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.
“What do you plan to do with the cash from the sale?”
“Do you have another property you want to buy with the proceeds?”
“Is management (or managing) the problem with the deal?”
These are just a few questions you can ask to try and get a feel for why the seller is selling if they don’t answer you directly. If the seller needs cash for something like buying a new property or something personal then you are less likely to get a MLO offer accepted. If they don’t need the cash or the management of the property is the problem then this is great for you. Most sellers will be interested in a master lease option deal if they are “burned out” Landlords. Bad management is the easiest fix and a great fit for a MLO offer.
If the property is physically distressed (needs repairs) then you need to find out exactly what is wrong and how much it will cost to fix it. This is something that you will do in your due diligence before you sign the contract. Once you know the needed repairs you will have to come up with a plan to fix them and correct the operations of the deal. A MLO offer is really a type of business plan. You need to create a plan to fix the structure and operations of the deal and a plan to get all this paid for.
Once the property is in good shape you will sell it or buy it yourself and the seller gets their money (probably more than if it was sold in the distressed condition). You will need to present this “plan” to the seller so they will believe in your ability to create value for them and agree to the deal. A point of caution here, give the seller enough info so they feel good about doing business with you but not so much detail that they will feel like they can take your plans and do it themselves without you.
I have lost deals like this by giving the seller all the details as to how I was going to fix their property. Armed with my plan they decided to keep the property and fix it themselves.
Now that you have a deal and a plan of action we need to deal with one small issue. How do we pay for all this? There are many ways to dealing with repairs to a property with an MLO contract on it. My favorite way is to get the cash flow to fix up the property for me. I usually try to get the payment to the seller as low as I can so I can use the excess rent money to do the repairs instead of having to come out of my own pocket to fix up someone else’s property. The larger (more units) the deal is the easier it is to use the income to complete the repairs. This is the safest way to create value by mitigating physical distress.
If you can’t get enough income from the property day one (such as an MLO on a house), then you will need to come to the table with some cash up front. If you don’t have the money you need then I suggest that you find a partner that can come to the table with a little money to get the ball rolling. Share the deal with this partner. The profit at sale or any cash flow will be the return on this person’s money. Your profit will come from selling the deal once you have it fixed up.
Creating a plan to create value is the number one way to get sellers to accept a master lease option offer. Convince them you can get the work done and make their asset better than they did, without giving away too much detail is a plan for success with MLOs.
Source: The Master Lease Option Series – Part 3: Creating Value