Seth: Hey, everybody. How's it going? This is Seth Williams and Ajay Sharma, and you're listening to the REtipster podcast. This is episode 177. Today we're talking with Logan Fullmer.

So Logan reached out to me recently about coming on the podcast, and when I heard more about his experience and his story, he seemed like a really great fit. Logan is an investor in land and commercial real estate, and he deals with some of the toughest title issues out there and uses them to kind of find some incredible opportunities. And these are three areas that I have a lot of interest in, and I know a lot of other people in the REtipster audience do as well. We're going to talk all about that and learn everything we can from him.

Logan, welcome to the show.

Logan: How are you doing, Seth?

Seth: Doing great. I appreciate it. Thank you. So why don't we start from the very beginning? Why don't you tell us about your real estate investing story? How did you get into it? What did you start with? How long ago was this? And then when, how, and why did you make your foray into the land business? How did that come about?

Logan: Well, about ten years ago, more or less, I'd kind of gotten my first real job. I inherited a little bit of money early on, and I was a poor steward of that, so I spent it as fast as I got it, just about. And it was a substantial amount of money.

After that, I thought, oh, my gosh, I got to figure out how to be an adult. I thought the $1 million was going to last the rest of my life, and it lasted, like, three years. So I went up and worked in the oil field, and after a couple of years, I started saving a little money and thought, okay, let me try this again. And I knew that I had to invest, otherwise, the salary that I made wasn't enough to get me much further in life. I bought some low cost vacant land just outside of downtown San Antonio, just outside of the MSA.

And those lots I was buying for between $5,000 apiece back then about ten years ago, and I'd already lost. I already had an experience with risk and loss and poor choices, and I went in with a bigger concern about my downside risk than more people usually do. Usually, folks are looking at how much money they're going to make on the upside, and they completely forget about all the risks. And this happens. A large part of the people, even after their experience, it continues to happen.

When I looked at this, I thought, what have I seen in the past? How did people make money? And I saw folks buy land and buy houses in older parts of town. And as those parts of town would turn around over a ten-year period, they would get some value, not just rental income, but just truly appreciation. And I remember seeing a couple of different big cities in Texas.

So I kind of had this thought in my mind. San Antonio was very close to where all the oil field areas I was working in. And San Antonio is the 7th largest city in the United States, but it's very undervalued. So I could buy these lots, literally. There was a highway that divided the central business district from some of the lowest values in San Antonio, so you'd have big time value and then nothing.

And I thought, boy, if the value spilled over that one highway, we're in good shape. So I bought a couple of dozen lots with a couple of years of my savings. So $5,000 to $10,000 dollars apiece. At that time, I was thinking, how much lower can the value go? They can't get that much less valuable than $5,000 apiece.

But if they do anything like the other downtowns in the big cities in Texas, they could go to hundreds of thousands apiece. So I've got a good shot at a lot of upside, but the downside risk is very low. So that made me feel comfortable spending every nickel that I had at the time. And the neat thing is, that segment of the story is very short, because within about two years, the market moved. I got really lucky and put all my chips, pushed them across the line there, and bet on black.

Thank God black was the color and the values just started skyrocketing. And the way I found out is I got a call from a realtor that said his client wanted to buy one of my lots for 200,000. And I was all in the whole portfolio for about 300,000. So you can imagine what changed in that moment.

Seth: You didn't learn about the land business from some land flipping course or something like that. You just kind of figured this out on your own, is that right?

Logan: Right. So this was ten years ago. So what we had on YouTube, that's just at the time, the guys, like all the guys that we look at as the old timer guys now, they were just starting to play with YouTube or hadn't even had a channel yet.

Seth: Yeah, that's kind of unusual. I do come across people like that from time to time who figure out land on their own, like, without somebody prompting them and kind of showing them the light. But it's not that often.

I mean, usually people hear land and they just are kind of turned off by it and they walk away. But it sounds like you kind of figured it out on your own and put the pieces together. It's pretty cool.

Logan: My dad was a CPA, so I'd gotten to see his stories about a lot of wealthy people because he got to see their taxes. Now, my dad wasn't wealthy, but I got to hear these stories about folks. And I realized folks usually made their money investing. It was a lot fewer people made it in just some kind of special career. And I realized that I couldn't afford a lot of the investments that were out there at the time. So I kind of defaulted to land because I just happened to be in a situation where someone said, oh, wow, land is cheap in San Antonio.

And I thought, I don't have a lot of money. Land is cheap and it's stable, whereas stocks, I don't understand that. And that'd just be a bigger risk than I took. So that was something that was affordable, it was close and I felt like I understood it because the lot that I bought was right there and no one could move it and it couldn't go up or down in value overnight like a stock. And I thought, this is the easiest thing I can get close to in my proximity and timing.

Ajay: Super interesting, Logan, because I feel like you interpret risk very differently than most. I think a lot of investors and folks listening get super excited at the prospect of doing massive deals, which I do too. I like doing deals where you can add some zeros at the end.

But I want to highlight your philosophy as you were getting started You essentially said, well, it can't go any lower. So if I'm investing five grand, I can't lose more than five grand a pop. But these things can go to the moon, essentially, right? And so they're not really going to go down to zero because their land in San Antonio, this is a great area, but I have a lot of upside here and I think investors talk a lot about asymmetric bets. But you basically figured asymmetric bet out on your own. Just reasoning through, let me throw some money at this thing.

I'm curious, is there a reason as to how you thought about risk back then and why you perceived it that way or anything kind of ingrained in how you grew up?

Logan: I didn't grow up with really much, just middle class, whatever, nothing really special, but neither up here big into investing or any of that stuff. But when I inherited some of that money, I didn't realize it was nearly a million bucks, and it was just the largest amount of money I’ve ever seen. I never had more than $10,000 or $5,000 in my checking account at one time. So when that kind of money came in, I thought I was rich for life. I was young, I wasn't paying attention. And when I lost all that or just blew through it, basically, I remember thinking, oh, my gosh, money can go so quickly. I need to respect it more. I had a good shot at it and it's all gone.

And I remember the next time when I worked to earn a couple of hundred thousand dollars. I remember it took me several years, three years to earn and save this after my income, after my expenses, after my taxes. And I remember thinking, gosh, it can go so fast. So I was really worried about losing it.

Seth: Yeah, for sure. I know a lot of people who went through the last big recession in 2009 and all that, myself included. It kind of scarred me to this day. I kind of have a hard time going out on a limb because I always see the world through that lens. I mean, that's how I entered the real estate investing market. Just saw it, it's very risky.Things can go wrong, things can go terrible, which they can. But that was kind of an unusually bad time back then, and that was not an appropriate way to think over the past ten years, as things have been going up and up and up.

So, it's kind of a blessing and a curse, I guess, when you have that sort of scar in your upbringing, right?

Logan: So there's an interesting balance. I met a guy, he's a local CPA. We started doing business together a couple of years into this. And it's interesting because I still had this care for the downside and risk mitigation. But he is ultra conservative. So there were times where I was willing to push the envelope more, although not near as risky as some people. I kind of helped things grow and expand, but he was always there to remind me, if you screw up, this is how bad it can be.

And I always remember thinking, man, I can swing for the fences like some of these guys that take on huge amounts of debts and take on projects that are real risky, that might have massive multiples, but if we screw up, we have to start all over again. And I remember thinking I would rather grow aggressively, but in a manner that I could control and felt comfortable with than looking for that one in a million shot. But I have good odds that I'm going to lose it all or bankrupt. I would rather be stable and consistent and grow in the long term than keep swinging for the fences.

Because I met guys like that the old time. A lot of developers have been bankrupt multiple times. They've been divorced a couple of times. They've had to move back into that small apartment multiple times from some lavish life. And man, that's stressful, dude. I didn't want that.

So anyway, that mattered to me a lot. But that was an interesting part. But to me, what was more valuable than that particular chain of events was when I went back to the market after I'd found that my lots had gone up in value and I sold several of them. At that point I said, great, I'm going to go buy some more of these $5,000 lots. And I realized there were no more $5,000 lots.

Ajay: Yeah, where'd they go?

Logan: Yeah, there's a really unique situation though. One of the lots that I bought, I got sloppy and I didn't buy title insurance. I was going through this slow process of going to title company, getting a commitment, closing, blah, blah, blah. And this one guy would sell me his for $5,000 or $4,000, but he said, “I'm not going through all the title company stuff. Just come pay me for it.”

So I gave him a check and he gave me a deed that recorded it. But later on I found out that I bought one of five deeds. That's why I didn't want to go to title because he would have to share the proceeds with four other siblings. And I went through this process that summer of calling lawyers, asking them how to fix it, making calls to property, the other owners trying to get this thing in front of a probate judge (it turned out I only need an affidavit of heirship), just all these steps.

And I figured out how to fix that. I picked up the other shares and then I also found there were some judgments and liens along the way. And I had to call these creditors and negotiate them. Some of them were so old that they were no longer valid. I learned a whole lot of information about that property. And I remember when I went back to the market to try to find those $5,000 lots that were no more, they were $100,000, $500,000. I remember thinking, “Wait a sec, there were a lot of people that couldn't sell because they had problems with title.” And I thought, I bet they haven't sold still.

So I called some of those people back and none of them had sold. So I remember thinking, well, there are problems but if I can figure out how to solve them, maybe I can get a deal. And that's when I started offering people just pennies. Like, literally, I'd still offer them the $5,000, but the difference is, I said, hey, you can come to the lawyer's office to pick up the check, and I'll get a deed from you.

I know we got multiple owners. I know we have title problems, but I'll basically inherit your issues. And that's when I started buying the land with problems in tow and figuring out every possible way to solve the problem. And that more or less became the basis of my business model for today. That was eight years ago.

Seth: Maybe that's a good segue. Tell us about your curative title work. Is this like a separate company you have where you help people solve title issues? Let's get into that a little bit.

Logan: So it basically has become the basis of a lot of my companies. It's kind of the feeder to my portfolio. It became the feeder to my cash flow machine. But at the end of the day, everybody's out buying property from wholesalers, sourcing their own deals, figuring out any way to acquire real estate. And I realize I'm looking at the downside risk.

If I can buy something for substantially less than it's worth, I can make a mistake valuing it. I need to liquidate it real quick and get some cash and still make money. All the things can go wrong, and I can still do okay because I got such an extreme discount on it. And that really mattered to me.

So I started acquiring properties with these problems, and it started translating. Into big ranches, I bought apartment complexes with problems like this. I'm talking industrial sites. You'd be absolutely amazed how often this problem exists in the rest of the commercial world.

Seth: If I understand right, are you intentionally going out and trying to buy properties with title issues? Is that what's going on? Or you're helping other people solve their problems with title issues, or what is it you're doing in that?

Logan: My goal is to buy them with the problems, I guess, inadvertently solving other people's problems along the way. But I'm the one that most of the time gets the bigger financial benefit out of that. I'll pay them some amount of money for their share, and then I'm taking on their problems. Then I've got to solve those problems that now become mine because I've got the land.

So at the end of the day, I'm looking for something that's got trouble. It may have judgments or liens, like an IRS lien or a creditor lien that's more valuable than the property actually is. As a result, these folks cannot sell with title insurance. It doesn't work. I'll buy it for a very small amount of money and then at that point I'll go in and negotiate with the creditor, sue the creditor, I'll deal with all the title issues. Maybe I have to open a probate. Maybe I've got to go find some owners that are lost or disconnected, things like that.

And once I get through solving those problems, now I have an asset for $0.30 on the dollar and I can decide, is this development land? Is there something I'm going to go sell to the market and capture my equity? What am I going to do with it?

Seth: So it sounds like the big advantage of buying properties with these title issues is basically you can get them at a huge discount. I think you just said $0.30 on the dollar, that kind of thing. It makes me wonder, though, what kinds of issues are we talking about and how costly and time consuming are they to fix those problems?

Logan: Yeah, I'll say one of the most common ones is multiple owners in unresolved estates. I call them kind of “orphaned estates.” That's one of the big issues.

Another issue is a break in the title chain, meaning someone didn't file a deed 40 years ago and then the next person that bought it sold it to the next person. They didn't get title insurance, but there's this chain of transactions, occupants, users. There's just this gap in the title chain for an unrecorded deed 30 or 40 years ago. Maybe you'll have an unreleased mortgage that's 70 years old and there's no release. And the owners can't find a mortgage company because they're out of business.

Sometimes you'll have a bad deed. Sometimes someone will sell this property and they'll write the legal description wrong. But that deed is from 60 years ago, maybe. That's a problem that has to be solved or the property can't sell the judgments or the liens. Maybe somebody didn't pay their child support liens. They have 250 grand in child support. The properties are 200. That doesn't make sense. All of these problems that prevent a property from selling.

I'll give you an example. Somebody wants to sell an apartment complex. He contracted to sell it. And the guy who was the seller changed his mind and did not close. He backed out. But the person who wanted to buy it still wants it. But he's in this spot. Well, I'll buy a specific performance claim from him and go sue that seller for performance, as long as there's enough equity in the deal. And I'll become the buyer of that after I win a lawsuit, basically.

So, in that case, you got to have millions of dollars at stake. I mean, that deal is $150,000 worth of legal fees. Took two years. I had a couple of million dollars in equity on the line there. So that is an expensive, long, high value-solve.

But some of these aren't so bad. I'll give you an example of a very common event. A property is worth 200,000. I'll buy it for ten or 20 grand from two or three owners. But there are half a dozen lost owners, and none of their probate, none of their heirship has been not. I'll just buy shares at a time and go find people one at a time, and we'll do a big affidavit of heirship or a declaration for heirship in the local probate court. That might cost… I might spend another 20 grand buying shares and doing a declaration of heirship. So that would be on the low end of the expensive side, and then the apartment specific performance would be on the high end of the expensive side.

