Overview of Disposition Risk Management

Disposition risks fall into five categories. Tax Risk: miscalculating gains, missing 1031 deadlines, triggering depreciation recapture unexpectedly, or failing to account for state-specific taxes (some states like California have clawback provisions for 1031 exchanges). Transaction Risk: buyer financing falls through, appraisal comes in low, title issues surface during closing, or inspection reveals previously unknown defects. Market Risk: prices decline between listing and closing, days on market extend beyond projections, or seasonal timing misalignment reduces the buyer pool. Legal Risk: disclosure violations, breach of contract claims, lead paint or environmental liability, or failure to comply with tenant notification requirements. Reinvestment Risk: 1031 replacement properties underperform, or capital redeployment into a new asset occurs at an unfavorable point in the market cycle.

Each risk category requires specific mitigation strategies. Tax Risk: engage a CPA specializing in real estate before any disposition; build 15-day buffers into 1031 exchange timelines; always model both exchange and taxable sale scenarios. Transaction Risk: require proof of funds or pre-approval before accepting offers; include financing contingency expiration dates; maintain backup offers. Market Risk: pre-listing inspection and pricing discipline reduce DOM risk; be prepared to adjust price within 14 days if showing activity is below expectations. Legal Risk: use state-specific disclosure forms, obtain a Phase I environmental assessment for commercial properties, and comply with all tenant notification timelines. Reinvestment Risk: apply the same underwriting standards to 1031 replacement properties as to any new acquisition—never compromise standards due to exchange deadline pressure.

Every disposition should have a contingency plan that addresses the most likely failure scenarios. If the property does not sell within 30 days: reduce price by 3-5%. If the buyer's financing falls through after inspection: activate backup offer or relist immediately. If the 1031 identification period is expiring without a suitable replacement: identify a Delaware Statutory Trust (DST) as a backup (DSTs qualify as like-kind property). If market conditions deteriorate significantly: be prepared to convert to a hold strategy, refinance instead of sell, or adjust price expectations. Having pre-planned responses to common failure scenarios reduces emotional decision-making during the high-pressure disposition process.