Bill Ham has been investing in real estate for 8 years and has created a portfolio of nearly 400 apartment units in Macon, GA. He created his entire real estate investing portfolio using creative and seller financing.
I have been asked the same question a few times lately so I decided to answer it in this article. “Where can I get a master lease option (MLO) contract from?” The answer is easy- Google. You can search for MLO docs online. There were dozens of versions from just as many sites. I highly suggest that you have an attorney review any docs you get off line before using them. When I am asked this question I usually respond by telling the person that they aren’t really asking the right question. The real question is not “where do I find a MLO contract?” but “How do I use it?” You can print up the best master lease option document you can find but if you can’t get a seller to sign it…who cares?
Getting a seller on board with any kind of creative financing can be a challenge. You will find it a lot more difficult without the right presentation. Pitching your idea to the seller or realtor is the key to getting the deal done. Here are a few tips to make your next MLO offer a hit! Read More >>
The Master Lease Option Series – Part 7: MLO Exit Strategies
By Bill Ham on October 3, 2016
A good investor always knows the way out before going in. I don’t like the common real estate adage “You make money in real estate when you buy”. Personally I think this is a terrible statement. You make money in real estate when you cash the check and it clears the bank. If you don’t exit the deal profitably then you didn’t make money when you bought. Ask anyone who has been through a foreclosure if they made money when they bought. You may create value when you buy but you make money when you sell. This is why I don’t like that statement. It minimizes the value of a solid exit strategy. In this article I will discuss how to exit a master lease option (MLO) deal PROFITABLY.
The first step in analyzing a MLO deal (or any deal) is to decide how you will get out of the deal someday in the future. This can be hard when you are new to the business because everyone has told you that closing the deal is all important. While closing is important it’s not as important as the exit. Here are some exit strategies for MLO deals. Read More >>
The Master Lease Option Series – Part 6: Managing for Cash Flow
By Bill Ham on September 6, 2016
Cash flow and equity are the two main reasons for doing a master lease option (MLO) deal. Both can be had using this creative technique to close real estate deals. Proper management will create both and make your next deal a cash cow!
Business is not about making money, it’s about keeping it. It doesn’t matter how much money you bring into your business if you lose it all in the expenses of running that same business. When discussing real estate keep this simple formula in mind.
Income – Expenses = Net Operating Income (NOI).
NOI – Mortgage Payment = Cash Flow
If we cut the cost of operations then we will increase cash flow. The two main ways to do this with a MLO is to have the property create more income and less in expenses. In this article I will be focusing on managing the deal to cut down on operational expenses. Most people will hire a management company to take care of the daily operations of their real estate. If you are not managing the property yourself you will need to work closely with the manager/management company to achieve this. Read More >>
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!
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. Read More >>
One of the most common questions I get asked is “how do you find master lease option deals?” In this article I will show you how I have found most of my master lease option (MLO) properties.
The short answer to this question is REALTORS!
I will acknowledge that in the single family investment market, most hot deals probably come from your own advertising or from wholesalers that find you the best deals. In the commercial world the game changes significantly. Most sellers of a commercial property, such as an apartment complex, are not going to go out to the road and put up a FSBO sign hoping a buyer rides by and sees the sign. Most of the best deals are not on Loopnet.com either. While advertising such as direct mail and other forms of marketing can work in the commercial world, I have found that the response rate is usually too low to be worth the effort. The response is significantly lower than when advertising for houses. Read More >>
The Master Lease Option Series – Part 3: Creating Value
By Bill Ham on May 2, 2016
Creating value in real estate is a great way to make money. In this article of the Master Lease Option (MLO) Series I will discuss how you can add value to your real estate deals using MLOs so you can make more MONEY!
