in the MLS also have the advantage that all of the information about the property is pretty much laid out for you - a major time saver. And, with the sophisticated, computerized access available to your agent, it’s a matter of a few keystrokes to view all of the properties that are handyman’s specials, or bank-owned, or in estate, or priced under a certain dollar figure - whatever you’d like to concentrate on.

Another reasons that the MLS has worked so well for me is that I am generally in the market for really ugly properties. Coincidentally, these are the same properties that most agents prefer not to spend a lot of time with. In many cases, they’re downright cooperative - particularly when I’m offering all cash and a quick closing.

Bad: Direct mail to real estate agents. In 1994, I had the brilliant idea that I might be able to find MLS-listed properties even faster if I simply let agents know what I was looking for. So I purchased 1,200 agent names from the Board of Realtors and generated a 3-part mailing send to every agent in town.

The theme of this campaign was this: if you, Ms. Agent, have a property listed that fits my criteria, I’ll make an offer and you get to keep the entire commission. Out rolled my brilliant campaign -all mailed first class, incidentally - and in came the phone calls. All 7 of them. That’s right. The week after the first letters went out, we got 7 calls. We had already made offers on three of the properties; two were out of our price range; and two were overpriced listings about to expire.

The next mailing generated even more results - about 15 calls - all basically in the same categories. The final mailing, a postcard, received no notice at all. Basically, I wasted about $1400 on a campaign that generated absolutely nothing.

What went wrong: I still think that this idea has some merit, but if I do it again, I’ll make some major changes. First, I’ll target only the 200 or so agents who list the types of properties I buy. Second, I’ll do a better job of writing the letters, emphasizing how the agent and his seller would benefit from working with me. Third, I’ll make my campaign a continuous one throughout the year, testing different letters for response and mailing the best to the same agents over and over. And lastly, I’ll personalize the campaign by following up with a phone call to the 50 or so best prospects. Oh well, live and learn.

Good: Ads in the Yellow Pages. For 8 years, I’ve had an ad in the “real estate” section of the Yellow Pages. Each year, the ad has had some variation of the wording, “I buy houses - all cash”. This ad only generates 3-4 calls a month, but for some reason the quality of the calls is better than those that are generated by any other method I’ve ever used. The sellers tend to be motivated, cooperative, and have unlisted properties.

Why it’s worked for me: I love that you deal with these ads once a year, then forget ‘em. While they’re pricey - up to $3500 per year - the phone company will generally bill you monthly for the cost. In addition, as one of the very few ads in the phonebook that promise to buy houses, I haven’t got much competition.

Bad: Advertised FSBOs. Properties For Sale By Owner, a.k.a. FSBOs, are a favorite for some real estate investors. I, on the other hand, have never purchased a property from an owner who advertised his property for sale rather than calling me.

I’ve found several problems with trying to buy FSBOs. The first is that some are not actually for sale. Some FSBOs are just “testing the market to see what kind of offer’s he’ll get. Other FSBO sellers are very motivated to sell, but don’t list because they want to keep all of the money from the sale. They don’t want to pay a commission - but they don’t want to take a lower price, either. And sometimes a seller chooses to try to sell their property by themselves because they owe too much to pay a 5%-7% commission, even if he sells it at full price.

If you are buying expensive homes creatively, these sellers are ripe for the kind of solution you offer. My strategy is to buy ugly houses cheaply and for cash, and I just don’t find this type of deal in advertised FSBOs.

Good: Flyers to Targeted Neighborhoods. Last year, I had 10,000 double-sided “I buy houses” flyers printed. I hired someone to put this flyer in the door of every one, two, or three family property they saw in my “farm”. Every 3 weeks, 3,000 of these flyers were delivered, and the response from qualified sellers was excellent. For a cost of less than $500, I made two deals that netted over $6,000.

Bad: Billboards in the same neighborhood. Here’s a lesson in messing up a good thing: hot on the heels of my massively successful flyer campaign, I decided to spring for four large billboards in the same neighborhood. The problem was that my marketing budget is only so big, and buying the billboards meant stopping the flyers. Still, I figured that the billboards would get more attention anyway, so I forked over the $1,800 and got…

Absolutely nothing. Not one single phone call. Not even from an unqualified seller. Not even a wrong number. Nothing.

