The Master Lease Option Series – Part 5: Common Mistakes Using Master Lease Options

I have made a ton of mistakes over the last 10 years of doing master lease options (MLO) deals. Would you like to avoid those mistakes? Well then read on!

1. A MLO Deal Is Not About You- One of the first and biggest mistakes I have made using MLOs is to think about what I want and not to give enough consideration to what the seller wants and what the property needs. Your first step in making a MLO offer is to decide if it is a fit for the seller and property. You need to find out if the seller even knows what a master lease options is. If not then you will need to spend a little time explaining it and how it will solve their immediate problems. If your offer does not solve a problem for the seller then it is likely just an offer that solves your problems. This is not likely to get accepted.  Can you fix up the property using a MLO? Sometimes the answer is NO. Decide on the condition and area before you make a MLO offer. Some areas and some repairs cannot be dealt with no matter what type of offer the seller is willing to accept. You want to get good deals and solve problems not inherit someone else’s headache that can’t be fixed. Here is an acronym I use to remind myself of this process- S.P.Y. This stands for Seller, Property, You. This is the order in which you need to solve problems. Most people start a MLO offer with the reverse idea (Y.P.S.) and this doesn’t typically work.

2. Exit Strategy Is All Important- In real estate the most valuable part of any deal is the exit strategy. I hate the old saying “you make money when you buy”. I disagree completely. You make money when you sell the asset and cash a check. You create “value” when you buy but if you don’t exit the deal profitably you don’t make money. Ask anyone who has ever lost a deal or went into foreclosure if they made money when they bought that deal. NO!

   Your exit strategy must be an initial part of your MLO analysis. Don’t just look at the property to see if it can be fixed up. That is important but you also need to consider the hold time of this deal. Where will the economy be when you get ready to execute your option to purchase? Will the banks lend on the deal? Will the value be such that you can sell for a profit? Did you create the contract to last long enough to be able to assign it to a buyer for a cash payment? These are just some things to consider when you first analyze any deal not just a MLO offer.

3. Not Enough Deal Flow- This was a big mistake of mine in the beginning. If you don’t look at very many deals, they all start to look like good deals. Not enough deal flow makes you desperate for a deal and leads to mistakes. If you look at lots of deals you will be more comfortable in passing on marginal assets because you know a really good deal is just around the corner. If you only look at a few properties each month you will start to get anxious and you will want to “just get one done”. This attitude will make you chase a deal that is not a good deal. I have been guilty of this a few times. Once you are fully committed to the project you will start to wonder how you convinced yourself that this was a good project in the first place. Not looking at many deals makes you minimize problems that were likely staring you in the face during your analysis. No matter what asset class you are trying to buy (houses, apartments, storage, etc.) you need to be looking at 3-5 properties every week at a minimum. Deal flow builds confidence!

4. Not Enough Education- This is a problem that never goes away really. You should of course always be educating yourself. One mistake I made early on was to try and convince a seller to give me a MLO deal when I didn’t understand the process well enough. The seller started asking detailed questions I couldn’t answer. This did not give the seller very much confidence in me and the deal fell apart. Get as much book info on the MLO process as you can. This will allow you to explain to a seller or agent how the deal works in detail. If you are attempting your first MLO then this is an even more important concept. You may run into the objection “you have never done this before”. If a seller or agent says this you need to agree with them that this is your first deal but then you will dazzle them with your technical knowledge and this will give them the confidence to do the deal. If you can’t dazzle them with your technical info then perhaps they shouldn’t do the deal with you. Get educated! It’s the only investment that always pays.

It’s only your first deal once. Get started!

Bill Ham