Getting a seller to accept a master lease option deal is everything when using this technique. If a seller doesn’t believe that giving you a MLO on their property is the best option, then they won’t. Your job is to make the seller realize the value in allowing you to solve their problems with a MLO offer. The best way for you to present this idea to the seller is to know how to create value for this person. This will start by analyzing and becoming familiar with what the deal needs. In most cases we will get MLO deals done on distressed assets. You will show the seller that you can “un-distress” their property with a MLO and this is the biggest step in getting your offers accepted. If you can turn their property around then you have created value and the likelihood that you will complete the transaction is much better and that is what the seller wants. For the MLO to end in a sale and this is what you need to convince them of.
Why is the seller selling? You should get the best answer to this question as the first step in your analysis of any deal. Sometimes sellers will be honest in their answer and sometimes not. First ask the question directly. No matter what type of answer you get ask several more questions to get the real story. Read More >>
The Master Lease Option Series – Part 2: Keep Them Separated
By Bill Ham on April 3, 2016
I mentioned in the last article of this series that a master lease option (MLO) agreement is made of two separate documents. The two documents are the master lease and the option to purchase (also called an option memorandum). The separation is for many reasons, which I will cover in this article. Keeping them separated allows for more freedom and safety on your side of the deal.
The first half of the agreement is the master lease. The lease allows us to control the operations of the property. This means that if you find a deal that is distressed due to something the owner has done or not done then you can remedy those issues by controlling the daily operations with the lease. Note that I mentioned the distress coming from the owners operations. I make this remark because sometimes properties are in areas or neighborhoods that naturally have high vacancy or will be difficult to operate in general. A lease option is for fixing distressed deals not distressed neighborhoods. Make sure that a distressed asset is in a valuable area and has been mismanaged. These are the “MLO gold” that we are all looking for.
Once you have analyzed a deal and realize that better managers could do a better job… you are on the right path. The lease will allow you to hire a new management company or it will allow you to manage it better yourself. By keeping this document separate you are keeping the cash flow separated from the sale of the deal. Cash flow is a very valuable part of a lease option. The lease portion allows us to control and keep the cash generated by the asset. You will owe the seller a “rent” payment each month but anything above that is yours to keep! Read More >>
The Master Lease Option Series – Part 1: The Basics
By Bill Ham on March 6, 2016
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. Read More >>
Goals can be a great thing if we set the right goals using the right methods. Setting the wrong goals can be very detrimental to your business. Are you setting the right goals? In this article I am going to take a contrarian point of view to the normal goal setting info that most people teach. Let me go on record as saying I disagree with most of the general goal setting info put out in the information market these days.
When I take on a new real estate student one of the first things I do is to have a discussion about the student’s goals for the future. Usually I receive relatively similar responses such as “I want to quit my job and create $10,000 a month in passive revenue in the next 6 months” or “I want to quit my full time job and close 1000 units in 2016.” These technically may seem like good goals. They have a definite time line and a clear starting and stopping point. It will be easy to know when you have reached these goals. These are all things that make up a good goal but they may not be good at all. If these seem like goals you would set or if you have goals that are similar then I will ask you the same question I ask my students.
“Do you know what it takes to complete these goals?” Read More >>
Selling often has a negative connotation to it. I hear people say sell is a “4 letter word”. This is an unfortunate point of view as selling is an extremely important part of being a successful real estate investor/business owner. Selling in real estate has many more functions than just buying and selling the actual property. We sell ourselves to investors when we raise money for our deals. We sell when we convince a realtor to work with us and give us the hot deals or when we convince a seller to give us the contract instead of someone else. If you want to use any creative financing techniques, such as a master lease option or seller financing, you are definitely selling the owner or agent on that idea.
Don’t think that selling is just describing the value of something and hoping someone wants what you are describing. Selling is helping. The first step to understanding a successful sale is to find out what someone needs help with. If the person does not need something or doesn’t think they do, then you are not likely to sell them anything. Here are a few steps to better selling.