The Moral? Stick with What works
.
Good: Flapping my gums. Luckily, talking - a lot - is something I have little problem with. Laugh if you will, but my willingness to talk about what I do to anyone who will listen - or even pretend to listen - has made me a lot of money.

For instance, when my new hairdresser asked me what I did for a living, I responded that I buy and sell houses. His immediate reaction was, “really? How pretty do they have to be?” Long story short: I bought his unwanted junker house for $4,000 and sold it for $7,000 the same day. When my attorney wanted to know what type of assets I wanted to protect, I told him about my house-buying business. Four months later, he referred a client to me who sold me a $35,000 property for $12,000. You get the picture.

Bad: Using only one lead generator at a time. In my experience, it’s best to use at least 3 different ways of finding deals at the same time: preferably two you’ve used before with some success, plus one that you’re testing. Which brings us to

Ugly: Not knowing which of your deal-finding strategies are working, and which aren’t! If you’re going to spend money on flyers or ads or telephone pole signs or whatever, it’s very important that you pay attention to which methods are generating good leads, and which are duds. In looking over my own deals was very surprised to discover how many great deals came from attorney referrals - a strategy that I haven’t pursued aggressively, but will in the future. If you aren’t tracking your lead generators to discover which are working and which you should give up, you’re wasting time and money that could be put to use making you deals.

In this article I want to confess a huge marketing mistake I made when I started in real estate investing. I did not keep and maintain a database of leads I generated from my marketing efforts and I did not follow up with the database of leads on a regular basis.

This might not be news too many of you, but if you are spending money on any marketing (ads, bandit signs, flyers) and you are getting responses from your marketing efforts then you need to file those leads in a database of some sort. You might use Microsoft Excel and allocate the following to each lead: The date the lead responded, how good a prospect they are (maybe a point system like 1 point for keep following up on this lead until they tell you to stop contacting them because it is that good a deal and or a #2 if they are marginal and you wish to stop after 15 contacts either by phone, letter or in person).

You may wish to follow up once a month or weekly whatever is your preference, the most important principle is that you continue to follow up in a sincere, humble manner that does not insult your lead. Remember, once their situation changes your letter, call or personal visit is going to allow them the opportunity to sell you their property. Do not make the mistake of trashing your leads from your marketing efforts, you paid a lot of money for them and just like many other forms of marketing, follow-up is a great way to convert leads into deals.

I suggest hiring someone to do all the mailing and logging leads in your database for you so that you can spend time on the most important part of your business which is making offers and getting them accepted. This will also help avoid burn out.

Is there anyone in your town that doesn’t know that you buy houses? If so, you aren’t doing as well at marketing as you should be. I hear investors saying all the time that they aren’t getting seller calls and subsequently aren’t getting the leads they need to find deals. I say step up the marketing and the sellers will call. Not only that but if you are shouting to the world that you buy problem properties, eventually you will be known for what you do and sellers will call you strictly on your reputation. THAT is cost effective marketing.

I was in Home Depot a few weeks ago and passed a couple of guys in an aisle. As I walked by, I overheard one say, “That is the house man”. Now I had never seen either of those guys and have no idea who they are but that experience lets me know that I must be doing my job at letting the world know my business is buying houses. There are many ways to let the world know what you do. Some ways are cheap and some are more expensive. You are going to have to try many things and get a feel for what produces for you best in your area. I have tried many kinds of marketing techniques and have come back to a few that constantly produce enough results for me to buy the 2 or 3 houses I want to buy every single month. They are as follows:

Classified Ads
The classified ad in the largest paper in the area is by far the largest producer of leads I have found. I know it is expensive and I know there are times it doesn’t generate calls but if you are going to stay in the biz just put it in there and leave it. Get used to it being part of the cost of doing business. I pay about $300.00 a month for my 4 line ad and that is the commercial rate. I run it 24/7, 365 days a year.

