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.
You can sell a MLO contract to the next buyer. Once you have the documents in place they can be assigned to a new buyer for a fee. This will allow the new buyer of your contract to exercise the value plays for that property. They will get to collect the cash flow and profits while you get a one-time payday and get to go do it again. By selling the MLO contract you can wholesale properties without owning them. Keep in mind that the longer the time frame of the MLO contract the more valuable the document is. For example, a MLO contract that is for 5 years will be much more valuable than one that is for 1 year. The longer contract will give your buyer more time to fix up the property and cash flow before they have to exercise their own exit strategy. There are no set rules for how much you can sell the contract for. This will depend on the deal itself and your negotiation skills.
Split It and Wholesale It
If you have followed my advice in other articles, then you created 2 separate contracts when you first created your MLO. These two documents are the Master Lease and the Option to Purchase. With the lease you control the operations and cash flow and with the option to purchase you control the sale of the property. You can sell them separately. Someone would buy the option alone to be able to buy it at a good price in the future while letting you operate it for them under the lease. Someone would buy the lease to be able to create a stream of income.
This has been my favorite exit strategy for my MLO deals. Once I get a property up and running I like to exercise my option to purchase. I have fixed the property up and now it is worth much more than my option price so I buy it and operate for cash flow under my new loan. If you need to get a loan from a traditional lender to exercise the option (buy the property) then this will not be a refinance. You can’t refinance what you don’t own. You don’t own the property when doing a MLO. You are just a renter. When you go to the bank they will consider it an initial purchase. You will still have to put down money and qualify for a loan. Even if you have increased the value of the deal you cannot borrow against the new value because then you would have no “skin in the game” and a lender isn’t going to allow that. If you have created value with the MLO then it will be easier to get the loan and you will have equity in the deal but you will have to put down money. Once you own the deal for 12-18 months (seasoning period) you could refinance at the new higher value and then pull your cash out. But when you first purchase (exercise the option) the loan amount or loan to value will be based on the purchase price or appraisal, whichever is LOWER. This is very important to remember because you may need a financial partner to qualify for the loan and a down payment. Take all of this into consideration when planning to use the exit strategy.
These are just 3 possible exit strategies that you could use and that I have used to be very profitable. The possibilities are limited only by your own creativity. Each deal is different and will likely use different exit strategies and even a combination of them. The main point is to make sure you add an exit strategy to your initial analysis of any deal. Remember…you create value when you buy but you make money when you sell.