In a Tough Sales Market, Property Swaps Catch On

Ron Keeler is ready to make a deal. After eight months of trying to sell his beachfront home in Coronado, he’s now willing to trade.

Houses, raw land, investment property--whatever--Keeler says if you’ve got substantial equity and are ready to take on a $1-million mortgage, give him a call.

Keeler is indicative of a new breed of home sellers emerging from the crumpled real estate market. Discouraged after months of trying to sell their homes in more traditional ways, these individuals--and some development companies--are now willing to swap. Some aren’t too particular, either.

Some real estate traders are willing to take boats, luxury cars or, says one advertisement, “anything” to get out of oppressive mortgage payments taken on in better times. Others see these trades as an opportunity to get fresh assets they can revamp, re-market and resell--preferably at a generous profit.

Although sophisticated investors have been trading investment properties for years as a way of deferring income taxes on their gains, now the tax benefits are less important than the simple goal of unloading a property, many homeowners say.

“The market is so slow that it’s probably a better avenue to try to take something in trade than to try to sell for cash,” Keeler says.

Adds Romeo Milano, a Los Angeles actor who trades real estate on the side, “When there’s not a lot of money to go around, you’ve got to go back to the basics.” That’s barter, he says.

Although no one has statistics on how many people are now trading--nor on how the current activity differs from previous years--industry experts say there’s substantial anecdotal evidence to prove that the trend is booming.

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A Laguna Beach real estate company, for example, says 50% of sales in one of its developments were done through trades. The company now has 16 homes it is attempting to swap or sell.

“We’re not doing this because we want to,” says a company manager who asked not to be named. “It is just a way to sell houses right now.”

Fred Sands, president of a local realty firm, says trades are “up 1,000%.” Trades are still only a small fraction of the residential real estate market, he adds. But they were virtually nonexistent two years ago.

What’s the benefit of a trade?

Those who have substantial gains in investment property can defer taxes on the gains by trading rather than selling. The savings can be considerable.

Consider someone who has a $100,000 gain on an apartment building. If the building is sold, this individual would have to pay about $28,000 in capital gains taxes. In most cases, however, the entire tax liability can be deferred if you trade.

Even those who have no taxable gains may opt to trade today simply because it allows them to get rid of a hard-to-sell property without forcing the buyer to come up with cash.

In some cases, people with expensive homes are trading down to lower their mortgage payments or to get property in a state where home values seem more promising. The move-up buyer takes on the big house and big mortgage, and the move-down buyer gets lower monthly payments and the possibly simpler job of selling a more moderately priced home.

However, as many traders can attest, finding a clean, one-on-one match is tough.

“It is very difficult to exchange,” said Chon Batt, a Pacific Palisades resident who is trying to swap her Cabo San Jose vacation home. “Either you have a lot more equity than they do, or the other way around. I get the feeling it would be a coincidence if you actually found the right person.”

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Indeed, those who attempt a simple swap--I get your house, you get mine--are likely to be disappointed, experts say. So-called three-corner exchanges are more likely, says Gregg Ritchie, partner at the accounting firm of KPMG Peat Marwick in Los Angeles.

A three-corner exchange employs an intermediary--called an “accommodator”--to stand between two, three, four or more trading parties. The accommodator, usually a bank or mortgage company, holds any cash payments while the traders look for the home or homes they want.

The accommodator then purchases those homes with cash or the equity from traded homes and transfers ownership to the appropriate parties.

However, some maintain that trades between private parties are possible--and often profitable--when the parties aren’t too picky.

Milano, who says he has supported himself between acting jobs by trading property for Ferraris, pianos, boats and work, says that if you keep your eye on equity and potential--rather than the possibly depressing idea that you may be trading down--you could end up enriched.

“One man’s dirt is another man’s gold,” he says.