Over the past 3 years I have seen many “investor” ads come and go. Most folks put them in for a couple of weeks and then pull them or try just putting them in on the weekends. IT AIN’T GONNA WORK! Put it in the paper and leave it. It will more than pay for itself, believe me. If you are worried because there are several in there, don’t be. They are there because they are getting calls. Just be sure and actually answer your phone.

When a new ad pops up in my paper, I will always call. 9 times out of 10 I get a message. This is a big turn off to someone who needs a solution now. They want to talk to someone who can qualm their anxiety and tell them everything is going to be alright. Your answering machine won’t do that. As for what to put in the ad, you will have to work on this one. I have tried several and the one I have now hasn’t changed for over 2 years. I haven’t changed it because I get calls. My ad is:

CASH FOR HOUSES
In 48 Hours!
Any area, price or condition
Call xxx-xxx-xxxx

Now I have had other investors jockey for position and change their ad copy to be ahead of mine in the column but it hasn’t made any difference. Don’t worry about those things, just get the ad out there and leave it. It may take a few weeks to get going but sellers will call! Once you have your classified ad running than start working on your other ideas. If you only implement one idea a week, within a couple of months you will have a tremendously powerful real estate buying machine.

Ads in the “Freebie” Papers
I also run ads in the freebie papers here. These are the “Thrifty Nickel”, or the “Green Sheet” or whatever they are called in your area. I run both a column ad and a display in this paper and spend about $150.00 a month for these. They pull in seller leads fairly well and have always justified the costs. Remember that these guys are usually open to negotiating on your rates and you can probably get a better rate if you commit to a longer contract.

Bandit Signs
Bandit signs are great. They are some of the best lead generating tools around. I have yet to put out a bunch and not be bombarded with calls right after. I just don’t put them out that often. I might put out 5 or so a month and the ones that stay continue to pull in calls. At an average cost of less than $2.00 apiece, they are one of the best values around. Check the internet for sign companies for cheaper prices. I use 18 x 24 signs and place them at high traffic intersections around town. I also place one in the front yard immediately upon buying any house.

I have bought several homes in the same neighborhoods as a result of this. You can either use contractor stakes or the wire stakes with your signs. I like the contractor stakes because they don’t bend like the wire ones, in addition, they are cheaper. Just nail the sign to it with the roofing nails with the orange or green plastic tops or you can use screws. There are many variations on what your wording on the sign can say. Keep in mind that traffic will be moving so you want to keep your message short and sweet so it can be read. My signs say:

I BUY HOUSES
Cash in 48 Hours!
Any area, price, condition
xxx-xxx-xxx

Notice that it is the same as my newspaper ad? I like to brand my advertising because I think that helps with recognition. My signs are white with dark blue letters. Some folks swear by black on yellow or black on orange. Again, I say it’s not what or how you say it but the fact that you DO say it that counts. When dealing with bandit signs, be sure that your local code enforcement laws are tolerant of them. In my area, the City of Macon is very lax on them but a few miles down the road in Warner Robins they are super strict and will fine you in a minute.

Flyers
Flyers are another inexpensive way to get the word out that you buy houses. Just create a flyer telling people what you do and how to get in contact with you. Make copies for $.05 cents apiece and you have some really inexpensive advertising. It really is that simple. Then place these flyers on every bulletin board in your town. I also place some of them in those plastic sheet protectors so the rain won’t destroy them and put them up on telephone poles around neighborhoods I like to buy in. While not as large as the bandit signs, on poles actually IN the neighborhood they still attract calls. I carry a file with me in my truck and place them up whenever I stop at a grocery store or Wal-Mart. Some other places to put them are:

• Laundromats
• Taped to the inside of Pay phones
• On the counter of any business that will allow you
• Bulletin boards at Wal-Mart or K-Mart
• Grocery store bulletin boards
• Fax to Mortgage Brokers
• Fax to Real Estate Agents
• Take them Door to Door in target neighborhoods
• Employment Center Bulletin board
• County Courthouse Bulletin board

These are just a few examples. Any place that will allow you to put one is a good place. You can never let too many people know that you buy houses!

