1031 company went bk.

Mortgage and Lending with kandola mortgage services


As you are undoubtedly aware, the 1031 qualified intermediary business has received a great deal of press over

the past few weeks, as a well known QI in San Jose filed for bankruptcy last month (on the heels of a Las

Vegas-based QI folding earlier this year).  I have received numerous inquiries from Realtors, investors, escrow

officers and others about this situation and about IPX1031's security of client exchange funds.


While investment property sellers must use a qualified intermediary in 1031 transactions, the qualified

intermediary industry is not regulated.  How the QI decides to protect the clients' money during the transaction is

up to each QI.  Some smaller QI companies may only have little or no fidelity bonding or E&O insurance


Comments (2)

Rob Egenolf

With the recent spate of QI failures there is no doubt that real property investors have become quite concerned about how to choose a QI.  I have been in the Qualified Intermediary business for nearly 30 years and I can confirm that there are some very real indicators of the security of any QI.


First: Look for completely segregated accounts.  I am also an attorney and my law firm is required to segregate all trust funds held for a client.  While QI funds are not trust funds in the true sense of the word, there is no reason they should be treated any less strictly.  Funds are co-mingled by QI for their benefit and not the customer.  More on this below


Second: Don’t be confused by Fidelity Bonds or Insurance.  What a customer needs to require is some sort of joint signatory control over the segregated account.  Insurance or bonds may (or may not) provide some source of recovery if funds are lost, but an exchanger needs the funds to be there when they are to complete their exchange and the ONLY way to assure that is to have some control over the funds during t he exchange period.  Size and financial strength of a QI may seem like all that is needed but without this security, there is no assurance your funds will be there when you need them


Third: Insist that you receive ALL interest earned on your funds.  The reason QIs co-mingle funds and the reason QIs lose funds is that they usually receive some or all of the interest earned on those funds.  Hence there is an incentive for the QI to take risks with the funds to increase their (not the customer’s) return.  Not only does this arrangement hide the true cost of the exchange, it is essentially stealing the return the exchanger is entitled to receive.  Less than 4% of the QI nationally pay all the interest earned to the exchanger.  Look for these companies  Compare the actual cost (including lost interest) when comparing fees the QI will be paid.  Often the “cheapest” QI may keep the most interest and become the most expensive option.  TJ Starker received “interest” and there has never been any reason all exchangers should not receive this interest.


Fourth: Often smaller companies (who do provide the necessary security) can provide greater flexibility and assistance in your exchange.  Larger companies can only offer “cookie cutter” services and I can assure you every exchange is unique and will present issues that should be discussed and reviewed.  When you want personalized professional service, you will find it in the very experienced smaller QI companies.


Fifth: Look for experience and a long term track record. Ask other professionals about which QI they would use.  Attorneys CPAs and experienced commercial real estate brokers will often have experience with a variety of QI and may provide some insight into who is best in your area.  Remember that the QI need no be local as long as they meet your standards.


These concepts are not rocket science, but it is amazing how often exchangers don’t do even the most basic “homework” before picking  the QI who will hold their exchange funds.

Jun 14, 2007 03:12 AM
Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert

There is a very real concern here and consumers need to know what to look for when choosing a SAFE Qualified Intermediary or Accommodator.  I have written an article on the subject at http://www.exeter1031.com/Selecting_SAFE_Qualified_Intermediary.aspx.  I would be happy to discuss these issues with you in depth.  Just call. 

Nov 24, 2007 03:55 PM