Seth: In terms of these different issues that you're mentioning, some of them I understand pretty well because I've seen them many times. Some of them, I haven't seen them. But when I think of breaks in the chain of title or multiple owners and that kind of thing, can you just file a quiet title action to fix that stuff? Or is it way more convoluted than that?

And what happens if you take on one of these projects and you can't solve the title issues, and now you have a property you don't really own? Does it ever happen? And what's the risk of that?

Logan: Okay, that's a two-part question.

The quiet title lawsuit is not for multiple owners. That would be a declaration of heirship. That would be a different situation. So you need to be very sure that the share you're buying is legitimate. I've bought shares of properties before that were not shares of properties. So I got a deed for somebody from somebody, and paid them money, and that deed was worth nothing. So I've made that mistake. But I also bought six deeds to the same property, and I got those deeds for a good deal. And that last 7th one that I bought that was worth nothing. Didn't matter because I paid so little for them. I was still in the money.

So that happens a lot. But a quiet title action, a lot of times a quiet title or trespass to try title, those are two curative lawsuits that basically can catch a lot of different problems. A title break in the chain, that's a really common word that I'll use for that type of suit. And what you're doing is you're basically saying, this is my property. I'm saying it's mine. And unless anybody else comes to challenge that, the judge is going to rule in my favor and give me a full order for title. That works on some of these problems.

But when you're talking about the heirship stuff, the simple answer is you have to find everybody, and you have to have a bunch of people sign off on a genealogy report. And in Texas, we have a statute, an affidavit of heirship. And a lot of family members have to sign off on this after this big genealogy project has been done that says, this is my family. These are the heirs. Then an attorney compares the intestate succession chart in the estates code that says, these are the heirs. According to the law, if there was no will, it's a big document that gets filed in the land record, and that becomes your title chain instrument that connects all of those breaks in the title chain from all the owners.

To me, some of the ones I've done have been the worst. You're talking 60 and 70 heirs. So you have to find people all over the world sometimes. Sounds like an absolute nightmare. It can be. I made a million dollars on a 60-heir property. I spent $250,000 paying liquid taxes and buying shares. So I was all in for about 250. It took about six or a little less than six months, about half a year, when I got down the way and resold the property. Sold the property for a million.

So it is a hassle. But for a million bucks, I'll take that hassle

Ajay: Me, too!

Seth: It almost kind of reminds me of when you're trying to subdivide or get entitlements for a property where there's some. Risk there that maybe this won't work out. Like, I'm sinking a bunch of money in that maybe it won't come to fruition. It sounds like kind of a similar thing where you're doing a lot of this paperwork to put the pieces together. Has that ever happened where you went all in on this thing, and you couldn't get all those heirs to sign off, and you're like, well, I'm screwed. I mean, does that ever come about?

Logan: It's happened, but I'm not screwed. So let me talk about the entitlements for a minute there. You're saying you're going to spend all this money and you might not get the entitlements. There are tons where you're not going to do well in that case.

And I've got several, very large, I've got a 250 and a 450 lot subdivision happening right now, one in Austin and one in Dallas. But I bought each of those 30% below market. So I can screw up and spend a quarter million dollars on engineering fees and legal fees and all this.

And let's say I don't get the entitlements. I can still take the property to market, sell it for fair market, and I'm not going to lose any money. I'm going to make a couple of bucks, but I'm going to get reimbursed for my legal fees and my labor and time and the investment. I'm going to get all that back because I bought it below market.

Seth: And that's assuming we have a firm understanding of what market means, right?

Logan: I'm not going to spend three, four, five, 6 million unless I know what market is.

So there are times where I'll pass on them. When I'm looking at the 100 acres it was $7 million. I've got another one that's 200 acres, that's 450 lots, that's $6 million. So if I'm going to spend that kind of money, I'm going to figure out what it's worth and feel good about it, or I'm not going to buy it. So I'm not going to take that risk.

Some guys, they'll cut that check and say, go big or go home. I'm like, well, you might be in the courthouse one day and I might buy that land from the next guy at a price where I got the protection. You see? Different.

But that's how that'll play out of the land development deals. I don't want to take that risk there. But when it comes to the 60 heirs, I've had that situation where I get 40 people in and the other people say, “I'm not selling to you, forget it. I'm done.” In that case, in Texas, we've got section 23, which is a partition of real property. 23, the property code. It's an absolute right in Texas to access your equity and land.

So you file that judicial plea in your county or district court, and you ask the judge to sell the land and you get your share of the money, the partition lawsuit. So you're not ever going to be in a spot where you're just screwed and you can't get your money unless you bought a share that's not actually a share, then you might be. But if you bought a bunch of shares, that judge will sell it and give you your money so you can get out. I had to do that, too.

Ajay: Logan, this is super interesting, and I think most people are afraid to go through the quiet title process, and I think a big portion of that is truly, they just don't understand it. And so could you speak about, number one, who are you hiring to get that done? I'm assuming an attorney, right? But for those that don't know, just what type of attorney are you reaching out to?

Number two, how long does that time take, that whole process take? Number three, sorry, this might be like a four-question stack, man. Number three is, what court is that going through? What judge is ordering that summary of judgment? So I guess who do you hire? How long does it take? What's it cost? What court? Let me know if you need me to repeat that.

Logan: A real estate attorney that's experienced in this specific area. If you go to the doctor, you're not going to go to a quick doctor for a brain problem.

There are a lot of real estate attorneys. You need to find one that specializes in this stuff. I've got an attorney that works for me and he has a lot of this experience, but over the years, working specifically with me, he's kind of narrowed that down. Now I've got half a dozen other attorneys that don't work full time for me. I use them as necessary.

So an attorney that is experienced in this type of lit is what you've got to get.

Ajay: And what would I Google, “title attorney?” Or what exactly would I be looking for?

Logan: You're going to have to Google real estate attorney and start calling them and asking who takes on these cases, what their experience is. A lot of attorneys will say, oh, we do quiet title. And I say, great. How many of them have you done? How many have been successful?

And that second layer of questions, people like you and I are usually afraid to ask an attorney that, because the attorneys are condescending, you think they're smarter than you, you think they're richer than you, you think they know everything. When you take my annual income and divide it by the hours I work, I make probably four to six times what most of the best attorneys make.

So I had to realign my thinking and say, no, I'm the expert here and I need to find the best trade. It's a carpenter. It could be, I don't know, a plumber. In this case, it's an attorney. But there's still a trade to supplement my business. So when you think about it that way, all the questions you would ask a carpenter, you better be asking these to an attorney before you start dropping tens of thousands of dollars to hiring him, before you know what kind of work he can do. So you got to ask the right questions. But when you find that right attorney, then you get going.

Now, when you talk about, you could make a mistake and things may not go your way. You mentioned that earlier and you said, because you don't know what you don't know, is more or less what you're saying. In this case, we look at the statutes, we find out exactly what that is, we compare my fact pattern to that, and I look and decide how closely those line up.

If the fact pattern is darn near dead-on, and I really feel good about that, then I’m gonna file the case. But there are a lot of cases that I've looked at that I decided not to file and not to take because the fat iron wasn't convincing enough or wasn't close enough of a match. So I walked away and didn't take them because I didn't think I could win. I'm not going to take on that case and file that lawsuit unless I think I got a 90% chance or more. Otherwise, I had a really good track record in winning these things.

So it's kind of like that. You don't pick a fight that you don't think you can win. All the boxers do that. Now let me speak to the time. If you're going to get a default judgment, let's say you notice all these other parties that you have a plea and their name might be on an instrument of title chain. And I'm basically saying, hey, everyone, this is my property in this plea. And either you contest my ownership or you let this thing go. But if you don't contest it, I'm going to be the title holder according to the judge's final order.

That's what the summary is. If you get a default judgment and you notice everybody in the title chain and no one responds, you're going to get a default judgment in 90 days. But if folks raise their hands and say, “Whoa, that's my property, and here's why.” You have to litigate it a little.

Quiet title cases, unless you're dealing with a high value in a very complicated fact pattern, if you spend more than 10,000, $20,000, and it takes more than a year, be really surprised. These are usually relatively simple. So less than a year, less than 20 grand.

Seth: I got a question. When you were talking earlier about buying shares in a property, so are you talking about, like, a tenants-in-common situation where that's how the property is deeded to the existing owner, and you buy out one of the owner's shares in the property? Is that what you mean?

Logan: Right. Yeah. So you have co-tenants here in Texas. So what happens is most of these people that have multiple ownership situations, they didn't buy the property. It's not like all three of us went and bought the property, and all three of us are entitled together. That's very rare. That does happen. It's very rare.

It's typically Seth's daddy died, and Seth had four siblings, and Seth died and had seven kids. And now you have this congregation of 18 people. That's the most common tenants-in-common situation or co-tenant.

Seth: Okay. And that's what you're referring to when you talk about buying shares, right? Because otherwise there are joint tenants and that kind of thing. That's where everybody owns all the property together. And do you not deal with those types of properties as much?

Logan: Texas laws are different. We don't have rights of survivorship in our Texas laws. So when Seth passes away, if you don't have a will, Seth, the state's got a will for you. It's just a succession chart. It's in the state’s code.

And when you die, Seth, without a will, that section of the law, the codified laws, basically say who your heirs are. And there's this whole chart that you go through to pull out who says the heirs are.

Seth: It sounds like a lot of what you're able to do here hinges on the fact that you understand Texas law really well. If you were to try to do this in some other state, how much of this would you have to relearn? I don't think you'd be lost. But is there a lot of stuff where it’s like, oh that doesn't apply anymore. And neither does that. That's the Texas thing.

Logan: Yeah. I think once you understand the process and you understand how to read it, how to understand it and how it works, that's your biggest hurdle. Laws apply a little bit differently in each state, obviously, but it'll take you some time to figure that out. But as long as you understand the basis and civil practice and procedure, you'll be able to look at stuff and figure out the difference just by reading the common law or the statute and figure out what to do differently.

But what's neat here is Texas is huge, and I got no reason to go outside of Texas at this point. And I can talk through these projects with people on the phone like that without having to research.

Seth: Now, when you're working through these title issues, do you wait until the title issues are clear and then take title to the property, or do you just buy it and assume you're going to be able to figure it out and then deal with the stuff after that?

Logan: Typically, what I'll do is contract with at least one or multiple owners. I'll get a contract, and then I'll do some real research. And at that point, I'll make the decision to buy pieces of the property without title insurance or continue to work on solving them while I have a contract.

But I would say a large part of the time, I'll buy without the title insurance, and then I'll fix the problems. And the reason is, early on, I would trust people, and I would go fix all their problems. And then at the end, they would say, I changed my mind. And that's how I learned to do so well with specific performance lawsuits.

Seth: That's not cool.

Ajay: That's tough.

Seth: Are you putting down an earnest deposit or something to secure this? And how much time do you have to work through this stuff while it's under contract?

Logan: I do pretty low earnest money on stuff like this. A lot of times, I'll give somebody $500 for earnest, if I'm doing earnest. But because a lot of these are not going through a title insurance company, I'm going to send them a contract that doesn't include earnest money. And I'm basically going to tell them I'm going to close them.

The typical contract in our office closes between three and five days. So I only need enough time to run my own title abstract, get a third party title report to fact-check my work. My attorney and I look at it, and then it closes, usually within a week. So I don't have time to receive earnest money, get it receded, send out copies, everybody. I need to get them to sign that contract, and I'm going to pay them for their deed.

Seth: So it sounds like you are taking title to as much of the property as you can for as little as you can, and then solving the title issues after the fact, just based on what you said there.

Logan: That's right. A lot of folks watching this stuff saying, oh my gosh, that sounds so complicated. But one of the messages I like to explain to folks is it's a lot less complicated than you think because you don't have the right guidance and you haven't been around the right folks to figure it out.

But I'm going to tell you, I look at this and say, I can't understand why everybody is not doing it if they would just get a very small amount of education or read a little bit about it and invest very small amounts of money at a time. The returns are freaking astounding. I bet there's probably half a dozen people in the United States that are doing it at my level and they're all really open and really willing to share.

So if someone's got some, if, let's say they have a little bit more time than they do money and they're willing to invest some time but make exceptional returns, I'd tell people to seek these folks out, go watch all the stuff on the internet, call an attorney and pay them a couple of $100 an hour to explain stuff to you and go buy yourself a deed for $500. How much are you going to lose?

Seth: It sounds like there maybe is a systematized way to intentionally go out and find properties with these kinds of title issues on them. And it got me wondering, say if I want to go out and find a bunch of commercial properties with title issues so I can buy them at 20% or 30% of market value, how do you do that? Because a lot of times you can't really find title issues until you do the title search. And that's when you realize, oh, there's a problem.

Is there a way to, in DataTree or whatever your data service is, only show me these properties that are likely to have a problem? Or do you go to Foreclosure.com and look for those properties? It sounds like there's some special list somewhere that has all this stuff. Is that true?

Logan: Usually the property that have these kind of problems, the problems have been there long enough for the owners to be frustrated, are delinquent on taxes. So there are a lot of different ways that you can go find this stuff. In my opinion, that is the best distressed real estate list ever in the world and probably there will never be better.

Seth: When I hear that, I think, the distressed issue is delinquent taxes. There's a tax lien on the property or something like that. But it sounds like there's probably lots of other different issues on those same properties. Is that accurate?

Logan: Yeah. Usually once you start peeling those layers back on that onion, the first one is the delinquent taxes. But there are usually other layers in there. So let's examine that for a moment.

A property can only be delinquent on the taxes if there's no mortgage. Because if there's a mortgage, the loan servicer or the lender will pay the taxes and then shoot that bill over to the borrower and put them in default many times. So if there is no mortgage on a property, then the taxes can be delinquent. If there is no mortgage on a property, then it's very old ownership, or it's a very wealthy person that didn't use debt and they just bought it. The odds are it's old ownership.