Promotional Items
These are some of my favorites and most fun. While they are not the top producers of leads or the least expensive, they will sure set you apart from the average investor.

Pen Knives – These tiny Swiss army knives are the coolest. They are actually key chains engraved with your message, mine being: WE BUY HOUSES- All cash or take over payments within 48 hours! Xxx-xxx-xxx I guarantee if you give one of these to someone they will keep it and if they think of selling, they will think of you. They are about $1.50 apiece.

Key Chains – I give these to all my buyers with the keys to their new house on them and leave them all over the place. They come in the shape of a house or #1 or whatever style you like and have your message on them. You can guess what mine says. Cost – about $. 25 cents apiece.

Pens – I use these all the time. Whenever I sign a sales receipt or anything I leave my pen. I can’t tell you how many calls I have gotten off of these things and since I always need one, I always have one to give away. My attorney even has a supply on his closing table. Mine are the “click” type and have my message repeating around the barrel. I have two types printed. One for sellers says “We Buy Houses!” and one for buyers says “Everyone Qualifies”. Cost – about $.21 cents apiece.

Coin Holders – These you hardly find anymore so everyone is surprised when I have them. I leave these things everywhere. Mine are bright yellow with blue letters and my message. Cost – about $.30 cents apiece.

I leave all of these promotional items everywhere, on the top of gas pumps, on end-cap displays in grocery stores and in department stores. I look at it this way, if I give away 100 pens, 50 knives and 50 coin holders a month, that is only a little over $100 bucks a month. That is still cheap advertising. You can get any of these promotional advertising products at National Pen. Their website address is www.pens.com or you can call my rep “Madison” directly at 1-888-672-9810. Always ask for her specials and tell her William sent you.

Business Cards
I order business cards by the 1000’s and you should as well. They are cheap, mine are about $50.00 for 2000, and I pass them out everywhere. I leave my cards everywhere, in pay phones, on restaurant tables, my kids even have their own supply to pass out. Try to get a box a week out. The card doesn’t have to be fancy, in fact the simpler the better. My card is bright yellow with blue letters and says:

WE BUY HOUSES
Foreclosure? Need Repairs? Bad Tenants? Divorce?
CASH IN 48 HOURS!
OFFERS MADE ON ALL CALLS!
XXX-XXX-XXXX

Car Magnetics
Magnetics are one of those things where you spend once and get use for a long time. Mine cost about $75.00 and are yellow with blue letters. They say:

WE BUY HOUSES!
FA$T CA$H
XXX-XXX-XXXX

I have gotten several deals from these signs. Remember to order a smaller set for the back of your car/truck. People have more of a chance to read the message when they are riding behind you.

Clothing
I like golf shirts and oxford dress shirts with my logo on them. There’s plenty of advertsing houses that will help you design a logo if you don’t have one or use the one you already have. There is no charge for set up and all items ordered include your embroidered logo free. They also have cool baseball caps and other stuff there as well. They have specials for new customers at great prices.
I pass my hats out to everyone I know who wears one and have given away many shirts as well. They really look nice and present a nice image for your business.

Other Advertising Tools
There are many other forms of advertising, some I have tried in the past such as billboards, door hangers, yellow pages, television and radio advertising. I even have a traveling billboard, an old SUV painted bright yellow with blue WE BUY HOUSES! and my phone number that I drive around and park overnight at different places. It gets the calls! Get the marketing going and let the world know who to call when they have a house to sell. If that phone isn’t ringing, you aren’t making money!

You’re a Real Estate Entrepreneur or Investor, and you’re out there in the market place looking for deals. I have a question for you.

Are you doing a bit of advertising and just hoping that a deal will fall in your lap, or are you operating in a way that makes certain it will happen. If you don’t have a process for making sure deals happen, you don’t yet understand the importance of having a marketing plan.

The sad fact is that even after all their training, less than one percent of all real estate entrepreneurs and investors actually have a marketing plan. Even though it’s very simple, don’t underestimate its power.

The Most Important Thing About Marketing is to Have a Marketing Plan!
1) It’s a concrete result you put out for your mind to seize on and strive to achieve.

