How to Use Master Lease Options for Multifamily

Guest Article By Bill Ham, Founder – Real Estate Raw, Author – Creative Cash

A master lease option is a contract between a seller and a buyer that does two basic things. It allows the buyer (you) to control the operations of the asset and the future sale of the property. The master lease option consists of two separate documents: the master lease and the option to purchase. The lease allows you to control the asset while the purchase option allows you to control the future sale.

Here’s an example of a master lease option: Gino agrees to a master lease option offer from Susan for his apartment complex. The master lease allows Susan to sublease the apartments to the tenants. Susan is taking control of the property by “renting” the entire property, with the right to sublet the units.

In short, Susan can manage and control the property. She may hire a management company, or she may choose to manage it herself. The option to purchase (option memorandum) allows Susan to set a price for the property today with a sale date sometime in the future. He can rent the asset while getting ready to purchase the property.

If a master lease option is done correctly, the value of the asset should rise above the option price that was negotiated during the time of the contract (option period). Once it does, you would exercise your option to purchase. The master lease option works for all types of assets, whether a 200-unit apartment complex, a single-family house, or anything in between.

The Purchase Option

The purchase option of a master lease option contract is the portion that gives you control over the sale of the property and is usually the part that comes with a price tag. An option is exactly what it sounds like. It gives the buyer (you) the “option” to purchase a particular property within a set amount of time and for a set price. The buyer usually pays an amount of money for the right to hold this option (option period).  This money is called “option money” and is treated as a deposit.

The option money is given to the seller (or put in escrow) at the time of the execution of the entire master lease option contract. This money “buys” the rights stated in the option document. During the option period, you may choose to purchase the property for the set amount stated in the option contract, or you may choose to let the option contract expire and not purchase the deal. If you execute the option to purchase, the option money is applied to the price at closing. If you do not purchase the property within the time frame set by the option, you will lose the option money. This is the risk of being able to control the sale of the property within a set time.

With an master lease option, you have control over the sale in several ways. The option lets you buy the property for the set amount. It also lets you sell the asset to another buyer if you purchase it first. This may sound complicated, but it’s not. Once you have agreed to an option agreement, the price is set in stone and cannot change for the period that you hold the contract.

If you can find a buyer to pay more than your option price, then you could exercise the option to purchase and sell the property to the next buyer. The difference would be yours. The master lease option contract could be sold too, which will be covered in the next sections.

Example

Imagine you decide to go for a master lease option deal. Here are the details:

• You get a master lease option deal for $1,000,000.

• The master lease option contract is for three years.

• Year 2, you find a buyer that will pay $1,500,000.

• The price is set at $1,000,000, so you keep the difference.

The catch here is that you would need to complete the sale before you could sell the property to the next person. You could use transactional funding. In this case, a lender will come in and lend up to 100% of the needed amount, but for a notably short time, usually two to three days. This would allow you to complete the option agreement and then immediately sell to the next buyer.

There are many other options, such as Transactional Funding. This is a very short term (24-48 hr.) loan at a high interest rate. For now, focus on exercising your option to purchase and close the deal. Then you could immediately sell to the next buyer at a higher price.

As you can see, the option document allows us to not only control the sale but to benefit from the PROFIT at sale. This is a great way to create equity in real estate. Always check with an attorney in the state in which you are doing the deal, because laws change from state to state regarding closing procedures.

The Master Lease

This master lease is the other half of the master lease option and is a formal rental agreement between you and the owner of the property. The lease allows you to take control of the day-to-day operations of the property, and it will allow you to sublet the units to new renters (or the ones that are already there). Your duties will be the same as the owner in this position, including management, rent collection, paying the bills, and covering the repairs and expenses of the property. Under the master lease, you could hire new management or become the management yourself.

The value of controlling the operations is it will effectively allow you to renovate the property and improve its operations without the risk of owning the asset. Once you have it at its full potential, you can then exercise the option to purchase and realize the equity you created between the option price and the new value. The lease portion of the master lease option also allows you to control the CASH FLOW.

Note: I often get asked about the difference between a lease option and master lease option.  Quite honestly, there is not much. The term “lease option” is more commonly referred to in the single-family markets and master lease option is more referenced when discussing commercial or multifamily deals. If you wanted to rent a house with the option to purchase it later, you get a lease option. This is more commonly known as “rent to own.” A master lease option allows you to control multiple units at once.

Why Use a Master Lease Option?

A master lease option is not the only way to approach buying real estate. It is just one of many ways for you to do deals. There are many creative techniques for investors to do deals. The technique is just one tool in the toolbox of a skilled real estate entrepreneur. That said, the Master Lease Option is the best way for a new investor to take control of a property without the hassles of banks, lenders, appraisals, or qualifications.

I have already discussed the requirements for qualifying for traditional financing. Besides the financial aspect of qualifying for a loan, most lenders want you to have experience too. If you are trying to do a large, multi-family property, you may need multi-family experience to get the lender to qualify you for the deal. Experience may not be as much of a factor if you are only trying to buy a duplex.

Read further: https://realestateraw.com/how-to-use-master-lease-options-for-multifamily/ https://realestateraw.com/how-to-use-master-lease-options-for-multifamily/