Three Property Rule Implementation

The three property rule is the identification method most Los Angeles exchangers default to because it is the simplest to apply: up to three replacement properties can be identified within the forty five day window regardless of their combined value. There is no value ceiling under this rule, which makes it the natural choice for an exchanger targeting one higher-value replacement property alongside a couple of backups.

Unlike the two hundred percent rule, which limits total identified value to twice the relinquished property's sale price but allows an unlimited number of properties, the three property rule caps the count at three with no dollar limit at all. A Los Angeles exchanger selling a mid-size multifamily property and targeting a single larger replacement, plus two contingency options, generally finds the three property rule more straightforward than tracking a value ceiling.

Because only three slots are available, each identified property should be one the exchanger would actually be willing to close on, not a placeholder added just to fill the list. We help Los Angeles exchangers build a genuine short list of three properties across different submarkets or property types so that if the primary target falls through during due diligence, a real alternative remains available within the one hundred eighty day closing window.

If more than three properties need to be identified, perhaps because an exchanger is dividing a large relinquished property sale across several smaller Los Angeles replacement properties, the three property rule no longer applies and the exchanger must fall back to the two hundred percent rule with the ninety five percent acquisition requirement, which carries a different set of risks if too many identified properties fail to close.

Regardless of which rule applies, the identification of all three properties must be in writing, signed by the exchanger, and delivered to the qualified intermediary before the forty five day deadline, with unambiguous legal descriptions or addresses for each Los Angeles property listed. We prepare this documentation alongside the property search so it is ready to finalize the moment the search narrows to three viable candidates.

Because the three property rule caps the list at three regardless of value, the search leading up to identification should focus on genuinely narrowing down to a small number of strong candidates rather than casting the widest possible net, and we sequence the Los Angeles property search accordingly, prioritizing depth of underwriting on fewer candidates over breadth across many.