By now, you’ve like realized the inevitable: You need a qualified intermediary for your 1031 exchange. For one, the IRS says that an exchange is only “safe harbor” when there’s a facilitator involved. Second, 1031 exchanges are tough. There are hundreds of “if’s, and’s, and but’s” to consider for every situation. Last, qualified intermediaries give you the peace of mind that the IRS won’t come after you.
This presents a new set of problems:
How to find a qualified intermediary?
Once I find them, how do I know if they’re trustworthy?
How much will their services cost?
Can they help me find 1031 exchange properties?
This is your guide to finding and selecting a 1031 exchange company. We’ll help with questions to ask during your qualified intermediary evaluation process. Additionally, we’ll give you nearly every thing to consider that separates QI’s from each other. By the end, you’ll walk away more prepared to work with your 1031 exchange company.
Things to consider when Finding a Qualified Intermediary for your 1031 Exchange
Doing a 1031 exchange is difficult enough. Once you’ve decided you need a qualified intermediary, these are the top things to consider. Not all QI’s are created equal. If you’re unsure about the 1031 exchange company you’re talking to, keep looking! There are over 300 qualified intermediaries in the United States. Even different QI’s at the same company can be better for certain situations.
Level of Experience – Track Record & Complex Exchanges
The first thing you want to find out is their track record. First, how long have they been doing 1031 exchanges? Many of the top 1031 exchange companies have been in business since the late 1980s. That said, not every qualified intermediary at the firm has been there since the start. We encourage you to ask them their background!
Many QI’s are former lawyers, tax pro’s, or started as investors themselves. It is important, however, that being a qualified intermediary is their primary profession. There are some QI’s that do exchanges part-time. For something that involves large sums of money and some risk, we think it’s best to use a professional. If something goes wrong, their livelihood is on the line. The same can’t be said for a part-timer.
Since there are no federal regulations to become a qualified intermediary, it’s important to get a sense for their level of experience. Some example questions may be “What was your most difficult 1031 exchange?” or “What’s the biggest mistake you’ve seen?” If you’re not comfortable asking pointed questions, you can try a softer approach with questions like “How many 1031 exchanges have you done in total?” or “Why do investors choose you over other QI’s?”
The last thing to ask about is experience with the most complex type of exchanges (construction and reverse). Even if you’re doing a normal delayed exchange, it’s a good sign if your QI has done more complex exchanges. This demonstrates they have a thorough understanding of the 1031 exchange and laws to follow.
Costs and Fees
You may be surprised that costs and fees are our second item to consider. While cost is always important, it is less important than finding a qualified intermediary who has lots of experience. Much like a good lawyer or accountant, paying more up front can save you in the long run. We see the best qualified intermediaries charging more than less-experienced, but have a higher change of a successful 1031 exchange.
Most qualified intermediaries charge a similar amount for their services. For a typical delayed exchange you can expect to pay between $700-$1,100 per exchange. This can be higher if you have multiple relinquished or replacement properties. Some QI’s claim they can do your exchange for less than $700, sometimes as low as $400-$500. As the old saying goes “you get what you pay for.” There’s enough paperwork and administrative work that it won’t be worth a QI’s time to do an exchange for that much. If they’re still willing to, maybe their time isn’t worth very much. We suggest steering clear.
For the more complex exchanges such as construction or reverse exchanges, these are harder to price. There are many variables that come into play, and we suggest consulting with multiple QI’s to get a thorough price estimate. That said, reverse exchanges usually start at $6,000 and construction exchanges $8-10k. The value of the property, timelines, number of involved parties can all significantly affect the final price. We do see some QI’s who claim they can do reverse exchanges for less than $5k, but we would stay away from these offers.
Most qualified intermediaries come to similar initial pricing, but the fees and extra costs add up. We highly suggest asking your qualified intermediary about the following:
- Wire transfer fees
- Title transfer fees
- 24 or 48 hour rush service
- Charges to set up special purpose entity (for reverse or construction exchanges)
- Charges for multiple relinquished or replacement properties (very common)
The third most important consideration is how responsive your qualified intermediary is. There are two main ways to figure this out: 1. Judging your direct interactions with the QI and 2. Reviews and experiences from others who have experience with the QI.
From the first time you contact a qualified intermediary, you should take note of their response times. Most QI’s tend to work on exchanges over the phone rather than in person. While we recommend finding a local QI, over the phone can work as well. From our experience, an initial response within 8 hours is a good sign they will be easy to work with. From there, take note of how long and helpful their responses are. Some QI’s demand a phone conversation immediately, while others are OK with giving information through email.
You should also note whether they offer consultations about your situation. Some QI’s are there to only execute against your plan. Others are more beginner-friendly, and will work to make sure your exchange will work. Even as an advanced investor, qualified intermediaries who offer consultations are worthwhile. They cannot give legal or tax advice, but they can give you an indication your exchange will work or not.
Reviews and Other Experiences
Given your qualified intermediary has experience in the industry, there should be reviews or anecdotes available on the internet. It can be difficult to corral reviews from Google, Yelp, BBB, and other sources. We’ve compiled a guide for the 7 best 1031 exchange companies, but there are many QI’s at each company. For this reason, we suggest asking your QI for customer case studies or references. Given they have been in the industry, most will be happy to provide this. Also, many of their websites have testimonials from satisfied customers.
Insurance, Bonds, and Separate Accounts
Another important consideration are the insurance and bonds your qualified intermediary holds. Though it is not common nowadays, you should ensure your money is not commingled with other clients. How to find a qualified intermediary who fits this criteria? The best way is to ask.
First, all QI’s should hold Fidelity Bonds of at least $1M USD. Fidelity bonds are a type of insurance that protects businesses in the event of theft or dishonest actions. For example, if a qualified intermediary 1031 exchange company’s employee steals your funds, Fidelity Bonds cover the amount lost. While this would still be a giant pain, it ensures you will recover the large dollar amount.
Second, QI’s should have Errors and Omissions coverage. This protects you against the risk of your QI making a mistake with their paperwork, and causing your exchange to fail. If this occurs, you can collect the damages from their insurance company instead of them directly.
Last, it is important to make sure your funds are not commingled with other client’s funds. During the great recession, one of the largest 1031 exchange companies went bankrupt. LandAmerica fell in November 2008, and investor funds were considered “company funds” during bankruptcy proceedings. Because funds were held together, many investors did not get their money back during the worst recession since the great depression. It’s not common for 1031 exchange companies to keep funds together, but we advise you to ask the question.
How to Find a Qualified Intermediary – Conclusion
Pulling off a 1031 exchange is difficult enough, and choosing your qualified intermediary makes it tougher. With this guide, we hope you are prepared to ask pointed questions of your potential QI. If you are still uncomfortable, check out our article where we highlight the 7 Best 1031 Exchange Companies. If you need someone local, check out our qualified intermediary map.