The Master Lease Option Series – Part 1: The BasicsPosted on March 6, 2016 by
In this series of articles I am going to teach you the art of using Master Lease Options to purchase real estate. I don’t know how many articles it will take to convey all the info I have…so stay tuned!
A master lease option (MLO) is a form of creative financing most often used to deal with distressed assets. I buy and teach commercial multifamily real estate so these articles will be about “master” lease options. If you are investing in single family deals then you would use a lease option. The “master” part only comes in when you are dealing with multiple units at one time otherwise it’s a lease option. You can use the info I am going to teach here to buy single, multi or any type of real estate asset.
A master lease options is simply a document or contract that you will use to control the operations and the future sale of a property without actually owning it. Sound too good to be true? It’s not. Master lease options are done in the real estate business all the time by people who know how to do them. The agreement is made up of two separate contracts, the master lease and the purchase option. Combined they form a master lease option. These two documents should always be kept separate. I will go into more detail on that in future articles.
The master lease document allows us to control the property and its operations while the option to purchase allows us to control the future sale of the property. Under the lease option we will be able to take control of the operations such as management, income and expenses of the property. This will also give us control over the best part…CASH FLOW!
The option to purchase allows us to control the sale of the property at a future date without having to buy the property today. Basically it is an agreement with the seller to set a price for the property now with the right to buy it at a mutually agreed upon date in the future. You will need to put down a few dollars to make the contract legal. This will be a deposit or option price. If you do not actually buy the property at or before the agreed upon date (called exercising the option) then the deposit will be forfeited. If you do buy the property then the money is applied to the purchase price.
The main idea behind a MLO deal is to control the operations with the lease and get it running better than it is now. You control the cash flow. Once you get the property running better (rehab it) then you will exercise your option and buy the property. The value here is that you will set a price for the property in the “as is” condition. When you get the deal up and running the value will increase significantly but remember you set the price already. Now that it is worth more than the option price you can buy it at the option price and you have instant equity.
Your creative mind should be going now. What if you create value in the property but don’t want to close it… flip it! You can flip a MLO just like wholesaling any deal. The MLO contract can be sold just like a property or a contract to buy a property. This type of transaction can allow you to rehab and flip properties without actually owning them or having to qualify for a loan at the bank (that’s the best part).
Master lease options are a great real estate business tool. They are not the only way to get a deal done but when other options fail this is the “go to” move for me. In the next few articles I will be covering these topics and more.
- How to find MLO deals
- How to work with realtors and MLOs
- How to find hidden value in the numbers
- Negotiating the deal
- What kind of seller are we looking for?
- Making successful MLO offers
Each month I will add one more article to the series and each one will get more in depth and cover more details as we go.