When initiating a 1031 exchange, you have seller financing options for the sale of your relinquished property. Instead of going to a bank or traditional financial institution for funds to buy your property, the buyer takes an alternate route and uses seller financing. In this scenario, the exchanger is the bank, and they assign the note and mortgage during the closing to the Qualified Intermediary (QI).
The lender is the QI, in this case, “Midland 1031, LLC.” Any payments are payable to “Midland 1031, LLC” and sent to us for deposit in the escrow account established for the exchange.
However, the loan must be paid before closing on the replacement property to complete the exchange successfully. There are three ways to do this:
The Borrower Pays
With this option, the borrower pays the loan off within the 180 day exchange period and before closing on the replacement property.
This example is exactly what it sounds like. The borrower has full responsibility for paying off their loan in its entirety before the exchange period expires and before closing on their new property.
The Exchanger Buys the Note/Loan from the QI
Here, you, the exchanger, take ownership of the note or loan. You give the owner of the note, for example, “Midland 1031, LLC,” the amount of the loan to buy it. A prepared assignment would show you as the lender. The borrower would then make payments to you.
A Third Party Buys the Note
Like the option above, someone else – who is not the exchanger – purchases the note from the lender and now holds responsibility for it. The third party would give Midland the funds to buy the note, and it would be reassigned to them. The borrower would then make payments to the new lender.
It is up to you to find someone to buy the note. This outside party can be a person or an entity such as a business or bank. Traditionally, disqualified persons can buy the note in this case.
For more information on 1031 exchange seller financing options, please get in touch with Midland 1031 on our website or call us at (239) 333-1031.