2) It allows you to clarify exactly what you want to achieve in the coming 30 days.

3) It allows you map out the activities needed to achieve that plan.

4) It allows you to plan in advance to delegate off the lower paying activities, so you don’t end up doing them.

5) It allows you set time deadlines, to hold others accountable so everything gets DONE!

6) It results in you being free to concentrate on your highest payoff activity: Making Offers on Great Deals!

7) You have a business that operates consciously, not by accident.

More people fail in real estate because they simply do not have a plan or goals. You should have a detailed marketing plan of what you want to accomplish and how you are going to accomplish it.

And, don’t be vague, either. Things like, I want to make more money than I can ever spend, and I want to be rich, and I want to make $10,000 a month, are not plans. They are too vague, and they won’t help you get there. Be as specific as you can possibly be.

In planning for monthly revenue, try to put your money goals in cash income, not gross revenue. I know gross revenue is what you’re used to thinking in, but cash is obviously more important. It’s what you take to the bank, and it’s what pays bills.

First, examine your current numbers. More than 80 percent of all real estate entrepreneurs know how many houses they are buying each month, but they don’t know where those houses came from and how many leads they had to process to develop them into the single deal. And, this is a deadly sin.

You Simply Must Know How You Are Currently Doing
You should know:

1) The total leads that call each month (each week is more manageable),

2) Where those leads come from,

3) How many “qualified” seller prospects (i.e. those that you are willing to invest follow-up in if they don’t sell now; they have motivation, you are interested in the house.) you get each
month,

4) The ratio of total to qualified,

5) The number of deals you close,

6) The ratio of closed deals to qualified leads – for each lead source

7) How much you make from each seller,

How much it cost you to acquire a new seller.

With this information you can look at your current resources, look ahead, and then plan out what you want to have happen. The number of deals you want to do, the amount of money you want to make.

For example, let’s say you are bringing in around $10,000 a month and your average deal gives you $5,000. Yes, I know that’s low, but for the sake of example. That’s two deals a month. These are cash proceeds and after expenses you net 50 percent of your gross or $5,000 a month. And let’s say that you want to double your net income next month.

You will have to get twice as many deals to double your business. Goal? Four deals a month, or one a week.

Let’s say you currently get one deal a month from a classified ad, and one deal a month for mailing expired listings. But, you get ten qualified calls a month from his classified ad and 10 qualified prospects calling a month as a result of mailing expired listings. So, you currently close ten percent of your prospects.

First, you can improve on this situation by improving that twenty percent closing ratio. By improving your closing ratio by things like more precise targeting, the present lead-flow would stay the same, you’ll get your same twenty real prospects and achieve your goal of doing four deals next month.

But assuming that’s not something you have control over right now, the other way to double your income in the next month is to double the number of qualified prospects you talk to and make offers to. So instead of getting 20 qualified leads to call, you would need 40.

Your plan to get forty qualified prospects would need 10 to come from expired listing mailings, 16 to come from flyers in target neighborhoods, 4 from business cards handed out everywhere, 6 to come from signs placed in the ground at high traffic count intersections, 10 to com from classified ads that drive people to the website. Total: 46 prospects. Cool! That’s six to spare.

With this number of leads coming in you have what is needed closed four deals and reach your goal of doubling your net income. Actually, it’s more than doubling because your fixed expenses don’t increase with the income.

You should have a monthly plan. Schedule thirty or forty minutes out of one day to make up your monthly plan and see how you did last month. Schedule this time and keep to it. Don’t do any work or take any calls during this time. Keep it strictly for planning. If you do this and you allow yourself to get into the whole spirit of planning, and making things happen on purpose, you will easily double your income in twelve months.

Your Monthly Plan Should Include The Following

1) A goal for total net income.
2) A goal for number of deals signed up
3) A goal for number of appointments made.
4) A goal for number of qualified, interested sellers.
5) A goal for total number of leads.
6) Average net income from each deal.
7) The number of prospects you have to generate to reach your goal.

A detailed plan to generate the number of prospects you need. Your plan doesn’t have to be typed out or put into a computer. It can be handwritten on paper. It doesn’t have to be pretty.