So many times when there's old ownership, title problems exist. Because generally, if a mortgage is for 30 years long, most people don't pay mortgages off in their life. Some do, but a lot of people don't. So let's just say most people buy property and pay it off and live there. When they die, their children inherit it, may not do the right paperwork, and it comes without mortgage liability.

So many times you have second generation owners with title problems and they become delinquent on property. These folks didn't buy property and set out to be a property owner. They inherited it. They were given the property from their parent. So the folks that handled the title problems paid up the taxes and kept the property in good standing. They're not the person you're dealing with. You're dealing with that person that inherited it and really wasn't ready for it.

Seth: Well, this makes me wonder. Of all the different title issues out there, what one or two title issues would you say are the easiest ones to solve? Like when you're aware, okay, that's the problem. No sweat. We're going to take care of that. Just push-button easy.

And which title issues are like, the worst? Like, so bad they would scare you away. What would cause you to say, no, this isn't worth it, I'm running. Is there such a thing?

Logan: Yeah, there is. Or two things.

One of them is low property value. Almost any problem with the property. If the property is only worth 30 grand, I ain't getting out of bed for it. Not worth it.

The other thing is one of the owners is a minor. That's a nightmare. You're unable to buy a minor share for a discount to market, and you're generally unable to buy it for market value. You have to appoint an attorney for them, for the minor. You have to go get a guardianship of the real estate of a minor. You have the estate of a minor. Then the judge appoints an outline of attorney for the minor.

By the time you're said and done to this thing. You had two or three freaking attorneys for this dead gum minor. And if the minor has a very small share, like a few percent. You can afford to pay the premium on it. But if the minor has a large share, 20%, 30%, 50%, you can't pay the premium. So it's not worth doing it.

So if I hear there's a minor involved, I'm out. Unless they own a very single-digit share.

Seth: When you say minor, are you talking about somebody under 18 years old? Are you talking about like a coal miner? Because I keep hearing miner, like, what's the problem with miners? These coal miners, why are they such an issue? That's what you mean now, right?

Logan: Yeah. Somebody who's under 18, it's slow and it's a hassle. Some of these bigger problems, they're okay to deal with. When you're dealing with property, it's worth a couple of million dollars. You're willing to deal with it and pay the fees and take the test of time.

I did one earlier this year. That was about between $5 and $7 million community property estate. And I purchased the community property from the wife. It's worth somewhere around $3, maybe $4 million per share for. I'm not going to say how much, because this will probably end up in court one day. And we're not that far. But I'm going to tell you that you could buy a forerunner for more than I spent for this share of property.

And I believe the husband, who is going to say this is separate property. And we believe that it's community property. I think it'll be a substantial fight. Hundreds of thousands of dollars of legal fees. Many years worth of fighting. But on my side, I got $2 to $4 million on the law. So I'm willing to take that fight.

Seth: What are, like your bread and butter easiest title issues to solve. Like when you see it, it's basically not even an issue. Like you know exactly how to fix it.

Logan: A judgment or a lien that's almost ten years old, that's cake. That creditor is willing to negotiate. The debt is so old, it's almost worth nothing anyway. You give them 10 cents on the dollar, you're settled, done. I don't care how big it is. Good deal. So a low value judgment or a very old judgment.

And then when you have less than half a dozen owners, that's usually a gimme because each share of that property is worth at least 15% to 20%. So if you can buy that first share or two for a small enough discount, or big enough discount, small enough price, you're in the money. You're going to get those other shares from those folks.

And once I buy two, three, four, or five shares, even if the last person says, I'm not going to sell it to you because you want to give me small money for it, I just say, look, let's go sell it at market. I'm going to sell my 80%, you're going to sell your 20%. You'll get fair market value, your 20%, while I'll get my 80%. To me, that's cake. I'll get the three people of the five that agree in contract and close them. Let's go sell it at market together. It's easy.

A lot of folks walk away from a deal who only have four owners and two of them don't want to sell. They walk away from that because they don't know what to do. I just say, buy those two who do want to sell for ten grand or something low, record your deeds, call the others and say, let's go sell at market. You just replace those other two people, but pick up their equity for the discount you negotiate, and then it's a clean deal from there.

Seth: When you talk about low value judgments, that being an easy thing to solve or a judgment that's ten plus years old, is there a systematic way to find properties with just that issue? Or is it, again, back to the delinquent tax list, and just hopefully you'll come across something like that in your contact with those people?

Logan: I think the best way to do this is to start becoming very familiar with the basis of these half a dozen most common issues. Become familiar with them, how to spot them, what you think you might be able to do, and then go start fishing in the delinquent tax list. And once you start to find these and hear the problems, you call a guy like me, you call a local attorney and start to walk through those problems. You would be surprised how much easier you can really solve these.

But a lot of folks just don't want to put in the time. I look at it and say, I ain't about to go flip that house for a $19,000 profit margin and do all that construction and borrow hard money and all that for four months. I'd rather call lawyers and call property owners and make negotiations for four months and make an 80% margin instead of a 20% margin.

Seth: Well, on that thing, because I've seen this tons of times on the delinquent tax list, where there's properties that have a break in the chain of title or like a tax sale in the not too distant past. But I won't know that until I get it under contract and send it to a title company and they do their title search.

And now, at that point, I've already made an offer to them not knowing about this issue. How do you know this stuff before you make an offer? Or do you make the offer and then adjust it way down?

Logan: Well, it can happen like that. You make the offer and you adjust down, but that's really hard to do because the moment you tell someone, you're giving them $200,000, and then you come back to them and say, just kidding, you have all these problems, 20 grand, they don't trust you, and they walk away.

But typically, if you're buying from the delinquent tax list, these folks have already tried to sell. They know they have problems. I know there's usually a problem. So when I'm going through this process, we're scanning the delinquent tax list, especially on the tax sale list, we're plugging these people's names and legal addresses and land records and doing a five-minute title search real quick to see what we can find as we're talking to them.

So, in my office, people are in clusters. You have a closer and you have a researcher. So everybody works in teams of two with this kind of work. So I got somebody, a phone jockey. And he’s like a deal maker who loves to talk to people. They're gregarious or charismatic. They love making phone calls. They're doing that. And I got a super nerd sitting there on the computer running the data.

Seth: How are you doing that five-minute title search? Are you using certain software for that?

Logan: Most land records, there's a couple of iFile pages or websites that will allow you to search all of the land records together. But we're in Texas, we're pretty familiar with the different real property records. So you just get a login to the deed records in your county and log right in, and you can pop the name in and literally see all of the deeds that attach to that legal description.

Or you just go, grantor, grantee, and just keep swapping their names into the search and you'll pull out deed after deed after deed. So it is a skill. I won't say it's not.

Seth: Yeah, I've actually got a video I put together a couple of years ago showing how to do this with DataTree. You can do title searches right in there. It doesn't work everywhere. The county's data has to be available in their system, but assuming it is, you can do it pretty easily there, and there's a cost to that.

Logan: What's DataTree?

Seth: You know First American Data?

Logan: I have no idea.

Seth: So First American, it's one of the big three data aggregators around the country. First American, Corelogic, and Black Knight. They all basically collect this county data from the counties. And First American has a platform called DataTree, and that's where people like us can actually subscribe and get this data directly from them. And it's pretty convenient.

DataTree data is also hooked up to a lot of other resellers out there that kind of pretend to be their own data service, but they're just rehashing DataTree's data. DataTree has a way to do these title searches throughout the country, in most markets.

Ajay: DataTree is where us regular land flippers go to find deals at 50 cents on the dollar, where people want like 120 cents on the dollar pretty regularly. It's a great tool.

Seth: I was actually talking to the folks at DataTree not long ago, and they were telling me that apparently most users of DataTree are not real estate investors. Really, the reason any real estate investors use them is because, well, I don't want to take all the credit, but I started making videos about it and a few other people started doing it too. Most real estate investors use other stuff, like PropStream and that kind of thing. It's really tailored to them. But DataTree is like a catch-all. Like anybody who wants property owner data, you can use DataTree. So I thought that was kind of interesting.

Ajay: That's super interesting.

Logan: Is there a couple of providers that can provide a title report within one day? And they may be using some of this as a background source of information. But I've got providers that for $200 will do a title report and it's 80% of perfect, and it literally gets delivered in a couple of hours for $200, we do a quick report real fast, in a few minutes in the land records, and then we get to the point where we say we're going to do this deal, let's get on the phone, let's start finding people. We'll immediately order that third-party title report and it'll show up later on that day. And we have something to compare our work to just to make sure we're not messing out. It's kind of a fact check for $200.

Seeth: I've made several videos showing how to do this with several different platforms. I'll include links to those in the show notes for this episode at retipster.com/177.

I was wondering, Logan, so I was looking at your Instagram profile, and you got some really fascinating stuff there about some of the deals you've done, like this landlocked parcel that you bought and then put an easement and a road in there. And I think if I remember the numbers right, you said you bought it for $5,000, put about $150,000 of work into the easement and building the road, and then it was worth $500,000. And I saw another one about like an RV, a parking lot that you bought and then a metal building that you bought and turned it into storage.

Are these deals all coming from the delinquent taxes? Like, is that what you're doing right now when you find these deals? Or are they coming from other places, like referrals from other investors, or do you have some other secondary or tertiary source of deals you're getting?

Logan: I would say right now about a third of these transactions are coming from referrals. I really don't like to be the first one that calls to identify a problem because then there's no trust with me. And that's not an indicator of my pitch, that's more a human situation.

So I'm the first guy that shows up and says, I found you have a big problem, by the way, I'm going to buy it from you for nothing. I have a hard time there. But usually when I'm the second, third or 10th person that just gets brought to me at that point, it's real easy. They already know the problems. They've been down this road.

And it's funny, the shoe is down the other foot where these folks are referred to me by a realtor, or we have called them after they have had many years of problems. And I say, look, I think we've identified some problems. This may be the type of project that we take on often. I have a series of questions, and if it looks the way I think it might, I would consider taking on that problem and maybe doing a project like this.

So I'm kind of telling them I might do it, I might not. And at this point, they tell me, “We've been trying to sell this property for ten years. We hired our own lawyer. We've done it all, and no one can buy it.”

And that's when I say, great, would you like to come to my office tomorrow and I'll give you $10,000 in cash? It's a whole different thing, because no one's ever offered that and no one solved it. They already told me. So now I've got an answer for them.

But I would say a third of the deals do come from referrals. We are looking through the delinquent tax list. You can run a search for tax foreclosures in the docket search in your county, because tax foreclosures are judicial foreclosures. They're not like a mortgage, where it's a foreclosure on a deed of trust.

So lawsuit happens for about six to twelve months before the order of sale happens. So we can get into the docket and find hundreds of those.

Seth: Have you had to work really hard on just making it known? Like, “Hey, I'm a guy who deals with title issues. If you have those problems, come and talk to me.” Has that been a useful thing for you to do, given that you have the skill set of knowing how to deal with those problems?

Logan: Yeah, I mean, I've spent a lot of time on my social media talking about, know, my followership is nothing like a lot of folks, relatively small, but it's enough to drive a substantial amount of business over the years.

Ajay: Logan, in terms of foreclosures, so obviously you're dealing with delinquent, you know, a decent chunk of these are tax foreclosures. But are you ever negotiating with mortgage companies as lienholders or banks or people who might be holding first position liens of a mortgage that's going into foreclosure? And how is that different from a tax foreclosure?

Logan: It does happen. A lot of the time, I'll find that there are mistakes. If there's a title problem with the property, they'll have a situation where they made a mortgage with the husband and never got the wife, and it's a community property asset. She never signed that mortgage.

So, unfortunately, they only have half of the collateral that they foreclose. They will only foreclose on a 50% undivided interest, more or less effectively, not the entire share. So I go to the bank and say, “Guys, you only have 50% collateral, but in order to get to that, you got to foreclose and then you have to deal with the other person. Then you have to file a partition lawsuit. Now you're going to look like a monster because you did this. You're going to be in the news. Do you want to go through all that or will I? Sell it to me for a discount and we'll all settle today.”

Man, this is an interesting thing. You take everything for granted. You think the guy that wrote your insurance policy on your car did it perfect and didn't make mistakes. You think the deed of your house doesn't have any errors in it. You think the lawsuit that was filed against all these people, you think all the mortgages are out there don't have problems? Think about this for a minute.

If you fill out a 100-item questionnaire, you're probably going to make a few mistakes. It just happens. We're humans. If you look at every single document and every single process, you find a lot more mistakes than you realize. And those are opportunities.

Ajay: Seth, I feel like your skin's crawling at the thought of every property…

Seth: A little bit. I was actually talking to a different guy, David Hansen, from the last episode. He does fairly complex subdivisions and plat maps and all this stuff. And he was explaining to me all the costs that go into doing that and how much time it takes and the risk involved. And it kind of reminds me of this a little bit. Just in the time and money investment to solving these issues and making it a marketable title and all this stuff and then having a much higher value on the other side.

But when you're figuring out how much to offer somebody, is there a certain formula you're going into this with? It's like, okay, well, the market value is this and it's going to cost me this much and take me this much time to solve the problem. So my offer is this. Or is it just like no, 30% and whatever delta is there between that and the market value, I just could take that.

How hard do you think through that? Or is it just sort of the standard formula is 30% of market value?

Logan: It is case-by-case dependent. But I will tell you a number that sounds really good is $5,000. And another number that sounds really good is $10,000. The reason I like those numbers is they're big enough to be real money, but they're small enough to where if you're talking about real property that has any amount of value, those are small dollars.

So if I'm offering a person 5,000 or 10,000, it can be a very small fraction of the value of the property. But I don't care how much money you got or how much money you got, $10,000 is real money. And if I'm going to put it in your hand tomorrow, the next day, I'm worth a lot of money and I'll pay attention to ten grand, so it matters.

10,000 is a really good number. I use that number a lot, and that number can be used on a $200,000 property, or it can be used on a $500,000 property. If I think the problems are big enough that people are just done with it.

