Today’s lending markets are recoiling from the high number of non-performing investment property loans that were written in recent years. The lenders are not unreasonable, but they are certainly looking for accurate appraisals, attractive credit scores, outside income and lower loan-to-value ratios. Several years experience by the borrower with managing investment properties is a plus, but not always a requirement.

However, an investor doing a reverse 1031 exchange and desiring financing for a replacement property of four units or less will generally have to contend with bigger obstacles.

• Prepayment penalties: The loan is expected to be paid down or paid off by the exchange, triggering a prepayment penalty. This can be avoided by proper loan design, as practiced by RFS for its clients.

• Multiple loans and closings: An old approach to financing is to set up a short term loan that will be paid off from the exchange. Retiring that loan and then getting a new long-term mortgage on any debt balance seems logical, but is usually not efficient due to additional settlement expenses including the potential for a second round of transfer taxes. A single mortgage for the whole transaction can help avoid these expenses, except in a few States.

• Cash for the Down Payment: A loan-to-value ratio above 75 to 80% on an investment property loan is nearly impossible. Drawing equity from another property solves the problem, but drawing out cash from the relinquished property may go against the advice of a tax advisor.

• Title held by the Exchange Accommodation Titleholder created LLC: Most LLC’s created for the purpose of holding title of the replacement property will have only one member (owner), that being the Exchange Accommodator. The lender cannot be assigned title, and the client is also not on title. This has always been a major hurdle for financing reverse exchanges, particularly if a permanent mortgage is desired.

• Non-recourse language: Except for filing tax returns, the responsibility for all aspects of owning the property, including the monthly mortgage payments is deferred away from the Exchange Accommodator. From the lender’s perspective, the titleholder is not liable for anything. The borrower is guarantor, but during the 180 days of the reverse exchange the property can not be seized by the lender even if no mortgage payments are made. This feature often causes pause by banks or lenders inexperienced with reverse exchanges.

The last two items above makes the loan ineligible for bundling, and therefore it cannot be sold off to Fannie Mae. Mortgage brokers have a very difficult time placing a mortgage on a replacement property, and often their attempts lead to false starts or disappointment just prior to settlement.

The last two items above makes the loan ineligible for bundling, and therefore it cannot be sold off to Fannie Mae. Mortgage brokers have a very difficult time placing a mortgage on a replacement property, and often their attempts lead to false starts or disappointment just prior to settlement.

We appreciate that the strict time parameters and sequence of events required of a regular 1031 Exchange sometimes pushes taxpayers into a Reverse Exchange (Exchange-Last Parking Arrangement.) This usually ruins the agreed-on financing that may have already been approved. Fortunately, the scope and intent of the Reverse 1031 Financing Solutions service is to arrange compliant financing for Reverse 1031 Exchanges which follow “Safe Harbor” guidelines as set forth by Rev. Proc. 2000-37 and subsequent related rulings.

Please note that this service is offered on a “Best Efforts” basis, and for any residential or commercial property loan, ultimately it is the decision of underwriters at the lending institutions that prevail.