The 1031 exchange is one of the most powerful tax-deferral tools in commercial real estate, and one of the most likely to collapse before closing. Between 50 and 60 percent of 1031 exchanges fail, according to Scott Abeel, who spent six years as a commercial retail broker in Texas before launching Exchango, a platform connecting exchange buyers with off-market and pre-market commercial deals. The failure rate is not new. What is less appreciated, even among experienced investors, is that the disadvantage is built into the structure of the exchange process itself – and it persists even when market conditions shift in the exchange buyer’s favor.
That structural disadvantage starts with the timeline. Exchangers have 45 days to identify replacement properties – a window that alone narrows the field. But the real difficulty, Abeel says, is competing against buyers who have no deadline at all.
An exchange buyer bidding on a property may be one of ten interested parties. The other nine may have all cash or flexible financing and no closing deadline, which lets them offer terms an exchanger cannot match. “They can beat your offer a little bit, maybe give terms that you’re not able to give,” Abeel says.
The result is a forced choice: overpay to stay in the exchange, or walk away and face a tax bill that can reach into the hundreds of thousands or millions of dollars. Many buyers end up doing neither – they run out of time without finding a property where the price, terms, and timeline align. Abeel says the core reason exchanges fail is that buyers simply are not able to identify a property that works within the window they have.
The deadline does more than limit a buyer’s options; once it becomes known, it also shifts bargaining power to the other side. Exchange buyers need their brokers to move quickly, which means disclosing their timeline. But that disclosure creates leverage.
Abeel describes a scenario where a broker with an overpriced property learns that a 1031 buyer has two and a half million dollars in equity to place and only days left on their deadline. That broker may push the property more aggressively, knowing the buyer’s alternative is paying taxes on the full gain. Buyers are caught between needing to communicate urgency and knowing that urgency will be used against them. “A 1031 buyer is every seller and every broker’s favorite buyer,” Abeel says, “but it sometimes can be used to their disadvantage.”
At the same time, Abeel notes that disclosure is necessary. If a broker does not know about the timeline, responses slow down – counters on offers take longer, feedback from sellers is delayed, and the clock keeps running. The information asymmetry cuts both ways, but the exchanger bears most of the risk.
One way around both the competition and the leverage problem is to see properties before they reach a competitive process at all. Abeel says Exchango aggregates deals from developers with properties not yet ready to list – including developers willing to entertain an offer before listing, such as on net-leased fast-food restaurants with long-term leases still under construction – and from brokers with pocket listings.
Access to pre-market deals has traditionally depended on personal relationships with brokers – relationships that take years to build. Abeel says that as a broker, he would not have shown a valuable property he was working on to someone he had just met. The platform attempts to bridge that gap by requiring confidentiality agreements on both sides, giving brokers enough protection to share deals with buyers they do not already know.
The platform currently carries roughly $600 million in total deal volume, with around $150 million in active listings at any given time and $100 to $150 million in equity from exchange buyers, according to Abeel. Access is free for buyers and their advisors.
Wider access has also revealed something about how exchange buyers search. Abeel says he has been surprised by how open they are to asset types outside their initial criteria. “A lot of people will come in and set their criteria for retail, and then they’ll look at a piece of land or a hotel,” he says.
Market conditions add a further variable, and in the current environment it works partly in the exchange buyer’s favor. Higher interest rates have reduced overall transaction volume, which means fewer properties are changing hands and fewer exchanges are being initiated. But for buyers already in an exchange, Abeel says, that means less competition for individual deals – though the deadline itself does not change.
For sellers and brokers, the same environment creates its own incentive. Properties that are not getting traction on the open market may find a willing buyer in someone on an exchange clock. “Maybe you have something that you need better pricing on – it’s not really going to work on market, but maybe the exchange buyer works,” Abeel says.
Even with better access and less competition, the exchange buyer still has to find the right property – and that is the one step the professionals guiding the exchange do not handle. Qualified intermediaries and CPAs manage the legal and tax mechanics of exchanges competently, Abeel says, but they do not work with properties directly. When a client asks what to buy, the typical response is a referral to a broker or another platform.
“They just don’t work with properties,” Abeel says. “That’s not their job. They’re not a real estate agent.”
The advisor’s scope ends before the property search begins: finding a replacement that fits the buyer’s equity amount, meets their investment criteria, and can close within the remaining days on the exchange clock. That search is the same step Abeel identifies as the main reason exchanges fail.
About the Expert: Scott Abeel is the founder of Exchango, a platform connecting 1031 exchange buyers with off-market and pre-market commercial real estate deals. He previously spent six years as a commercial retail broker in Texas.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
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