Fees
Our philosophy regarding fees is easily summarized:
- Increasing complexity, rather than the value of the assets, translates to higher fees.
- We’ll match a lower fee from any other Accommodator as long as that Accommodator’s processes are as good as ours. See our “Last Look Fee Guarantee” for details on how we compete.
- Our fees are fixed price and there are never any hidden or unexpected fees. While there may be unexpected costs (i.e. new LLC taxes), ExStra never benefits financially from them.
Our fee for a basic Exchange First or Exchange Last involving real estate is $5,000.
Additional complexity will drive the fees higher. Additional complexity derives from a variety of requirements: multiple properties, third-party loans, improvements, customization, and so on.
Our standard practice is to discuss circumstances and objectives, formulate a strategy and then produce a documents (we call it a “pro forma”) that describes the form and mechanics of the exchange, the specific assets involved, the specific steps that we propose to take and the roles and responsibilities of each party. The proposal will also include a formal quotation for our fees and our best assessment of other costs that the Exchangor will incur.
Reverse Exchange Fees and Delayed Exchange Fees – Apples to Apples?
Many potential Exchangers are puzzled by the large relative difference between fees for reverse exchanges and delayed exchanges (e.g. anywhere from $500 to $1,500). Some insight into the Qualified Intermediary industry and its standard practices quickly clears up the confusion.
In a delayed exchange, the QI holds the cash proceeds of the sale of the Old Property for a period of up to 180 days. The QI will deposit these funds in a bank with which it has formed a relationship that allows it to earn interest based on its total deposits and to satisfy other regulatory requirements. The interest earned on the funds held by the QI is the QI’s primary means of generating profits.
For example, suppose a client engages a QI for a delayed exchange in which the sale of the Old Property will generate $1million in proceeds. Suppose further that the close of the New Property is 120 days out. The cash is placed in a bank account “owned” by the QI and generates 1.75% interest. During the exchange period, the funds earn $5,833 during the exchange period. If the QI also charges a fee of $750, then its total earnings for the exchange would be $6,583.
The delayed exchange process is a very simple one. Most QIs can populate their exchange documents, review a closing statements, produce closer and wire transfer instructions and open a new account in an hour or two. Not a bad way to make a living, it is?
The Exchangor, in this case, sees a $750 fee going to the QI and sees its $1million in equity going to the QI for 4 months. The return on equity for the Exchanger during those 4 months is zero. If the QI shares some of the interest – and most do not with rates as their current levels – the exchangers ROE may a slightly greater than zero. In few, if any, cases does the Exchanger get the majority of the ROE.
By comparison, in a reverse exchange, there is no cash being held by the Accommodator. Its profit is derived entirely from fees. And, even the most basic reverse exchange process is substantially more complex that a delayed exchange. The opportunity to create and streamline reverse exchange processes that mask the complexity for the Exchanger and reduce the cost for the Accommodator is that which ExStra pursues.
However, there may be benefits from using a reverse for the Exchanger that are not often mentioned and virtually never analysed in detail by a QI. In both the Exchange First and Exchange Last forms, the Exchanger has access to both properties during the exchange period. If the properties are producing rents, then the Exchanger enjoys two sources of income. The Exchanger can also depreciate the property it owns.
ROE for a reverse strategy then becomes a matter of comparing various costs – interest on purchase money for the New Property perhaps being the most significant – and weighing them against the income stream. In many, many cases, the overall economic benefit of a reverse exchange is superior to that of a comparable delayed exchange due to the presence of two income streams.
This type of analysis is avoided by most QIs because of their profit models. However, we at ExStra are committed to helping potential clients develop their optimal strategy, even if it includes a type of exchange we do not perform. A template for developing an analysis of the relative exchange economics is available here.