1. Ask lots of questions. What does the person need or think they need?
You need to identify a perceived need and then fill it. Notice I said “perceived” need. If the person doesn’t think they need anything… then they don’t. You need to identify what they need. If you see that they have a problem but don’t know it, you need to gently bring the problem to their attention. An example might be a distressed property. They may think the value is much more that it is. You need to educate the seller on the real value while showing them that they have a need. The need here is to sell the property when a buyer may not be able to get a loan because of the distress they let the property fall into. This is where you might “sell” the idea of a master lease option or seller financing to get the property back in good shape where a bank will then give you a loan and you can complete the purchase. Read More >>
You don’t always need money to buy real estate…if you know how to use creative financing. Creative financing is a broad term. There are many ways to complete a real estate transaction using creative financing, so many in fact that it would take me at least a full day to teach you all of the tricks of that trade. In this article I am going to cover the two most popular creative financing techniques that I have had the most success with. They are Master Lease Options (Lease Options) and Seller Financing. I created a 400 unit portfolio using creative financing without ever needing a traditional lender like a bank and you can too. It’s really not that hard.
Master lease options (MLO) or lease options are a great way to get started in the real estate business or to limit some of the risk of buying a distressed asset. We use the term master lease options when we are discussing a multifamily property as there is more than one unit involved, therefore the term “Master Lease”. If we are discussing a single family deal then it’s just a lease option. They are basically the same thing and will work the same way.
A master lease option is a set of two contracts. The first is the lease that allows us to “rent” the property with the right to sublet or re-rent the property to a tenant. This gives us control over the operations of the property and the CASH FLOW! With this document we now control the operations of the deal including management. This will allow you to manage it yourself or to hire a management company to do it for you. If there is work that needs to be done to the property you can now get it done under the lease option. If there is bad management you can now hire new management and lease up the place so it makes more cash flow (multifamily). The lease will set a “rent” payment to the seller and it will stay fixed for the life of the contract so you always know what the payment is. Ideally this rent payment will consist of the owners mortgage payment, taxes, and insurance. This will allow the seller to break even and will allow you to keep any positive cash flow! Read More >>
“What size property is right for me to start with?” This is a question I get asked all the time. My answer is usually the same. “Depends on how much of a loan you can qualify for”.
Unless you already have all the cash you need to buy your next apartment deal (and I am assuming you don’t) then you are going to need to get a loan. Understanding what it takes to qualify for a loan is one of the best ways to decide on a property size when you are starting out. If you try and go too big you are limiting the chances that you will complete the project. 80% of your efforts in finding deals should be spent looking at deals that have the highest chance of closing. What has the best chance of closing? Ask your sponsor.
In almost all loans commercial lenders want to see that you have the net worth equal to or greater than the loan amount. For example if you want to borrow $1,000,000 then you need to have a total net worth of at least $1,000,000 or more. Now, the nice thing about this situation is it doesn’t have to be just your net worth, it can include the net worth of your sponsor. A sponsor is a high net worth partner that you get to join you in the deal who brings the balance sheet you need to satisfy your lender. That is the great part of the multifamily business. We can get partners that will help us build our business and there is enough cash flow and equity for us all. Read More >>
In this article I am going to take a different approach as to the format. This time I am going to give you a list of tips for finding and working with real estate Coaches and Mentors. A good education is paramount to building any successful business. Good mentors are the foundation of a good education. Here are some things to keep in mind.
Improper goal setting can really hurt your business. Proper goal setting can make you rich. This is a concept that I see most new investors and real estate business owners learn the hard way. If you don’t know how to set proper goals for yourself then you are very unlikely to obtain any goal. In this article I will help you to learn the art of goal setting.
Whenever I begin mentoring a new student or business client I always start by having them submit their goals. I am actually more interested to see how this person sets goals more than the goals themselves. Most people will set goals based on what they want with little knowledge of what it takes to accomplish those goals. Understanding the requirements of the goals we set will greatly help us achieve them.
