I am writing to you this week more as a public warning, or a real estate warning message if you will, than my regular message. This is something that all real estate agents and investors must be aware of in today's marketplace.

A large 1031 exchange company has declared bankruptcy in the last few weeks on the West Coast. Summit Accommodators 1031 Exchange filed bankruptcy before the end of the year with $13.6 million in assets and $27.8 million in liabilities. They are $14.2 million short in cash owed to their clients. They operate in over 8 states in the western United States.

Summit is not the only 1031 company in the US that has run into financial problems. Most people including real estate agents assumed that Summit deposited the funds in bank accounts insured by the federal government. This is the practice of most 1031 accommodators, but not all accommodators. Also, there are no government requirements or oversight agency or regulations to insure they do protect the clients' money through depositing the money in a federally insured account.

The 1031 accommodation industry operates largely unregulated. Summit was loaning money to Inland Capital, some 13.7 million, which in turn loaned on speculative real estate development. With the turn in this real estate market, Inland Capital clients cannot repay the loans to Inland Capital. Thus Inland can not pay Summit and Summit can not pay the people that entrusted money to them in a 1031 exchange. Many of the principles in the Inland Capital organization are the same as Summit 1031 Exchange. The result of this mess is a lot of people who are at risk of not getting their money; capital gains taxable liability since the money is not there, and purchase transactions that won't close because there are no funds.

The action we need to take as a real estate agent or investor is to be sure you know the company that is holding your money or your client's money. Be clear about where the funds are held and what type of protection you have in the event of a problem. What is the company's philosophy of "escrowed" funds?

Finally while I do not pine for more government intervention I do think that the consumers are not protected in most states because of a lack of rules and regulations with regard to the 1031 accommodations. Most states have zero regulations and rules. We, in the real estate industry, are regulated more on earnest money deposits that are held for 30-45 days than the 1031 accommodations are on large precede deposits that they hold for 180 days. That seems to be contrary to logic. We need to band together as in industry of professionals and get involved in this public safety issue. We need to require out legislatures to enact laws that protect the public and require safe guards, regulations, standards and even potentially licensing of this industry.

I appreciate any support that you can give us in this battle. You can rest assured that I am personally doing everything I can to move this issue forward. I have talked with many people in the industry in the last week raising awareness of this issue. I have had discussions with my local and state Presidents of the real estate boards. I have talked to the real estate commissioner in my home state of Oregon. I have called the President of NAR to express my concern for this issue. If we all take some action together we can better protect the clients that we care about and serve.

Published: January 22, 2009

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Dirk Zeller is a sought out speaker, celebrated author and CEO of Real Estate Champions. His company trains more than 350,000 Agents worldwide each year through live events, online training, self-study programs, and newsletters. The Real Estate community has embraced and praised his six best-selling books; Your First Year in Real Estate, Success as a Real Estate Agent for Dummies®, The Champion Real Estate Agent, The Champion Real Estate Team, Telephone Sales for Dummies®, Successful Time Management for Dummies®, and over 300 articles in print. To learn more regarding this article, please visit www.realestatechampions.com.