The Art of Master Lease OptionsPosted on April 5, 2013 by
Master lease options are a great way to get started in the real estate business but are often misunderstood. A master lease option is two separate contracts, the master lease and the option to purchase. Together they make up the master lease option (MLO).
A master lease gives you the right to “rent” an entire property. This could be anything from a single family residence to a large apartment complex or strip mall. Once you have a master lease in place you control the property. This includes the management and the operations. You can essentially become the landlord yourself or hire management at your discretion.
The option to purchase sets the purchase price for a certain amount of time and for a certain price. You will negotiate this price and time frame during your offer and negotiation process. Usually an option fee is placed at the time of the signing. The option money is used as a non-refundable deposit to the seller in order for you to control the sale of the property. If you do not close the sale in the time frame set in the purchase option, then you will lose the option money. If you do close the sale then the option money is applied to the purchase price.
The benefits of doing a deal like this is you can take control of a property with little or no experience. You don’t have to qualify with a traditional lender for a loan and get an appraisal. You can control the sale with the option money, which is what ever amount you can negotiate.
I just recently took over a 108 unit apartment complex with a MLO. The price is $5,000,000 and I now control the management, sale and the cash flow with a $25K deposit. I’m now running a 5 million dollar asset for $25K. I split the profits with the owner and the best part is I have already recovered my $25K from the cash flow. As long as the property remains profitable, I have a risk free stream of income for the next several years.
Master lease options are a great way to do business but there are some catches. You need to have a very experienced attorney create or review any documents pertaining to the transaction to make sure you comply with state laws. You are putting the “option” money at risk if you can’t purchase the property in the agreed time frame.
The benefits (as I mentioned) are that you don’t need prior experience or a loan. This is a good way for an investor to take control of a distressed asset and then improve the operations. Once the property is stabilized you can then execute your exit strategy such as purchase it or sell it to someone else. Did I mention that you only have to pay what the pre-negotiated option price is? If you can sell it for more than that in the future you get to keep the difference. Think of the possibilities as our real estate markets increase in value in the next few years!