Now, I do, back in a lot of times, I don't want to be in anything for more than 30 or 40 cents on the dollar. So I've got to back into it a lot of times and say, these are the taxes, these are the amount of shares. Total 30,000, but I'm only buying 25% from them. Okay, I can only afford to give them this much, but I also kind of feel through it because you'll hear indicators during the phone call. We're sick of it. I'm done with it. I'll just let the county take it for the taxes. And when they hear that, I'm like, you'll give it to people.

Seth: Logan, I saw you post about a landlocked property that I mentioned earlier, where you bought it for five grand and put 150 grand into it, and then it was worth 500,000.

That struck a chord with me because I come across plenty of landlocked properties and I buy them a lot. I just don't do anything to fix it. I just buy them for super cheap and then sell them for super cheap. But when I thought about this idea of, man, that is a huge jump in value from putting in the easement and the road. I mean, that's just amazing.

And you mentioned in that video that in Texas there are four common law remedies to get access to your property. And I don't know that those laws exist in every state. In fact, I've come across issues where there definitely was not a way to solve the issue, or at least everybody I talked to didn't know how to do it.

And so I'm wondering, if somebody was trying to do exactly what you did and intentionally seek out landlocked properties with the goal of suing for access and building a road. That is the sole business model, only landlocked properties where we can do this. How would they figure out which states make the most sense to do that in? Like, what do they need to research and figure out and then what's the best way to filter a list or find only landlocked properties like that and only go after those? Any ideas on that?

Logan: Yeah, so I know for sure Texas has really good laws for that. We've got a lot of common law that gives you those four remedies. So I might spend a little time doing that research for those other states. But if you get an attorney who knows what they're doing, it's not as complicated as people think.

I mean, you can get into Westlaw or some of these, the programs that they have and type in landlocked, and you're going to find a bunch of case laws. So a lot of attorneys just say if they don't know how to do it, you can't do it. I heard that for several years, and finally I heard a different answer. I realized there's a big business case out here. So spending the time to keep asking people and doing your own research, you'd be surprised what you'd yield.

Now, when you talked about CoreLogic, you can go into the company like that, or even, there's one here called TaxNet that we use, and there are a bunch of different categories of filters. But a lot of these properties, if they're landlocked, it does say it in the appraisal district like metric somewhere.

So you might spend a little time filtering through some data in particular counties that you're familiar with. But a lot of times you can find it where it says that it's landlocked, and they even under-assess the value sometimes because of that. So if you do that, and you could pull that stuff out really quickly in large volume.

I haven't done it that way. I'm really looking at this particular property that was on the tax sale list, and I called the owners, $5,000 in the taxes owed, and $5,000 is what I paid to the owner. So I was in it for ten grand, which is what I actually paid. But you really have to look at the fact pattern and what caused it to be landlocked.

So if you're a single operator and you want to go make a lot of money, you might want to do some bigger projects or other projects. But if you have some people or some help or your time isn't quite that valuable, you can poke through these and you'll see a lot that's landlocked and doing a little bit of research, you'll be able to see that the front property is what used to be adjoined with that property in a single property. And when the front person sold off the back piece and caused the back piece to be landlocked, that's your event that's going to allow you to get access. That particular problem caused land to be locked. That event is illegal in Texas. So you can sue that front tract owner for an implied easement and you'll get it.

Seth: It makes sense. I don't know why that wouldn't apply everywhere.

Logan: All of these situations exist. All of these situations have clues. All of these situations have data pathways somewhere out there. You can get into it fairly easily by just finding a few owners and doing one of those deals, maybe negotiating some judgments or liens. What I'm talking about is ten years in, so they're very complicated and I'm talking about very simply.

But if you really want to get started, pick a couple of problems and just sort your way through it at a low cost every time. And that's when you develop a skill that may not be your everyday full-time skill, but when you run across these deals once a month, that might be where you pick up massive deals because you feel willing to try it.

Seth: That thing you were saying earlier about how you come across an attorney who doesn't know how to do it so they can't say it can't be done. I feel like I've encountered that a lot in my life where people just, what they're really saying is they can't do it, not that it can't be done.

How do you know when to believe that versus saying, no, I don't believe it. I'm going to keep powering through. When do you quit or when do you settle and just accept what you're told? Do you have any guideposts that you use for us? Like, okay, well, this person is this level of smartness, so I'm going to take what he says. Any thoughts on that?

Logan: You know, you'd be surprised. There's a lot on Google today. A lot of these law firms put out good articles, and if you get on Google and start Googling about your problem, you'll find a lot of really good information. And you have to feel comfortable questioning the knowledge.

The first guy that I sat down with was referred to me, the attorney from the title company, and he would say, this won't work. And I would say, why? And he would say, well, because of this. And I would say, why? And he would say, well, because of this. And I would say, why? Like a three-year-old. You really have to be willing to pester the heck out of a professional who thinks he's smarter than you, and you have to get him to the point where he'll either give you a different answer or give you an answer that you really believe.

Seth: Awesome. Well, Logan, if people want to find out more about you or learn more from you about how to dig into these title issues and make sense of them and really get to the bottom of what can and can't be done, where do you suggest they go? Do you have a website for this kind of thing or how does that work?

Logan: I tell people to go to Instagram, type in “Logan Fulmer” on Instagram. You can see it right down there. My name, if you go there, man, I'm easy to connect to. I give a lot of information out here. And the truth is I need those folks and they need me. I can help solve their problem, but I do deals with folks from these referral sources all the time. One in three deals are referrals.

So I encourage folks to reach out to us with these problems. You're going to learn something from us. We're going to help do the deal with you and make you a little bit of money on it. And you might decide it's your new profession, I don't know. But let's start that on Instagram.

Seth: Awesome. And just to clarify, that is logan_fullmer, and I'm going to have a link to that Instagram profile in the show notes, again at retipster.com/177.

Logan, appreciate you spending some time with us today and schooling us on how this stuff works. Appreciate it. And let's stay in touch.

Logan: Absolutely. I enjoyed it. Thanks for your time.

Seth: Hey, everybody, how's it going? This is Seth Williams and you're listening to the REtipster podcast. This is episode 167, and today we're finally dedicating a full episode to the 1031 exchange.

So if you've been around the real estate investing world for any length of time, you've probably heard of the 1031 exchange before. But just in case you haven't, we're gonna give you a quick primer on what this is and more importantly, how you can use it to save yourself a ton of money on taxes as you're growing your real estate portfolio. This is one of those amazing tax advantages that real estate investors get to take advantage of. And as a real estate investor, you need to know about this. This is a big deal if you plan on making real estate a big thing in your life.

And today we're talking with Scott Saunders, the senior vice president of Asset Preservation, Incorporated. And Scott has an extensive background and a huge wealth of knowledge and experience in this realm. I met him over a year ago at a speaker dinner for a conference we were both speaking at. And in just about five minutes of talking with the guy, I learned a ton about 1031 exchanges. It kind of blew my mind.

And I thought, you know, I wonder if I could recreate this conversation for the REtipster audience? And even go beyond that, learn even more things that I'm sure Scott can talk about that most of us don't know about, specifically as it relates to land investors. Which is kind of a niche that doesn't get served a whole lot when it comes to this kind of thing. So we're going to understand how land investors can use this, and even just real estate investors in general, some of the things that you need to know and some of the things that you probably don't know about it that you're about to learn.

So, Scott, welcome. How are you doing?

Scott: Hey, Seth. I'm doing great. Great to be here with you today with your audience. And I actually think it's a fun topic. Most people don't think taxes are all that exciting, but when you're looking to build wealth and scale and grow in real estate, this is just a tremendous tax-saving strategy that really helps propel people faster forward they can really use to their advantage.

And a little known fact, I don't know if you know this or not, but it's been in the Tax Code now for 102 years. So we're not talking about something that just came about, we're talking about something that investors have been using for decades and decades and decades.

So I'm looking forward to unpacking it, adding some value for your listeners, and hopefully talking about the rules, the process, and maybe some things they haven't heard about before.

Seth: Amazing. Over 100 years. I had no idea. That's pretty cool.

So maybe we just start at the very most elementary level. What is a 1031 exchange? And why might this be advantageous for land investors specifically?

Scott: Yeah, let's say you buy a property if you were to do a taxable sale. And it's just the most simple level. I take some land, I sell it, and I receive back cash. That's a taxable sale.

In a 1031 exchange, I have a property that I sell. The consideration for that instead of being cash is what we call a “like-kind” property. So at the most basic level, taxable sale property for cash, 1031 exchange, I give up property, I receive back like-kind property.

Now, you hear this word, 1031. And so let me kind of share where that comes from. It's not that complicated. It's a section of the Tax Code, which happens to be Section 1031, that talks about how you do this. Now, why people do this is that a 1031 exchange allows you to defer all of the capital gain taxes that you otherwise would have had to pay if you did a taxable sale.

Now, with land, there's one aspect you don't really face most of the time, which would be depreciation recapture, because there are no buildings that you're depreciating. But in a taxable sale, you have up to four different taxes that you pay. So first, if you have an approved property, you pay depreciation recapture at a rate of 25%. The remaining federal capital gain is taxed at either 20% or 15%, depending upon your taxable income. Some investors face what we call this net investment income tax. So this is a 3.8% surtax on any income over certain thresholds. So a single filer over $200,000, married filing jointly over $250,000. So, on a larger land deal, you're going to face that net investment income tax.

And then the fourth component, which I think is important, is state taxes. So you could be in a state like Florida or Texas or Tennessee with zero, but the highest state tax rate in the country right now is in California, it's 13.3%. The point being you've got to add up all four levels of taxes to see what you'll be paying in taxes. So you might make a nice profit, but at the end of the day, you might not put as much in your pocket. After you pay the federal government, you pay the state government.

So where an exchange comes in is I take all of that gross equity, I pay zero in capital gain taxes, so I defer paying that and then I use that equity to go out and redeploy and buy more real estate. So it's going to give you much more purchasing power, which allows you to grow and scale faster than someone who's selling and paying the taxes every time they do a deal.

That's the big benefit. It's a purchasing power that gets redeployed into other property because you have all of that gross equity you can put that into something else and you can do bigger deals faster.

Seth: So maybe I can just illustrate this with an example. And if I'm saying this wrong, feel free to jump in and tell me.

Let's say I have a $100,000 house, for easy numbers, and I sell this thing for $100,000 cash and I just put in my bank account. So if I were to do that on an investment property, I might pay, I don't know, 20%, 30%, maybe more in taxes.

But if I were to take that money and instead very quickly go out and buy a second property worth 200,000 or whatever, just a like-kind exchange, something that's bigger, kind of upsizing my portfolio, instead of paying that $30,000 in taxes, I wouldn't pay any of it. I would just take all of it and put it into that new, more expensive property.

Am I saying that right or am I missing anything?

Scott: That's a great illustration. You're correct. When you do an exchange, you don't pay taxes today. You reinvest in another property.

And so one of the things that comes up, and here's a common misconception that I'll kind of address, which is, “Well, I'm going to have to pay the taxes someday, so why not just pay them at today's rates? They're relatively low. Bite the bullet.” And the beauty of an exchange is this: you can exchange over, and over, and over again and never pay capital gain taxes during your lifetime. Build a huge real estate portfolio, and then you pass on that highly appreciated property to your heirs. They get what's called a step-up in basis to the fair market value at the time you pass.

So let's just say you start with $100,000 piece of dirt. You go up to 200, 400, 500, a million. At the end of your life, you've got a $10 million portfolio. And so it's all capital gain, but you never paid taxes. You deferred it. And the tax code says your heirs now get the value at $10 million. So you essentially deferred paying taxes in your lifetime. And now your heirs don't have to pay the taxes either, because they get the value at the time they inherit it.

So this, to be honest, is one of these secret strategies that real estate investors use to grow massive portfolios, right? The big people do it in commercial real estate, they certainly do it. The REITs do it, the Donald Trumps of the world do exchanges. But where I think it's great is it allows your average investor to get into the game. So let's just say you buy a piece of dirt for 100 grand. It's worth 300,000. You do an exchange, out of that 300,000, you scale up to a 600,000 to 1.2 million to 2 million. This is really the tool that allows the average investor to get into the game and keep redeploying their equity.

And what's really great about this, Seth, is you've got the ability to do this with real estate, any type of real property, and we'll unpack that in a few moments of what will qualify. And some things you maybe even thought about as being qualifying like-kind property. You can't do this with stock. You can't buy Apple low and try and sell it high and defer paying the taxes. So we have a built-in advantage owning investment property that they don't have in the stock market or with other types of investments. It really gives a real estate investor a huge leg up on other asset classes.

Seth: When I hear the word “defer,” what I think of is just “delay.” Meaning, like, you don't pay the taxes now, you pay them someday. But from what I'm hearing you saying, you would never pay the taxes as long as you just keep going and you never get to the point where you just sell out and take the cash and run with it. Is that accurate?

Scott: You're 100% accurate. As long as you don't pocket the money and take the cash out on a sale, you can defer it.

So sometimes you'll hear it called a tax-free exchange. It's not tax-free. You're merely kicking the can into the future. But there are a couple of options. So people might go, I want to sell it. Well, you could. Another one you could do is something called a partially deferred exchange. You sell a million-dollar property, and let's say you buy one for 800,000 and you take a little cash out. That's called taxable boot. You just pay taxes on the money you take out. The rest of it's deferred.

But I'll tell you, I've been doing this since 1988, so this has been my sole focus, really ever since I got out of college. That's all I've done. The vast majority of investors exchange over and over again. And you've got in your audience a good percentage that do dirt deals. But let's say later on you come out of a piece of dirt. Let's say you go into an approved property. Let's just say it's a twelve-plex, an eight-plex, something like that. Because it's an improved property, you can refinance it. So you do an exchange out of land into an approved property the very next day, and you got to make sure it's done as a separate event. You can refinance and pull all your money out tax-free or most of your equity out tax-free. So there's actually a way, because it's not really fun, Seth, if you keep reinvesting, reinvesting, and you don't ever get to enjoy the benefits. We're all buying real estate to build portfolios that will fund our lifestyle, right?

