Seller-backed financing issues are coming up quite frequently so I thought I’d make a quick video to talk about when you’re doing a 1031 exchange and the buyer wants you to sell it to them on a contract for deed or with seller-backed financing. In a 1031 exchange, the seller wants to take all of their equity and reinvest it into a replacement property of equal or greater value, so they need to redeploy their cash. The problem with a lot of seller-backed financing arrangements is your cash isn’t released – it’s loaned to the buyer. Therefore, you’re not coming up with as much equity for redeployment into the replacement property. One easy way to fix this is to simply bring an equivalent amount of cash from your own pocket to the relinquished property closing and loan it to the buyer so that the net proceeds that go out to the qualified intermediary are the same as they ordinarily would be if there was a cash purchaser. We call this the “cash is king” solution. This is just one of many ways to approach 1031 exchanges involving seller-backed financing, but this is typically the easiest.
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