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Perch Weath Insights Blog

What to Consider When Choosing a Delaware Statutory Trust (DST) Broker: 5 Qualities and Red Flags

When you set out to find the right Delaware Statutory Trust (DST) broker for your 1031 exchange, the decision can make or break your investment success. Investors face decisions that require sophisticated evaluations all the time but knowing with whom to invest and trust is vital.

Finding the DST investments that make the most sense for you and receiving knowledgeable and experienced advice by someone that is concerned with your best interests as to which DST(s) to choose is critical. Your broker should also have a diversified menu of investment choices available, an understanding of the DST sponsors' track record and management, as well as the ability to match you to investment options that are aligned with your needs and goals by taking the time and effort to get to know you.

Learn about the red flags and signals that you should consider when choosing a DST broker to walk you through your 1031 exchange.

5 Must-Have DST Broker Qualities And Notable Red Flags

Knowing what to look for and what to avoid can help you when choosing a broker. That means you will be able to consider your investments with the peace of mind that you are getting information tailored to you. But, more importantly, you will gain confidence in knowing you are walking through the process with a knowledgeable and experienced broker who cares about your investment outcomes and who wants a long-term relationship with you.

One: Are they well-established and respected?

The DST industry is smaller than you might think, which means word travels fast when professionals mistreat their clients, especially if it is their common practice. For example, suppose a firm or broker has a history of recommending replacement properties that are less suitable for their clients. That is a telltale sign that they likely don't have the investor's best interests at heart.

What to do: Make sure your prospective broker has experience and understanding navigating market cycles. Ask them about their investment and real estate background; how long have they been doing what they do, and what did they do before?

Two: Do they disclose and do their best to mitigate conflicts of interest?

You need an advisor who can be there for you despite their conflict of interest. Anything that could sway their ability to stand up for your financial interests should be considered when determining whether to work with them, as well as in reviewing the recommendations that they make.

The best DST brokers worth working with follow a strict professional code of conduct, meaning they won't have any unreasonable interests associated with the DSTs they do or don't recommend. That means the DST investment has no ownership affiliation with the broker or their company. Of course, conflicts of interest, such as compensation, will generally exist to some extent.

What to do: It's worth asking your broker outright if they or their company have any affiliation or ownership in the DST investment offerings they put in front of you. You can also ask them about any other conflicts, such as compensation arrangements.

Three: Does your potential DST broker get to know and understand your particular situation?

This is a bigger deal than it might initially seem. Your broker should be wholly concerned with getting to know you and creating a relevant investment strategy tailored to your objectives and circumstances.

Also, make sure they have an education first approach, providing a balanced perspective about risks and opportunities.

What to do: Evaluate the recommendations your broker makes. Challenge anything that does not seem like a suitable course of action for you. They should present options and offer context about why each option could be the best for you and your situation. If they cannot speak to each investment's pros and cons and offer specifics about how to approach those choices, then it is likely they have not done much of an analysis. Meaning, you may not be getting a customized set of recommendations.

Four: What kind of due diligence and analysis team do they have when assessing offerings?

You rely on your DST broker to provide insight and understanding about each DST sponsor and their respective offering. But insight is derived from analysis and due diligence, and the more in-depth, the more useful for investors when they are deciding in which DST to invest. Informed decisions are based on having sufficient and relevant information.

What to do: Ask your broker if they have a due diligence team to analyze DST offerings, and if so, how deep is their bench; meaning, if they say that they solely rely on 3rd party reports for due diligence/analysis, or on their broker-dealer to approve offerings, that's likely not sufficient. The broker should have an in-house team that is solely focused on reviewing the offerings. Ask the broker about the background and education of their due diligence analysts.

Five: Is your DST broker objective and realistic?

Integrity and experience can come across in several ways, but an easy tell is promissory language. Your broker should never guarantee success or outcomes. In fact, they should be clear about risks and benefits, pros and cons, opportunities, and their limits.

They will understand market volatility, have done their due diligence in carefully researching investments they are recommending to you, and never speculate in such a way that guarantees the future performance of your investment. Anyone who talks like they have a crystal ball is not being objective or prudent.

What to do: be wary of concrete phrasing about the amount you'll earn from your investment and be ready to walk away from exaggerated claims. Instead, a prudent broker will discuss the value of an investment by exploring multiple possibilities. Perhaps most importantly, they will be able to articulate their assessment of the value and risks according to your specific individual situation.

Final Thoughts: Finding A Trusted Broker

When seeking the right DST broker, avoid a one-time exchange of professional services. Seek someone who approaches the relationship as a partnership.

If you are considering selling investment property, it is worth understanding the full suite of options available for maximizing the value of your proceeds. Contact us today. Our team would be happy to consult with you about which strategy might be best for your specific investment goals.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

  • * There is no guarantee that any strategy will be successful or achieve investment objectives;
  • * Potential for property value loss - All real estate investments have the potential to lose value during the life of the investments;
  • * Change of tax status - The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • * Potential for foreclosure - All financed real estate investments have potential for foreclosure;
  • * Illiquidity - Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
  • * Reduction or Elimination of Monthly Cash Flow Distributions - Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • * Impact of fees/expenses - Costs associated with the transaction may impact investors' returns and may outweigh the tax benefits

author : Ben Carmona

Ben Carmona is a Managing Partner at Perch Wealth. With over 20 years of applied experience, Ben is an expert in real estate investments, structures, and strategies.

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