Doing an exchange into an improved property and doing a refi is a completely non-taxable event. And that's how you get access to your equity without triggering a tax hit. So that's a strategy many investors do. They call it equity harvesting, different names. But that's a way to get access to the capital that you're accumulating over time without triggering taxes. And that's what savvy investors have been doing for decades and decades and decades.

Seth: But if you do that refi, then that's now debt you have to pay on, right? With interest.

Scott: It is. But think of it this way. Let's say I got a twelve-plex, I've got tenants paying my debt. I'm not paying my debt. So you're right, there's debt on it. But as long as the numbers work and you can still have a positive cash flow, you, as the investor, aren't paying the interest. You've outsourced that to your tenants. They're really paying your debt.

Seth: Gotcha. So I know one of the things that kind of trips some people up with 1031 exchanges is the timeline. So can you give us a quick rundown on what do you need to adhere to, what needs to happen within 45 days, what needs to happen within six months, and what happens if you don't meet those deadlines?

Scott: Sure. What I'll do is let me go through the time deadlines and then also let me kind of insert what I call some practical tips that I find help people out.

So in the most common exchange, it's called a delayed exchange. Sometimes you'll hear it called a starker exchange, but it's delayed over time. So let me walk you through the sequence of steps. What do you do to set up an exchange? Number one, you list your property, and once it's under contract, this will be what we call your relinquished property, or the property you're selling.

Once you're under contract, you contact what is called a qualified intermediary. Sometimes you'll hear others call it a QI, an intermediary, a facilitator. We are going to be assigned into your transaction. We'll step in and we're actually going to sell the property to the buyer.

So when you close on the property, that is day zero, the closing of the property being sold, you have 45 calendar days, and they end at midnight of that 45th day to identify the property. And then you have another 135 days after that to close on it. So it's 180 days maximum.

The first 45 is what we call the identification period. The 180 days is called the exchange period. So you've got some very specific time deadlines that you have to adhere to.

And the question we get asked all the time, particularly in markets where inventory is tight, is there any flexibility in those? And 99.9% of the time, there isn't. And a very narrow exception is if you've got property in what is called a presidentially declared disaster area, say a hurricane, a wildfire, typically these are natural disasters. If the IRS declares your county a natural disaster area where you've got a presidential disaster declaration, you can get an extension of 120 days. But let's say that doesn't apply to the vast majority. And frankly, if you have a hurricane or fire go through, you've got all sorts of challenges. This isn't something you really want.

You've got to identify in that 45-day period. Now you've got flexibility there, Seth. You can start on day five and identify three properties and you can revoke them and you substitute with better properties. But by midnight of the 45th day, you have to buy something in that exchange period that was identified in the first 45 days.

And you probably hear this all the time. People look at that as a little bit of a challenge or certainly a concern. Right, what if I don't find anything? So let me give you my tip that I think makes it a little bit easier. As soon as you're listing the property that you're going to sell, you just get in a listing and you think you're going to list it at a reasonable price. You're going to get some good offers on it at a reasonable time period. Start working with your real estate professional, the broker you're working with, on what you want to purchase at the moment you list.

Where people get into trouble is they don't start until they close. I say start that process early on. Start looking at what you're looking for. You can start making offers, you can make contingent offers, but start identifying what you want to buy. I personally did an exchange two years ago. I sold a property in Phoenix, Arizona, and I exchanged into five replacement properties. So, four of them in St. Louis, one in Memphis, Tennessee. I didn't even list the property I was selling until I had locked up my purchases. So I literally had all five purchases with a verbal confirmation that I'd be buying and felt very good that I had all my purchases locked up.

So the way to kind of get around that obstacle is work on the negotiating the purchase. As soon as you list the property, get a bit of a jump on it. That's a big pro tip there. So that's called a delayed exchange. Yeah, the process is pretty simple. A good qualified intermediary, by the way, is going to walk you through this. They'll let you know, hey, here's your 45-day period. They'll provide a form to identify properties on. They'll explain those rules and we can go through those because you've got three different rules to choose from, to identify.

Seth: So, yeah, a bunch of questions coming up here. So how many properties can you identify within the 45-day period? I often hear the number three thrown around, but could I do 10, 20, 50, as long as it happens to be those that I end up buying on?

Scott: Yes. You've got three different rules. So what you've heard, Seth, is what's called the “three-property rule.” So if you sell, let's say for 200,000, you could identify three properties of any value. So one at 200, one at half a million, one at a million. But you're limited to three properties under the three-property rule. But that's just one of three rules.

The second rule is you could do something called the “200% rule.” So that allows you to identify an unlimited number of properties, but no more in value than twice what you sold. So if you sell for 200,000, you can identify up to 400,000 of a bunch of small one-acre parcels. So three property rule, you're limited to three, but the value is unlimited. On the 200% rule, you've got an unlimited number, but the values are capped at twice of what you sell.

One more rule here and it's rarely used. Believe it or not, I did this personally a few years ago. It's called the “95% rule.” And what this states is if you identify more than three and they're over twice the value of what you sold, you can buy those. So in your example, can you identify 50? Absolutely. But there's a little caveat you must close on, meaning acquire 95% of the value of the properties identified.

So to kind of make it really simplistic, if I identify ten hundred thousand dollars properties and I only buy nine of them, in a real estate deal, we'd say, hey, that's pretty good, you bought nine out of ten, but you're not over 95%. So you would have to pay all your taxes. So if you're going to use this 95% rule, my input would be you want to be 100% sure you can close on every single asset that you've identified.

So in summary, three-property rule limited on number, unlimited value. 200% rule is many properties but no more than twice what you sell. Or 95% rule. You violate the three property rule and 200%, but you basically have to close on everything. That's what it is.

And another thing to kind of share, when you identify, there's some very specific wording. You have to identify specific properties. So if you've got several parcels of land, you can't say, “I'm going to buy one of these five-acre pieces of land.” You've got to identify the assessor's parcel number or if it's a street address, you've got to identify a specific property. So the wording in the Tax Code is it has to be unambiguously described. So sometimes we'll have somebody, they'll go into, let's say, a condo complex in Hawaii, two-bedroom, two-bath. You have to identify unit 32 or unit 77, a specific property, not just a “two-bedroom, two-bath condo.”

Seth: Now this qualified intermediary that you're talking about, is that what you are or how do you go about finding one of these?

Scott: Yeah, a qualified intermediary is a middleman. That's all we really are. So we're going to hold the funds and we're going to prepare all the paperwork.

Now here's something a lot of people don't know, Seth. We are in a completely unregulated industry at the federal level. There's no federal oversight, so we're not under the SEC banking or anything like that. There are a handful of states that have state-level consumer protection laws. I'll rattle off the states: Colorado, Nevada, California, Oregon, Washington, Idaho, Virginia. And you know, a handful of states have that, but we're not in a regulated industry and so we're physically holding your money.

One of the most important things you want to do is find out how does that qualified intermediary secure those funds? Right. What security do they provide? Some things that you want to look at and I'll kind of share that with you and your audience. First off, probably one of the most important things, you want a separate segregated account. You don't want to be in a big pooled commingled account, but you want your money to go into your own account, require your signature to set up that account, and then your signature to move funds at any time. So that's an important aspect.

Another one that's probably a reasonable safeguard is work with a company that's a subsidiary of a big parent company. So most of the major title insurance companies have subsidiaries, like Stewart's, our parent company. There are a lot of banks that have qualified intermediaries. So now you're part of a bigger financial institution. So you're going to get those institutional controls, right? Checks and balances. Our parent company is publicly traded, so we're going to have all of those institutional controls built into it and a decent resource, a place to start.

It's kind of a mouthful, but the industry trade organization, I've been on their board and past president of it, is called the Federation of Exchange Accommodators. But I'll make it really easy to remember. Their website is super easy. 1031.org is their website. So it's just 1031.org and you can find qualified intermediaries in your local area that subscribe to the code of ethics and agree to hold funds in certain matters.

So that's a place to start, but for sure do your due diligence. There are a lot of excellent companies out there that do this, but you want to look at how are those funds being held, particularly in today's world. Look at what happened with the banks a few months ago. You probably don't want to be a big depositor in a little local community bank, but you want somebody to work with a lot of the bigger national banks, some of the ones that are too big to fail. That would probably be another good practice to make sure you're working with the big banking institution.

So does that give you kind of a little background on what a QI or qualified intermediary is?

Seth: Yeah. So I guess to clarify, first of all, that's what you are, correct?

Scott: Correct. I'm a qualified intermediary. Our company is Asset Preservation. What we do is we hold the money and we prepare all the paperwork. Yes.

Seth: Okay, so do you replace a title company or do you work in addition to a title company and how do you guys make your money from this process?

Scott: Yeah, we work in addition to, so we're another principal. So we would work with the real estate agent, the title company, we'll even work in conjunction with somebody's tax and legal advisor. So we're another principal in the transaction, qualified intermediaries.

Since they're not regulated, the fees vary. I would say you're looking on average somewhere to $1,000 to $1,500 is a fairly typical fee that's charged. We charge $1,250, which covers one sale, and then you could buy up to three replacement properties. So it's kind of a flat fee that allows people to sell one and buy up to three other properties. Might start at $1,000 and then charge you $500 for the purchase. But somewhere in that range is a typical fee.

I do want to point out that's on a delayed exchange, there are some really creative exchange variations out there that a little bit more sophisticated investor might want to use. Let's say you found just an unbelievable land deal, right? You found something that's $300,000 under market, but the seller needs a quick close. And you know, this deal has a lot of built in profit into it.

You can do something called a reverse exchange where you buy the new property first, then you've got six months to exchange out of your current property. You can do something called an improvement exchange, buy a piece of dirt, put a rental cabin on that beautiful lake property and rent it out airbnb. You can do a reverse improvement, buy the new property, start building a building, and then sell your existing property within six months. Those are all called what we call a parking arrangement because the QO is actually going to be parked on title. We're going to form an LLC, be parked on title. Those fees are going to be a lot more expensive, somewhere between $6,000 to maybe 12 to 15.

So that's another tool for maybe a little bit more sophisticated investor that could benefit from those strategies. So those are other options that are out there.

Seth: Going back about five or eight minutes. We're talking about identifying these three properties or however many. So what does it mean exactly to identify? Is this a paper you're filling out? Is this a person you're telling about it? Is this going on record somewhere? How does that work to identify?

Scott: You just have to write down so you take any piece of paper and you write down, identify these three properties, you have to sign and date it and then you send it typically to the qualified intermediary. So most of the time you're going to identify with the qualified intermediary.

Now these rules are pretty specific. You have to sign and date it, you have to unambiguously describe the properties. And once you do that, at the end of the 45th day, you've got to purchase one of those properties you've identified. You can't try and shoehorn something in after day 45. So the rules are specific and it can't be oral. It's got to be done in writing.

So it's interesting when you go back to the code. The rules from this came out from the IRS back in 1990, so we're talking quite a while back. They use a weird word, they use the word “telecopied.” So you can send it on over and done a number of different ways today. We've all got smart devices, right? Email wasn't happening back in 1990, except maybe the military. So the tip would be put it on a piece of paper, scan it in, and then send it to your qualified intermediary as an image. Don't just identify it in Microsoft Outlook. That way you've got your signature on it.

And a pro tip would be, I always have people have the qualified intermediary verify that they received it and send a copy of that back to you if you get audited a few years down the road. Now the qualified intermediary has it, but you can pull up your file and you could show the IRS. “Not only did I send it over, but I have proof my qualified intermediary received that.”

So I think that's an important thing. We all know there's a whole bunch more IRS audits that are going to be coming in the future because there's significant staffing for auditing. So anything you can do today to sleep well at night, and if you do get that letter in the mail that you're being audited, at least you're prepared for it proactively.

Seth: You mentioned earlier that qualified intermediaries are not regulated. Does that mean that you guys don't get audited?

Scott: You're 100% correct. We're not regulated at the federal level. So the states that I mentioned have some local consumer protection laws. They're really to protect the proceeds. But no, we're not audited.

I want to share with you, it's super important to do your due diligence selecting a good qualified intermediary. Some have better security than others, and those are the types of questions you want to ask and get good answers to.

Seth: So on that whole thing. So if you guys are never audited, what if you're my friend and I want you to do me a favor and just forget about those first three properties I chose and just put these other ones in there instead? You're never going to get audited. So as long as I've got my records from my IRS audit, I'm good. What's to keep a qualified intermediary from doing that?

Seth: Yeah. No can do, Seth. So we get asked that all the time. People want us to get creative about substituting. Here's why.

We're a principal in the transaction. We're a subsidiary of a huge parent company. We're not going to have somebody go through an audit. If we do that, we're committing tax fraud. We're not going to commit tax fraud because you didn't get your act together on exchange. So, believe me, over the years, I've had every trick in the book. Everybody, every request, as you can possibly imagine, from a revert request to, hey, pull my file out and can you run out and give me a cup of coffee and come back in a few minutes? Wink, wink. A reputable, qualified intermediary will never do that.

And the reason is let me tell you why. When you're an intermediary, what we're doing is we're holding money on your behalf so you don't have access to it. We're a principal, right? We act like a buyer or seller. We're a principal. We don't act as an agent of the investor, right? A real estate agent acts in the best interest of their client; a CPA and a lawyer is an agent of their client, we're not. We're a principal. So we're going to follow the rules of our agreement. If you don't choose to identify or you don't have your act together, that's on you, not on us. So we're just going to follow the strict wording of our exchange agreement. If you follow those rules correctly, you can do an exchange, and I will tell you set.