Scratch pad plans are good enough. The important part is that you do a plan every single week and keep on top of things.

This is a simple thing to do, but it is just as easy to not do. Blowing it off is the equivalent of you absolving yourself of responsibility for your business. On the other hand, taking the time to think through your goals each month, both for income, and marketing activity, then committing them to paper will make things start happening by plan and put you in control of your business.

by Gerhard Cronje

Dear Friend,
What I would like to address in this article is something that is disturbing to me. Over the past few years I have seen how many investors after a real estate seminar or buying a new course would jump on the band wagon of the usual marketing strategies we are all familiar with. You know, bandit signs, classified ads and postcards too just name a few. Now, these marketing strategies in themselves are not bad but it is sadly the method how these marketing activities are applied where investors get into trouble.

Not Having a Marketing Strategy At All

Just placing bandit signs in neighborhoods and intersections without planning, testing and reviewing the quality response rate from your signs is a sure recipe for failure.

Not Identifying Strategies That Work and Sticking With Them

There are many ways to skin a cat. Some ways are better than others. It is the lack of not knowing what works and not knowing what works well that leads many astray and cost them a lot of money in the process.

Not Staying Within a Budget and Wasting Your Money

If you only have $10 or $100 per month or more that you can spend on marketing then you need to stick to that amount and use strategies that fit into your budget otherwise you might soon be distracted from your real estate investment business by facing a cash crunch.

Having No Competitive Advantage Above Other Investors

I have a personal bias towards attorneys and using free publicity as my competitive edge. What is yours? If you don’t know, develop one.

Not Being Persistent.

Sadly many quit with a huge database of leads they accumulated from haphazard marketing efforts not realizing they have unrefined gold in their hands. All it asks is some nourishment and follow up.

Following the Herd and Using the Same Marketing Strategies

Ask yourself, with all the same strategies used by fellow investors in your market, why would a seller call you ? If you can’t answer this then you need to think of a different strategy like marketing to attorneys. When you market to attorneys there is no competition and no negotiation. What I like about this approach is that the attorneys may times would send pre-qualified leads your way which makes negotiations much less stressful and complicated.

by Sandy Gadow

When you are exchanging property under a 1031 Tax Deferred Exchange, you may choose to “direct deed” your property to the buyer or have the seller direct deed his property to you. Direct deeding is achieved by deeding your property directly to the buyer rather than to an intermediary, which initially was the common practice in 1031 tax deferred exchanges. The seller of the property which you are buying then deeds his property directly to you, skipping the deed to an intermediary.

An IRS ruling in 1990 provided that it was no longer necessary to use “sequential” deeding in a tax-deferred exchange transaction. Under sequential deeding, a deed from the Seller was given to an intermediary who then deeded the property to the buyer. Most property transfers in tax-deferred exchanges today use “direct deeding” rather than “sequential deeding.”

Using direct deeding reduces the risks involved to an intermediary, who would be in title for a short period of time and exposed to risks of liability for asbestos or other environmental hazards and the disclosures required for those risks. Direct deeding also eliminates the payment of duplicate transfer taxes which are normally charged each time a deed is recorded.

There are several safeguards you can use when direct deeding. Be sure that if you are using a qualified intermediary, that your intermediary has an agreement with your buyer for the transfer of the property to be exchanged. Also be sure that your intermediary has an agreement with the seller of the property you will be acquiring which allows for the transfer of that replacement property to you.

All parties to the agreement must be notified in writing of your intention to use an intermediary in the exchange. If you are using a qualified intermediary in your exchange, typically the intermediary will have an affiliation with a title or escrow company, which can then provide all the services required to handle the closing, such as title insurance, escrow services, and document preparation and transfers. There are several advantages to using a professional intermediary in your exchange.

These advantages include reducing the potential liability for the structure of the exchange and any tax consequences, shielding the principals from accepting additional liability, and providing an audible trail by way of the assignments and exchange agreements.

