Choosing the right intermediary for a 1031 exchange is essential, especially when you consider the tax consequences of even one “minor” mistake.
Here are 9 questions you should ask a potential intermediary to ensure you find the best person for the job.
1. How much experience do you have?
1031 exchange deals are far from simple, and since they involve large sums of money, it’s critical the broker you choose has at least several years of experience with 1031 exchange transactions. There are numerous rules and regulations, but experienced brokers also know how to help you find the right type of 1031 exchange for your investment needs.
2. What kinds of deals have you done in the past? What are you working on today? A month from now?
Experience is important, but a broker who has experience with the types of properties you’re interested in exchanging is even better. Not only will they have extensive knowledge of market values, what to look for in a property, and industry trends, their extensive network will give you access to off-market deals that never make it to a commercial MLS.
3. How do you get paid? By the seller, the listing broker, or the buyer?
1031 exchanges are considered two separate deals: one to sell the property, and one to buy the replacement property. However, most brokers only receive payment from sellers, so you would end up paying a commission when selling the original property.
4. Do you need to be exclusive? Or am I allowed to do a non-exclusive contract?
Some brokers prefer to work exclusively with a client, due to the amount of time and effort involved in brokering a 1031 exchange. An experienced broker, however, will not insist on exclusivity.
5. Where do the properties come from?
An experienced broker won’t send you leftovers from LoopNet. Instead, they’ll cultivate their extensive network of buyers, sellers, brokers, and other professionals in order to find a property that best suits your investment goals.
6. Are you a member of the FEA (Federation of Exchange Accommodators)?
The FEA is a national organization exclusively for qualified 1031 exchange facilitators, as well as primary legal or tax advisors that work with them. If the intermediary you’re interviewing is a member, then that is one sign they’re both reputable and qualified.
7. Do you have errors and omissions insurance?
A 1031 exchange involves transactions in which properties are bought or sold for millions of dollars. That’s why it’s essential any intermediary you choose has insurance with sufficient coverage for your 1031 transaction.
8. Do you have a fidelity bond?
Fidelity bonds protect your investment money from employee dishonesty. If there is dishonest or fraudulent behavior from the intermediary or another party working for the intermediary, fidelity bonds ensure your funds are safe.
9. Do you provide a letter of assurance or another guarantee?
Be sure to ask what sort of guarantees your QI will provide for you. A letter of assurance is an excellent sign that your prospective QI is committed to excellence and will ensure that your needs are properly addressed. By itself, a letter of this kind has mostly symbolic value, but it also helps to prove that your QI is sufficiently organized and prepared to handle your exchange.