There are people that try to monkey around with this. There's somebody got audited in California a few years ago. It's called Dobrik v. Commissioner. They tried to backdate, they got audited. They got hit with a $2.2 million capital gain tax, hit a 75% fraud penalty. They had to pay another $1.6 million in fraud, plus they had to pay interest on it. So the penalty box for committing tax fraud is relatively severe, as it should be.

My input is to do a straight-up exchange plan in advance, work with somebody in advance, line up your purchases, and you can defer taxes and build a huge portfolio really quickly. But don't try and monkey around around the edges. It's just not worth it.

Seth: Yeah. The reason I'm asking these questions is it's not because I'm going to do it. I find it really fascinating that you guys don't get audited and that there's no regulation because, like you saying, you'd be committing tax fraud, but how would anybody ever catch you if you're it not audited? I mean, I know how I would get caught. Obviously, you have your own moral conscience and all this stuff, but if somebody doesn't have that and they just want to monkey around and they're never going to get caught, what's to keep them from doing that?

Scott: At the end of the day, let's say you were audited and we monkeyed around for you. Then they would know that we did that, and here's the big risk.

Seth: Is that because I would point to you? Is that how they would know that?

Scott: Well, they would know because you would point to us, or it would come out that we backdated it.

Okay, here's the big problem. Let's say your exchange is blown. Now. It's a taxable sale. You got to pay the taxes in our particular company, we've done over 250,000 exchanges, right? A quarter million of these. Seth, if I did this for you and I've violated my exchange agreement for you, and let's say the IRS finds one other time when we did it, you know what the IRS could do? They could come back and say, every exchange that we've ever done is unwound. Because we didn't follow our written agreement as a principle, we acted like an agent, which means now you have control over your exchanges.

So take your one deal out. Now all of the other people we've worked with ever could have their exchanges invalidated because we monkeyed around with one. And I can tell you, I won't mention names, but we've worked with all sorts of well-known people and players on deals. So big Fortune 500 companies, names of people you know. So there's no way we want to risk jeopardizing all of those legitimate exchanges because one person wants to come in, become a shyster, right?

Seth: What a disaster. That would be terrible.

Scott: Yeah, that's on you. So again, you want to work with a reputable company. And there are lots of reputable companies that are going to 100% do that that are ethical players.

Seth: So I've heard you mentioned a couple of times doing your due diligence on a qualified intermediary. And the things I've heard you mention are making sure your funds aren't commingled with other funds and making sure they have good security. I'm just curious, what does good security even mean? Or what would be red flags to the questions I would ask that would say, oh, I shouldn't use this one. What exactly am I looking for?

Scott: Yeah, why don't I do this? I'll share what we do in that regard. And there are other companies that will do something similar. We provide from our parent company, which is Stewart Title, a letter of assurance. So it's signed by the CEO of Stewart Title that says if anything happens to the money while in our possession, Stewart Title, who's been in business for 127 years and publicly traded, stands behind the money.

And there are other companies that can do that. Through maybe a letter of assurance. You could set up a standby letter of credit at a bank that you pay a fee for. There are some other mechanisms, but when you're working with a subsidiary of a big parent company, you're going to get those institutional-type security arrangements that are out there, and not everybody has those and can offer them.

But I personally think you aren't entrusting your money to somebody else for six months. And the most important thing is to make sure that they're going to have it to purchase the property that you want. There have been some examples in the past where people have absconded with funds. There was $100 million in Las Vegas. There was $132,000,000 bankruptcy that involved six different companies. The largest was $420 million because they invested in auction rate securities, a market that went illiquid back in 2007.

So there are a lot of great companies, but this is what you want to look at, are these types of things. And then look at the parent company. If they're publicly traded, look at their balance sheet. What do they have in equity, how long they've been around? What are their financial ratings? So you can find a very reputable qualified intermediary. It's pretty easy to find them.

Seth: So there's really like, people who just set up shop overnight, like, hey, I'm a qualified intermediary, give me your money. And then they'll just take off with money. Is that something that's happened?

Scott: Unfortunately, yeah, that's happened. And sometimes there are people that are trusted in the community. I'm here in Colorado. There was somebody by the name of Scoop Daniels, I believe is his name, about ten years ago, a trusted guy, church-going guy, worked on all these deals and one day just left. He went to South America for ten years. They found him and brought him back.

One individual, Ed Oaken, who was one of the larger bankruptcies. He served a 150-year prison sentence. So his situation, believe it or not, if you pull up an American Greed, you can find Ed Oakin on there. He did the typical crook thing, took other people's money and spent it. Bought cars, jets, yachts, all of that stuff. And he's a rare exception. But unfortunately, from time to time it does happen.

So do your due diligence. I think starting with the 1031.org, people that are willing to join a trade organization is subscribed to that. Dakota Ethics is a good start. And then just look at what bank do they put the money in, who can control that account? Having your signature to open it up and then to move money out is a really important aspect of it, I think.

Seth: Just kind of some random questions here. Is there a minimum dollar amount you need to be working with? Or a maximum dollar amount, like the deal needs to be 25 grand or higher, or it can't be higher than 100 million or anything like that, or like a limit to how much you can save in taxes or anything.

Scott: You can do it on any size deal. We get that question all the time. We've done billion-dollar deals, a billion. We've done deals with ten different apartment complexes. Smallest deal I've done is $12,000. And the way I kind of frame that, it's always a lot of money to you, right? If I'm selling my lot for 50,000 that I picked up for eight grand, that's a lot of money to me and to another investor, whatever their amount is, it's a lot.

So, no, you can do it on any size transaction. Really what it comes down to is where I say maybe you want to look at it, you want to weigh the taxes, you owe. And you came up with a good idea. Let's just figure somewhere between 20% to 35% is taxable on a typical sale. Then you got the fee, let's call it around $1,000 to $1,500. You got a really simple decision. Do I want to write checks to the federal government, my state, or would I rather pay a modest fee? And so if you've got only a little bit in capital gain, it may not make a sense to do it the other time. It may not make sense to do an exchange is if you don't want to be in real estate, you made money on a deal and you made a whole bunch on it. But you want to go back and you want to buy stocks, bonds, alternative investments. You don't want to be in real estate, well then an exchange isn't for you.

Now, I find most people in real estate love real estate, and all they want to do is buy more. They want more units, more dirt, more value, more cash flow. But there are times when people do want to get out for whatever reason, maybe partnership, they're going their separate ways and they're just willing to liquidate. So they might make a decision to just eat the taxes on that.

Hey, Seth, one thing I want to kind of jump into a little bit. Can we unpack? I want to unpack a little bit of like-kind property.

Seth: Yeah, let's do that.

Scott: So like-kind is super broad when you're dealing with real estate. It's any real property held for productive use for investment or in your business, exchanged for any other real property held for investment or used in a business. So land can be exchanged for improved property.

Probably an easier way to look at it, actually, Seth, would be let's talk about what you can't exchange. Number one, you can't exchange your primary residence. So the house you live in, that doesn't qualify because it's your residence. It's not held for investment. So you can't do that.

Number two, and we can maybe expand upon this a little bit, property that is held primarily for sale. So dealer property, fix-and-flips. Those types of properties where you hold for sale, not long-term investment, are excluded. As long as it's not your house and it's not property you're holding for sale, you can exchange it.

So let me share some things you can do. Land, improve property. You can exchange a vacation home that is held for investment and meet certain requirements. Certainly apartments, multi-family retail, industrial. There are even things called Delaware Statutory Trust or tenant-in-common ownership. So I can go in and buy a slice of a large building with a bunch of other co-owners and that qualifies.

When you want to look at creative things, have a little fun, here. You can exchange in New York City air. Literally, it's called a transferable development right? I've got a 20-story building, and I've got the right to add five stories, even though I don't add it. In New York law, that's considered real property, and I can exchange it.

Seth: So this is like air rights, right?

Scott: Air right, Yeah. So it's called an air right. The technical term is a transferable development, right? But it's an air right. We do exchanges on certain states on water rights. So in Colorado, water is precious. Same thing in Nevada, Arizona, new Mexico. A few states water rights, if they're considered real property under state law, can be exchanged.

Another one, easements of every type can be exchanged. So I can have an agricultural easement, I can have a conservation easement, and exchange that. And you can even exchange what is called a perpetual communication easement, which, if I say that in English, it's a cell tower. So if you've got a piece of dirt with a cell tower on that high point, I can create a new perpetual communication easement, sell just the cell tower, keep the rest of the dirt.

Another one that you probably never think of would be oil, gas, mineral rights. So as long as it's a royalty interest, the right to extract it, you can actually keep the land and exchange the mineral rights or the oil rights on it.

So, like-kind is very, very broad. It just has to be real property. After 2017, you can only exchange real estate. Prior to that, you could have exchanged exchanges on art, gold, coin collections, businesses, the tax reform, the tax cuts and JOBS acts, eliminated personal property exchanges. Today you can only exchange something that's considered real property, but you want to look to your local state law, because real property varies from state to state a little bit. A water right in Colorado is real property, in Washington it's not because water is plentiful. So every state's going to have a little bit different rules on that.

But I think that opens up a lot of potential. You can start scaling with land, and then you could go into multifamily and you could go into a Delaware Statutory Trust. So a lot of options out there.

Seth: Does all of this real estate or light kind of real estate have to be in the U.S. Like, say, if I own land in Belize or something, that doesn't count.

Scott: For this. You can't exchange U. S. property for Belize. So it has to be within the United States.

And now there are a few little caveats. You can exchange Guam, Mariana Islands, and the U.S. Virgin Islands qualify. The other one you can do to take your example of Belize is you can do a foreign for foreign. I can exchange Belize for another Belize property or Belize for Mexico.

So in the United States, it's got to be a U.S. property for another U.S. property. You can also do foreign exchanges, foreign property for foreign. But I can't go domestic to foreign and I can't go foreign to domestic. They modified the Code back in 1989 to restrict that.

Seth: So when we're talking about foreign to foreign properties, are we like completely leaving the IRS at this point? And now we're talking about that country's thing? Or does the U.S. somehow still stay involved if you're a US citizen?

Scott: If you're a U.S. citizen, it still is a tax liability, but it's a foreign for foreign. It gets just to let you know, it gets complicated the way you transfer property in other areas.

I just wanted a contract in a property in Tuscany, Italy, and it's different. Real estate laws are different. The process is different. When you put in earnest money in Italy, it goes hard at the time you make your earnest money. It's not like in the U.S. where you've got an escrow that's neutral. You put your money in. If you walk from the deal, your earnest money goes over to the seller.

So all these different international laws, it's fascinating learning how to transfer real estate in other countries because there are different terms and different mechanisms. But the vast majority, U.S. for U.S. And I gave you those little caveats so people cannot come out of the U.S. and go buy that rental condo down at Cabo. That's not going to work. Or the ski place up in Banff, that's not going to work either.

Seth: So from what I'm hearing from all that, is that if I've got a piece of vacant land and I wanted to do 1031 exchange with it, it can go to literally any of those things we talked about, which is very diverse. But you mentioned that this doesn't work with properties that you hold for the intent of selling it. It sounds like that whole investor versus dealer argument about what am I and what am I doing with this property. So how does one prove whether they're an investor or a dealer? Like, do they have to own it for a year or more? Or is there something else that has to substantiate that claim?

Scott: Yeah, this is probably one of the more not confusing, but there's a lot of discussion on this topic. So the question that we get asked all the time in regards to this is how long do I have to hold it before it's held for investment? What's the time period? Is it a year? Is it a year and a day? Is it 18 months? Is it two years?

Here's where I think you've got our unique planning opportunity. The IRS says it's just your intent. What you intend to do now, what they're going to look at are your objective facts and circumstances. What provable facts do you have that support investment intent or contradict it?

A lot of investors want to know the time period, and certainly the period of time is important. But I want to be really clear, there's no time period in the Code that says one year is long enough, or two years or 18 months, or a year and a day. Those might be reasonable time frames to aim for, but it's not required. We've got a tax court decision from just a few years ago. Somebody held it for only eight months, but it was considered held for investment.

So what do you guys want to do to do this right? You want to document your investment intent. If your intent is to hold for long-term investment, what I would do is have some correspondence with the other players in the transaction. Have an email to your real estate broker, “I'm gonna buy property in Missoula, Montana, which I intend to hold for long-term investment.” Keep that email if you need it. After you buy a property, email your CPA, or maybe your tax or real estate attorney, “Hey, I just bought such and such property in Yuma, Arizona, which I intend to hold for long-term investment.”

Where people get tripped up is they don't take the time to document their intent. So if you've got two, three, four, or five data points that substantiate your investment intent, if you get audited, you're going to be on much, much more solid ground. Here's where people get hurt. They have no documentation. They tell the IRS, well, of course I intended to hold it for long term investment. And the IRS is going to come back, and they're gonna come back with two simple words, and you probably know what they are. “Prove it.” Give me proof that shows your intent was to hold for investment. Who did you tell that to? When did you communicate it? What can you prove to me that happened at the time you're doing the transaction that supports the intent.

So a lot of taxpayers don't do this, and I think everybody in your audience take the time to document that intent. I think an email to your CPA would be great. An email to your real estate or tax attorney, have correspondence with your real estate broker. If you're married, you even have a discussion with your significant other, right? “Hey, we're looking at properties we intend to hold for long-term investment. Here are some of the parcels we're looking at.” Rip off that piece of paper, slip it in a file folder.

So the more you have support that documents the intent to hold for investment, the stronger you'll be in an audit. To the extent that you have goose egg, the weaker you're going to be in an audit. So those are just a couple of planning tips.

And we were talking right before we kind of kicked off this show, Seth, about people that maybe flip properties or hold really short-term. One thing you can do, you can buy some assets in whatever entity you're buying in where you flip them. You flip it, make the money and pay your ordinary income.