When choosing a tax deferred exchange, be sure to be aware of the tax regulations required to qualify the exchange under IRS tax regulations. These regulations will spell out how to identify your replacement property and how many properties you can identity, how you can structure the exchange, how to direct deed your relinquished property to your buyer, how you can receive remaining cash that you may not choose to invest in the replacement property, how to receive interest on your exchange balance in addition to how to handle the closing and other transaction costs.

by David Whisnant

This article is meant to be an introduction on the topic of performing tax-deferred exchanges. There are a number of legal hoops that the IRS makes you jump through to complete a tax-deferred exchange, but they are actually not that complicated once you study up on them a bit.

A tax deferred exchange allows us to sell a piece of investment (i.e. rental), trade or business property, buy a new property with the gain or profit from the sale, and not owe taxes on the sale immediately. If you eventually sell the new piece of property, you would owe taxes at that time. Generally, all gains and losses on sales of real estate are taxable, but an exception lies where the property sold is traded or exchanged for “like-kind” property. The new property is seen as a continuation of the original investment, so taxes are not due at the time of the sale.

Many people view tax deferred exchanges as being for huge corporations, or only for professional investors. I believe that everyone should take advantage of these where they can. Strategy — purchase a rental home below market value, rent it for a year, sell it, and buy two rental properties with your gain. Note that if you do this too many times, the IRS may take the view that you are not a long term investor, and disallow such exchanges. When you get ready to do a tax-deferred exchange, you will need the services of a qualified CPA or Attorney. This is a basic introduction only, and you should always get professional advice from someone who has all the details on your deal, since so much liability is at stake. In my course I list the company that I use for these real estate exchanges. They are a national company and can help you out wherever you are in the country. I have used them for several deferred exchanges, and they have been an excellent resource and extremely competent.

Let’s look at how one of these deals would work. Assume that you own a rental property that has gone up in value. You’d like to sell this property and then reinvest the proceeds into some other rental real estate. You can avoid the tax bill if you can find suitable property to exchange for. The difficulty of the tax deferred exchange is that the property you are going to purchase must be identified within a certain amount of time, and it must be closed within a certain amount of time after it is identified. Unfortunately, no extensions are possible.

Identifying Property
You must identify property in a written document signed by you, and delivered to the party assisting you with the exchange (cannot be related to you!) on or before 45 days from the date you sold the original rental property. There is a growing body of support for identification of properties, and closing of new properties before the original property is sold. This is somewhat controversial and outside the scope of this discussion.Technical Note: You can identify more than one property as the replacement property. However, the maximum number of replacement properties that you may identify without regard to fair market value is three properties. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. Note that you don’t have to close on all the properties you identify. You can name several if you’re not sure what will close, or not close, but you have to observe the rules in this technical note in terms of the value of properties you identify. If at the end of the identification period you have identified more properties than you are allowed, you are generally treated as if no property was identified. This means that you pay taxes!

Time Limits For Completing the Exchange
If you have correctly complied with the identification phase of the exchange, you have up to 180 days to complete an exchange, but the period may be shorter. Specifically, property will not be treated as like kind property if it is received more than 180 days after the date you transferred the property you are relinquishing, or after the due date of your return (including extensions) for the year in which you made the transfer.For multiple property transfers, the 45 day identification period and the 180 day exchange period are determined by the earliest date a property is transferred.

Avoid Boot!
Boot is defined as any money or any type of property of unlike kind (example, a car received as part of down-payment). You will be taxed on this boot regardless of whether or not you carry out the exchange correctly. You will want your exchange company, or attorney to examine your transaction closely to make sure you don’t receive anything that could count as boot. Special rules apply for exchanging property with assumed mortgages. Summary
The tax-deferred exchange is a great way to maximize your wealth. By keeping your investments growing without immediately paying taxes, you can do wonders for your net-worth. You will need to search out a good intermediary. I am happy to provide the name of mine for our members. This may seem like a dry subject, but it is important to understand when you begin to accumulate some rental properties.Remember that this article is to provide basic information only. If you are planning on doing a tax deferred exchange, you really need to speak with a professional that handles these transactions on a regular basis. Information here is subject to change by IRS regulations or statute, so be sure to use current information provided by your accountant or other professional when planning a strategy involving tax deferred exchanges.