Master Lease Options 101Posted on January 4, 2014 by
Lease options have made a big comeback in today’s market. They are great ways to take control of real estate without using banks or lenders. They are also a great way to fix up a distressed asset that a bank won’t lend on. Once you have the property up and running, you can then sell for quick cash or refinance for a long term hold.
A master lease option is a set of two contracts that give us the right to control the operations and the sale of a property. The term “master” is typically given when you are doing this in multifamily and is just a lease option when doing single family deals. The master lease gives us the right to “rent” an entire property with the right to sublet the units. By implementing the master lease we can effectively take control of the property and all of its operations. We can also control the cash flow!
The master lease side of the agreement is what will allow you to fix any problems the deal may have before you sell it or refinance with a lender. You essentially become the new owner without having to actually purchase the property. This will allow you to hire new management to take control of the deal and to implement your plan of action.
Some areas to improve may be bad management, high expenses or low occupancy. The idea is to use the income that the property is already producing to get the repairs done without having to spend your own money to fix it up. Once it is repaired…sell or refi!
The purchase option is the second half of the agreement. This document allows us to set the sale price of the property for a fixed amount of time. No one else can buy the property while you have this agreement in place. An example would be to place an option on a property for $100,000. Next would be to decide how long we will have that option for. Let’s say 4 years. After this agreement would be completed I would have the ability to buy this property for some time in the next 4 years for the price of $100K. If the value goes to $200K I would get to keep the difference. To place an option on the property takes an option fee. This fee could be as small as $10 or as much as it takes to get the deal done. If you do not buy the property during the option period, then you forfeit the option money. The seller would get to keep this. Consider the option money to be a deposit. It is usually applied to the purchase price when you buy it and lost if you don’t. Try to put down as little as possible while still satisfying the seller.
Now you can see that with the combination of the master lease and the option to purchase we have a master lease option. These two documents allow us to protect the sale of the property while we do our work to get the deal up and running. This also allows us to benefit from the increase in value that the property will have after we do our repairs.
Why would a seller even consider doing this? Lots of reasons. Everyone has problems in their life and in business. Real estate is no different. Sellers have problems from time to time. The key to getting a seller to accepting this type of offer is to identify what problems the property has and what problems the seller has (usually one in the same) and to show how your MLO offer is the solution to their problems. Always make your offers about solving problems and you will have a much higher success rate. Here is an acronym that I use to make sure I am creating problem solving offers.
This stands for Sellers, Property, You. This is the order of importance when solving problems. Start with what the seller wants and needs. Then look at what the property needs and lastly look at what you need. S.P.Y.
If you solve problems in that order (NOT the reverse) then you are off to a great start in using a MLO to make problem solving offers that will get accepted without using your own cash!