But let's say you find a property that you want to hold long-term, buy that in a separate entity and kind of separate it. So you have one entity over here that's flipping, and then you have another entity here that holds for long-term investment. That way you can show the IRS, “Look, I bought these properties to flip. I paid my taxes as ordinary income. But I had a couple properties over here which were I really intended to hold for long-term investment.” The purpose of that LLC was to hold long term, and I treated them separately.

So try to bifurcate your assets. Here are my flipping assets. I'm paying my taxes. I'll deal with it. Here are my assets that I'm going to hold for long term investment. So that might be a strategy that people can do when they're really kind of doing a little bit of both that would help them out. That's a way that I'd recommend structuring it.

And the other thing is, pull in your CPA. You want to get your tax advisor involved who knows all of your unique facts and circumstances as a qualified intermediary. Seth, I have no idea what you're doing with your investments. I have no idea of your intent, what you do, but your tax advisor will know what you're doing. So bring them in early on, get their advice.

And as a qualified intermediary, we're happy to talk. We're really good in this niche called 1031. I know all the tax court cases. Everything about 1031, probably better than most CPAs ever know. But I can't give tax or legal advice. But I could talk to your CPA and we could talk about, here's an aggressive approach and here's a conservative approach and here's what's in the middle. And then you and your tax advisor can decide to do what's right for you. Some investors are aggressive and some are conservative. Some tax advisors are fairly aggressive. Some tax advisors are ultra conservative. So I don't know where somebody lies on that continuum and what's right for them. Somebody that has one property and that's all their wealth is a very different scenario than somebody that owns 60 properties and they're very wealthy. They can probably stomach a little more risk because of their financial situation.

So that's why you got to pull in your tax advisor, bring them into the thought process, the decision making process, and get their input and guidance. I think that's critical.

Seth: That's interesting. I've had these similar discussions with my CPA before about how do I prove whether I'm an investor or a dealer? And a lot of the examples you just shared, even seemingly trivial stuff like having a separate LLC that's called like Williams Long-Term Investments, LLC to imply that, hey, this is a long-term investment, and buy it with that one instead of Williams Land Flipping LLC or whatever your normal land flipping entity might be.

So it feels kind of grayish, kind of loosey goosey, but maybe that's just the nature of the beast sometimes.

Scott: Well, you know what? I like the gray area because it gives you opportunity, right? If you're somebody that likes to be a little bit more willing to take just a touch more risk or you want to be pushing the envelope in a gray area, you can. So sometimes people want it to be all black and white. I actually like that it's about your intent and documenting that which you mentioned, right? Having different names for LLCs that reflect the intent and treat them that way, those are really easy things to do. But if you get audited, it makes it pretty easy in front of the IRS to clarify that.

So take the time to document that investment intent. I think that really would help all the listeners. If they ever face an audit, they can do it a lot more confidently. There's nothing worse than getting audited and the IRS says, hey, show me how it's held for investment and you can't come back with anything. You're going to lose in that situation nine times out of ten because you have nothing in your court to support that. So be smart, learn from podcasts and things like this and bring that into your real estate investing. And if you haven't been doing the past, start doing it right on a go-forward. Everybody can change and do it better.

Seth: On that whole thing of holding it for a year or more, does that mean anything? I know you mentioned the one about somebody who owned it for eight months and that was fine. But I mean, just generally speaking, does it help if you can prove it's been 365 days since you bought it? Or is that just a meaningless metric? Like, don't even think about it?

Scott: I'll give you my opinion. In my opinion, it's a meaningless metric. It's beneficial to demonstrate that maybe you've held it in two tax years, but there's nothing magic about day 366. It's a day.

So if I were to give you some broad input, the longer you hold it for investment, the more conservative becomes. If I hold it for 18 months or 24 months or three years, I can more easily make the argument that I'm holding it for long term investment. If I turn around and sell it in two weeks, I'm going to have a really hard time saying, and I held it for investment, particularly the other thing they're going to look at, Seth, they're going to look at things, did I list it with the real estate professional? I say I'm holding it for investment, then I list it with the broker. Well, obviously then I'm holding it for sale.

So they're going to look at a whole wide range of factors to determine what really was your intent. So you've got to make sure that if you have that investment intent, the facts support your investment intent and they don't contradict it. That's, to me, the most important thing, having a lot of good supporting facts.

Seth: Yeah. Again, maybe this is something about me, but I keep thinking about this through the lens of somebody who's trying to game the system and cheat the Code and all this stuff.

Say if I bought a piece of land, that in my heart, I know I intended to flip that thing. But all of a sudden, I change my tune and I decide I want to make it look like I'm holding it for an investment. I mean, couldn't I just shoot a quick email to my CPA saying something to that effect and then maybe put it on some marketplace to lease it out for rent, and then document that and then just sort of check some of these boxes just to kind of I mean, is that something people do? And does that work if they try to do that?

Scott: Well, if you're a savvy investor, I think anytime you create good facts to substantiate what your intent is—I understand what you're saying there—if you have a lot of favorable facts that support that, I think that makes a much stronger case.

I understand where you're going with that. You know, you've got a deal. It's got a lot of built in equity. But if you want to do an exchange, taking the time to do the sort of documentation, creating that paper trail and those facts and circumstances that will help you. If you're audited, most people don't do anything at all, and so they get audited. And he said, she said. And in that situation, a lot of times, the IRS will win, because your job as a taxpayer is to be able to support your position.

So let's use something not really just for real estate. It's morning right now. Let's say I woke up this morning and I intended to eat well today and exercise. And let's say I just started the morning I went out, I got three Egg McMuffins at McDonald's, and I didn't get a walk or workout in. My intent might have been to exercise, but if you look at what I actually did, I didn't work out. I blew off my workout, and I had three Egg McMuffins for breakfast, putting crap in my body. Well, the reality was, the facts show that I didn't really intend to work out this morning because I did something different.

It's the same way with the IRS. They're going to look at what you actually did, and that's going to show what your intent was, because your intent is right here in your brain. They're going to look at what you actually did or did not do to determine what your intent was.

Seth: So, in my limited experience with 1031 exchanges, I dealt with them as a banker when we were trying to close some various SBA 504 loan deals, which are inherently slow. They do not happen, quickly. Sometimes they take more than six months, believe it or not, to get those things approved and done. And in other situations, when I had other investors trying to invest their money with me through a 1031 exchange.

Just in those kinds of experiences, they seem a little difficult to do just in adhering to this rigid time frame. And it makes me wonder, why do they make these rules so hard? It's almost as if they're trying to make this difficult. Is there some benefit to the government to make it this way? Or are they just intentionally trying to make it cumbersome? Like, if they don't want us to do a 1031 exchange, then they just outlawed. Why make it such a hassle to do these things?

Scott: Yeah, the whole 1031 exchange came about back in 1921. So the rules came about for 1031 back in 1921, but they were primarily swaps of property.

An individual named TJ. Starker in 1979 went through a tax court case which created our first delayed exchange. So you could do a delayed exchange in 1979 for five years only in the West Coast, the eleven western states under the 9th Circuit Court. 1984, they codified in Congress the 180 days and 45 days.

So let me get to your point on this one, because you're looking at, from your perspective, saying the timeline is kind of difficult. The IRS could also just say you have no 1031 exchange. They put in some mandatory guidelines because they want people to have an intent to do the transaction. From the IRS's perspective, they would rather the IRS is the enforcement mechanism, right? They would rather get all the tax revenue. The IRS wants as much tax revenue as they can get. That's their job, to get the maximum amount of taxes that they possibly can.

So the IRS thinks that it's very generous. They provided a provision with that six-month window and 45 days to take advantage of tax deferral. You don't have that with other asset classes. So, again, I think the real estate investor has a tremendous tool available that you just don't find in other parts.

I get what you're saying from the frustration of it. It is what it is. But to me, why not use this tool to build a massive real estate portfolio? Follow the rules, take the time. Yeah, there's a little bit of stress. You've got to find rules, you've got to do some due diligence. But if I don't have to pay taxes and I can defer that indefinitely, I'm coming out way ahead. So I have no problem doing that.

I do cost segregation on some of my assets that I own. Does that take time to do a cost sake study? I got to pay money, but now I get a massive accelerated depreciation that I can use to my benefit. So sometimes you got to jump through a few hoops to get a massive benefit. To me, it's worth it. I'd rather get the massive benefit than not have that benefit available at all.

If you took 1031 out. So today I'll be on with somebody in Congress. I spent probably met with 60 people in the last year in Congress educating them on why 1031 is good for the economy. It helps create transactional activity. Real estate brokers get paid on it, title companies, lenders. It's something like $98 billion annually impact on the GDP of the country. There was a study done on that.

So it really affects, it creates thousands and thousands of jobs. So we educate people in Congress of why having this thing called 1031 is good for the economy. It helps real estate investors. And real estate, as we all know, really is a big aspect of our overall economy. So if you had people not taking advantage of exchange, let's say it was eliminated, people would not sell their properties because they'd have to write a big check to the government. And we'd have a lot less real estate transactions, a lot less turnover.

Think of what we see going on in the marketplace now. We see people leaving states like California, the western states, and they're going to Texas and Florida, Tennessee. Up in New York and New Jersey, they're going down south to Florida, the Carolinas. This allows businesses and people to relocate, bringing their investment with them. And so companies are relocating and they're doing exchanges on their companies and creating jobs at a new marketplace.

So it really allows people to kind of redeploy their capital into places where they think they're going to get a better return on their investment. And frankly, investors do a lot better job of creating return than the government does. And the government knows that. That's why they have this incentive in the Code is it helps create communities. I can tell you there are areas where people took an old blighted area, did a 1031 in, and created a whole new shopping center and redeveloped it, which now becomes a little economic hub for that community.

We're going to need 1031. Now think of office buildings, class A office building, the vacancies in some cities there's about 50%. We're going to need to repurpose downtown office buildings into something, could be storage, could be housing. 1031 is a way to come in and do that and improve it during that exchange time, the six months, and repurpose commercial buildings. So shopping malls that are kind of dying off that maybe Amazon wants to have take over that old Kmart store that was there, right? And they'll make it a distribution center.

1031 allows that to happen. So we do this for individuals, we do it for corporations, for partnerships and REITs who do major economic redevelopment. So as you can tell, I get a little excited about it. It's not just tax law. It's about creating jobs and economic growth and allowing capital to flow to where it can best be deployed and get the best return on investment.

Seth: Well, I guess one counterargument to what I heard you saying earlier about the whole thing about why does it have to be so hard and just be thankful that this is here at all, that kind of thing. I guess the way that I look at this is (and maybe I'm just thinking about it wrong), but with that whole 45-day timeline to identify a property and then six months to close on or 180 days to close. So the problem that I've had in trying to find self-storage deals over the past couple of years, like existing facilities to buy, is that the easiest deals to identify within 45 days are the worst deals, the ones that will not make much money or even lose money. I've seen people asking twice what their facilities are worth and I can go buy those all day long, but it's not good for me. And if I just do it to do it just to not pay taxes, it may actually long-term be a really dumb decision. And at that point, I think it's on me to understand that and not do it.

But contrast to that, the best deals usually take more than 45 days to identify and sometimes more than six months to close. So I think that's where the rub is for me. It's like I just need time and 45 days isn't going to cut it. I mean, sometimes just getting the financing approval can take a long time to get done and that can kill the deal. So it's frustrating. It's almost like if they're going to allow this, then make it feasible for more people instead of just making it like, oh, here's the thing, we're going to take it away from you because it's so hard to do. So I don't know, I guess that's where my question was coming from.

Scott: Yeah, well, it's a great point. I think in some markets, people have overpaid for assets because they have the exchange. So I think it's on you as a savvy investor to go into a deal that makes sense because the deal makes sense, not because of tax savings. Sometimes people get that wrapped up and they're looking to just the tax savings. They're not looking at the deal.

I think the way to try to prevent that pressure cooker of that time deadline there is start talking to sellers or assets that you want engage in those conversations early on. So I told you my property in Arizona, I didn't even list it. I knew I could sell it in a matter of days if I priced it right. So I spent all my time negotiating on my purchase and talking to people that I wanted and getting those locked up before I even listed it. So on self-storage, you'd want to do the same thing. You know roughly what you're selling for and you know roughly what you want to redeploy.

And that brings up something we haven't touched upon. In an exchange, you have two simple rules. You've got to reinvest your net equity and have the same or a greater amount of debt for full deferral. So if you do those two things, you have 100% deferral. If you take cash out, that's called cash boot. If you go down in mortgage, that's called mortgage boot. So start that negotiation early on. Just start reaching out to those sellers that you like. Their deals begin the discussions early on. You have a pretty good idea of your asset, what the market is that you're selling. And so that's really your deal to control. I always tell, put all the pressure, put all the energy on the purchase, the sale will take care of itself if you price it right for the market.

Seth: Thinking about this from the standpoint of a land investor. So let's say if I buy a parcel of 40 acres or something like that, and I want to subdivide that land or make improvements in some way or change the zoning or something like that, does that impact a 1031 exchange at all? Like, say, if I subdivide it into ten parcels and I sell off one at a time, are there any additional factors that I would need to be aware of in that kind of scenario?

Scott: Yeah. What I'd recommend there, you buy that 40 acres, sit on it for a period of time, document your intent to hold for long-term investment, and then don't subdivide right away, sit on it for maybe a year-ish or two-ish. Then you're going to move forward with the subdividing and doing everything that involves.

So make it clear, “I bought 40 acres, I'm holding these for long-term investment.” You might very well intend in your head, you see the opportunity to subdivide, break it down into five-acre parcels down the road. But don't start that. If you buy it, and let's say the very next day you start subdividing it, what does it look like? It looks like you're now going to be holding it for sale to sell off those parcels. So if it were me, I'd season it for a period of time, ideally a year or two-ish, then change your mind.