I follow a similar process for goal setting that the U.S. military follows. It’s called “Backward Planning Process”. Basically I decide where I want to be. What is my end goal? Once I know exactly where I am trying to go, I work backwards from that point. For example if I want to buy an apartment complex I start working backward with questions like this... Read More >>
Unless you are already rich and have all the cash you need to build your real estate empire, you will probably need to explore the world of private money. Private money can come in many different forms such as investor’s capital, private loans, and hard money loans. Most real estate entrepreneurs start with capital from friends and family. This may be the best place for you to start raising money for your deals. Depending on the relationships you have with your friends and family will determine if this a good place to start or not. They may be willing to join you in your deal or they may still see you as the person they remember growing up and not the new real estate mogul you are now. Regardless of their opinion the best way to start raising money from your immediate contacts is to focus heavily on your real estate education. Friends and family will know you are new to the business and may be hesitant to jump in. If they see the amount of education and work you are putting into your new business then that attitude may change.
When you are ready to start farming cash from new sources then you need to start by networking. Networking is one of the best business skills you can learn. In the beginning most people are nervous about networking. I have found that this is usually because the person is not comfortable enough discussing the subject of real estate. Again you need to be constantly working on your education. This will lead you to be able to network confidently, discuss and answer questions, and to start building trusting relationships with new investors. If you are not comfortable and confident in your ability to discuss real estate investing they will not likely be confident in you. Read More >>
Partners can really make or break your business. Finding good ones is easier said than done. How do you find or attract the right partners? How do you know when the right person comes along? Will they want to partner with you and what should you offer them when they do want to partner with you? These are questions I get asked all the time. Here are some ideas about partnering in real estate but this article is not about the legal structuring side of partnerships, it’s about the people side.
A good partnership starts with equal but opposite skills, not necessarily a friendship. It’s good to be friends with a partner but contrary to popular belief that is not the most important part and not where you should start. A good partner will bring strength to your weaknesses and you the same for them. You are going to be splitting a lot of hard earned cash with this person so you want to know what it is that they bring to the table. What are they capable of that you are not and what are they capable of that you couldn’t easily hire an employee to do? The first step in answering the questions is to do a long self-analysis. Start with what you are good at. Ok you don’t need a partner to do any of those things. Now what are you really bad at? Now you know what a partner should bring as far as skills are concerned. They need to be good at what you are bad at or have what you don’t. Read More >>
I will never forget my first business/real estate mentor. I was set to taxi the plane out to the runway on a flight to Carrabelle Florida. My passenger for the day was a wealthy real estate investor and developer. I was flying him to FL for the afternoon because he was in the middle of developing a new condominium community on a prime piece of water front real estate that I had watched him negotiate and purchase a few weeks prior on a separate trip that I flew him to Florida for.
At this point my real estate career didn’t exist at all. I was a pilot flying for a medical supply company in Macon, GA. My passenger (Lee) was a friend of the owner of the company I worked for. The owner had invested in Lee’s next development and had given him access to the plane (and me) to take him down to the development site when he needed. At this point in time I was working on my flying career but I was slowly getting the real estate bug. Little did I know that in less than a year from that fateful flight, I would be completely out of aviation and full time in real estate, never to look back.
As we taxied out to the runway on a beautiful spring day Lee said something that would change the course of my life forever “what’s that button for?” Read More >>
One of my favorite business books is Good To Great by Jim Collins. In this book Mr. Collins gives a great example that I realized applied to me when I was building my real estate business and will apply to you too. The author gives us an example of a great big fly wheel. He describes this as a giant metal disk on a thin pole. Imagine this disk weighs thousands of pounds and is currently stationary. Your job is to get this disk spinning.
It is easy to imagine that it will take time and effort to get the giant, heavy wheel to spin. You will begin with a single shove on the wheel. Very little will occur with this initial input from you. The wheel may move very slightly. You will push and push and the wheel will slowly start to move. Your effort will be great and the results will be minimal. Shove and shove and shove…the giant wheel begins to spin slightly faster and faster.
At a certain magical point the wheel will become much easier to spin. The weight of the wheel is now working for you. Its own momentum will keep it spinning with very little effort on your part. You can now give small gentle pushes and the wheel will keep spinning on its own. Read More >>