So remember, you can always change your mind with an investment. I could do an exchange under a beautiful golf course property that I rent out for a couple of years, and after two years are up, I decide, you know what, I'd really like to move into that golf course property. I convert a rental and I make it my residence. As long as I'm changing my mind down the road, it can't be my intent to do that from day one. So somebody can always change their intent later on and have a different intent with the property. Just make sure that initially you document the intent was to hold for investment.

Seth: So it sounds like the act of receiving rent on a property, is that significant in terms of determining whether your intent was to sell it or hold it as an investment property?

Scott: Yeah, if it's an approved property, that's one of the big issues. No prudent investor is going to have a property that can produce rent, not bringing in rental income. Now, some people go, “Well, what if I have it rented? At least I have it listed for rent, but I list it for three times market and nobody rents it.” Well, then you're not making a good faith effort to rent your property. So if it's improved property, rental income is a great way to substantiate that. Your intent is to hold for long-term investment. In fact, the IRS will look for rental income. They want to see the rental income. They want to see you taking depreciation, treating it as a legitimate investment property.

Seth: I'm curious, as a land investor who is trying to find deeply discounted deals from landowners who don't want their land anymore, could you almost use this as a selling point to help that motivated seller sell their property to you? Say, for example, if they have other goals for their money, but they're having trouble selling their land, could you somehow help them along in the 1031 process and make it easier for them to go down that path and give them yet another reason to sell their land to you, even at a discount?

Scott: 100%. It's absolutely a great tool. Some sellers, even though 1031 has been around for 100 plus years, some sellers don't know it or they don't know they can sell their land and go into, let's say, a fourplex that provides their retirement income.

So a seller has one piece of land and that's where their equity is. They really want to retire and get some cash flow so they can travel, sell the land, and you're a buyer of the land. You say, look, did you know you can do an exchange out of the land? You can pick up that fourplex for cash. Now you've got $4,000 a month of rental income coming in that allows you to pursue your retirement lifestyle.

So it's a great negotiating strategy, I think, for a buyer to say, hey, by the way, you could do a 1031, go into an approved property and get that retirement income now that you were looking for. So you'd be surprised how many sellers don't know of all the things that are available. So that's a great tool.

And a great way to do that is pulling a qualified intermediary. Just say, hey, I've got an expert here. We'll do a phone call, they'll explain what exchanges are. So a qualified intermediary stays on the line talking about what a 1031 is, what the rules and time requirements are. The buyer then is talking to that seller and saying, here's an exit strategy. This is why maybe I could pick it up at a little better price because you get what you want, which is retirement income. You take this land and you're going to get your retirement income on that improved property.

Seth: Yeah, because I've heard it said when people offer to buy properties with owner financing, where that seller is financing it to them, one of the ways they can sell the person on that idea is the legitimate point of this could help you save money in taxes because you don't have the whole tax bill in that first year. And this is kind of a different way of making a tax strategy offer by bringing in the 1031 exchange, like giving them a tax reason to consider something that they wouldn't otherwise consider unless they realize the potential benefit there. So that's great to know.

Scott: Yeah, no great strategy to do that. At the end of the day, if you can help solve their problem, they're selling a property if you help solve their problem as a buyer, puts you in a better position negotiating to get what you want, which is their real estate. So that's a great tool to use.

Seth: When you think back to all of your experience in 1031s, are there any big mistakes or oversights people make when trying to do this that they could easily avoid? But we've kind of talked a little bit about them just regarding the timeline and all that. But any other just big obvious glaring, don't do this if you want to go down this path.

Scott: Yeah, here's the one mistake and I get it every single week and it's tragic. Here's the mistake. They don't set up a 1031 before they close on the sale of their property. So I'll get a call, I guarantee you multiple calls a week. “Hey, Scott, I need to set up exchange right away. I just closed on my property three days ago and the money's sitting in escrow.” You can't set up an exchange retroactively. You have to set it up before you close. Even if you don't touch the money, if it's sitting in escrow or in a trust account, you have control of the money. It's called constructive receipt. So we probably as a company, get maybe 50 to 100 of these every single month. So these are people that wanted to get tax deferral. They just didn't know they had to have the documents in place prior to closing.

So that to me, hands down, is the number one mistake is not setting up an exchange when they want it. The other kind of thing to be aware of. You don't have to do a fully deferred exchange. So many people think, well, if I sell a property for a million dollars, I've got to go out and buy a million-dollar property. You don't have to do a fully deferred. So you can sell one, turn around and buy a couple of good performing properties. And if there's 20 grand left over, called cash boot, you just pay taxes on that 20,000. So statistically about 30% of all exchanges are partially deferred exchanges. So don't think I'm going to do an exchange and I have to do everything. If you find a really good deal and it's at a lower price point, okay, you pay taxes on the difference and you pay a little bit in tax, but you still did an exchange into one or two replacement properties that make sense.

So don't think you have to do a fully deferred exchange. You got to be all in, do the whole thing or nothing. You can do a partial exchange and buy one or two properties and then that cash that's left over, you pay taxes on that. And then keep in mind, you can use other strategies like cost segregation if you go into an approved property to create some other tax benefits.

So taking advantage of taxes is a critical way to build wealth. If you want to get ahead in real estate, you need to become tax-savvy and entity-savvy. And so this is just one piece, right? There are other things you can do. You need a good tax planner to work on setting up your entities, right? Passive entities over here, you're going to have sub-S entities for your active efforts.

So this is just one tool in your toolkit that could be really critical. And there are some other tools you're going to need as you become an investor. But this tool you can use over and over and over again. So I just think it's phenomenal. Fortunate. It's made a great career for me. And then personally, with my investment portfolio, I use exchanges too. So I'm professionally in the business and then I also personally invest and I never will sell my assets. I will exchange until I die and my kids will get a handoff of hopefully a decent real estate portfolio.

Seth: Do you ever see it happen where a person sells a property because they have this idea of doing a 1031 exchange? Maybe they identify three, then they close, then they try to pursue these things because it looks like a great deal, but then it doesn't work out. Say there's some huge environmental contamination issue or for some unforeseen reason it just doesn't work out. They end up having to pay a huge tax bill. And had they known that, they never would have studied this in the first place.

Because in my mind, that's kind of like my biggest fear about doing this is like I don't want to go into this blindly or somewhat blindly, which is inevitable because you're not going to know everything at the very beginning and then end up in a worse off position than before. Does it happen a lot or how could you avoid that kind of thing?

Scott: So what you're saying does happen not a lot. Let me give you the big planning tip to avoid that.

Where people get into that situation is they find one property they love, they identify the one property, but they don't identify two backups. So the way to avoid this is even if you've got a perfect property and you know you want it and it's great, what I would recommend is put your second and third options on that identification list. So as you're doing your due diligence and you find it's contaminated, now you've got two other backup properties to look at.

So the way people get hurt is they only identify the one that they really want. They're outside of day 45, and there's no way to get any other properties. So I strongly recommend put a couple of backup properties on your identification.

Now, could those also sell or have problems? Of course they could, but I'd rather have my first deal not work out and have two other options to look at that are decent deals than faced with a huge tax hit because I sold my highly appreciated property. So that's a way you can kind of mitigate that or try to proactively avoid getting into that situation.

Seth: At what point do you actually sign a purchase agreement with these new properties and put earnest money down? Do you do that after you've closed on your sale? Because once you do that, you're going down a path. There could be consequences if it doesn't pan out.

Scott: Yeah, you could do it anytime you want. We have a lot of people that will make an offer. They'll put down their own earnest money before the property they're selling even closes, and then we'll later replace their earnest money with exchange funds once they've closed on their sale. So you can start that process, and I'd encourage you to start that process of making the earnest money deposits, negotiate it, you can make a contingency offer, or there are a lot of different ways to do that. But anywhere in the process, you can make the purchase offer and get it locked up under contract. And in fact, I think the earlier you start that, you take some of those time pressures off of yourself, for sure.

Seth: Sounds good. And then last question. Are there any resources like books or websites or courses that you recommend for those who want to better understand 1031 exchanges? Where should they go if they want to really understand this?

Scott: Well, there are books out there. A lot of them tend to date themselves a little bit, and most of the books tend to be a little beefy for an investor. They got a lot of case law. They're written for attorneys and accountants. That's probably not my first choice. Probably your best choice would be in your local area. Find out where a qualified intermediary is putting on a class for CE credit. So most people are going to teach CE classes, two, three hour classes for credit for realtors.

And you as an investor, just jump into one of those. You're not getting the credit, but you're going to get a three hour discussion on the whole process. That's probably a good way to go. We've got a YouTube channel that's linked to our website APIexchange.com, where I've got classes that I do. So I'm an instructor nationally for CCIM. I do a two hour advanced class for them, but I've got introductory classes. That's probably a little better than trying to buy a book.

Now, the one little caveat I'll give you is if you talk to ten different companies about the question of how long I need to hold a property before it's held for investment, you're going to get ten different answers on that. That's just the reality of it. I like the answer that I gave it on this because I think it's accurate about your investment intent. But there are going to be some companies that are going to tell you a time period.

Now, I believe they're wrong. I don't believe that's the most nuanced, accurate answer. So realize when you learn from a qualified intermediary, you might get a little bias of that person teaching. So if I were around, I started giving classes in ‘88. 2023. I know a lot more than I did back in 1988, right? I was just out of college, young and dumb. So maybe pick an instructor that's seasoned, that's been doing this for a while, has been in the business for a while. That would probably be another way to do it. Some people like learning from a CPA or an attorney. I'm neither of those, even though I teach thousands of CPAs every month. But somebody that's got experience, 10 to 20 years of experience doing this, you probably are going to get a little bit more seasoned, maybe a little bit broader in depth answer. So that's what I'd recommend.

If you use Google, you're going to get all sorts of stuff, and you're going to get a lot of people pitching product. They're going to be pitching DSTs that you can exchange into. So sometimes the internet is not your best friend. You're going to get people that have a goal to get you into their particular offering or product rather than you learning about it.

The last thing I'd mention, too, is just call a qualified intermediary. Go to the website I gave you, the 1031.org. Call two or three companies, explain to them your situation. Here are my facts and circumstances, and just listen to their answer. Doing that, sometimes it's better. I think it's faster to speak to three qualified intermediaries, listen to their spiel and how they educate you rather than having to go in. You don't need to spend time on the internet studying this and Googling and reading. It's really not that complicated.

We visited together for a little over an hour. People now know pretty much everything they need to know to put a deal together. So you don't need to be kind of that analysis paralysis, where you think you need to become an expert on 1031, know the basic process and then review your situation with your tax advisor. I think that's super important and maybe with a couple of good qualified intermediaries would be a good way to go.

Seth: I don't know if you're familiar with Realty Mogul, the real estate crowdfunding platform, but I had heard of a thing that they were doing years ago where if you get into a situation where you start going down this 1031 exchange track, you identify the properties, but they all fall through. You're just kind of stuck in a corner. You don't know what to do. You can basically take your money and put it with them and tie it up for five years or however long it takes. And obviously that's not your first choice, but at least you don't have to pay the taxes because the money just goes over there, in a real estate fund.

Is that a viable option or is that a good example of like a plan B or plan C when things don't work out, or any other ideas of what could you do if everything falls apart and you don't want to pay those taxes?

Scott: So for a plan C, probably the best option is what's known as a Delaware Statutory Trust. You go into a property as a co-owner with a bunch of other people.

I'm familiar with Realty Mogul and what they do. There are probably 50 companies out there that offer something. So learn about what's called a DST, a Delaware Statutory Trust. These are kind of a hybrid. They're treated by the SEC as a security, but yet they qualify for 1031 deferral. There are probably 50 or so providers out there, they're called sponsors that have property right now that you could get into within a day or two.

So there are a lot of options. You want to look at them, you want to look at their fee structure. They're going to charge a fee for that. You want to look at their track record. How long have they been doing that? Some companies like Inland have done it for 20 to 30 years. They've gone through economic ups and downs. There are other new players that are in the cycle now. And we all know on the commercial side, commercial is going to face some distress, right? Loans people aren't going to be able to refinance and capital calls, and there's distress in a lot of commercial segments. You don't necessarily want to go into a DST with a brand new player that hasn't weathered a cycle or doesn't have a lot of capital behind them.

So again, do your due diligence with who you're going into, those types of relationships. There's a whole group of financial advisors that specialize in DSTs and Delaware Statutory Trust. And a good one would offer to you several different companies and several different programs. You evaluate them. These are for accredited investors only, so you have to be accredited investor. They're made available through a PPM, a private placement memorandum, and somebody with the appropriate securities license will offer these up.

But yes, there's a whole wide variety of these. Most qualified intermediaries can introduce you to several financial advisors in your market that you could turn to and get a list of options so that's a viable I call it a Plan C. Plan B would be identifying multiple replacements. Plan C, this is kind of a last fallback provision.

Seth: Yep, that makes perfect sense.

Awesome, Scott. Well, thanks again for sharing all of your wisdom and knowledge and experience with us. If people want to connect with you or work with you in some way, or find out more about how your company works, where should they go?

Scott: Yeah, the easiest way a toll free number is 888-531-1031. Website is APIexchange.com. So A as in Apple, P as in Paul, I as in Igloo, exchange.com, and then my personal email is just my name, scott@apiexchange.com. I spend 90% of my day just talking to people, answering questions. Even if you don't have a transaction, you just want to kick around some ideas, give us a call. That's why we're here, to educate you on your specific transaction. Love talking to people about it, and been great visiting with you and your audience. Had a lot of fun. Hopefully give some new insights, some things to unpack, some things that people haven't thought of before. So thanks so much. I really appreciated this.

Seth: Absolutely. I've learned a bunch here. I'm sure other people have too. Thanks again, Scott. And I'll have links to all the stuff that you mentioned here in the show notes for this episode at retipster.com/167. And I wish everybody out there the best. If you're working on a 1031 exchange, hopefully you found this useful. See ya.