Master Lease Options with Sharon Vornholt and Bill Walston

this is Sharon born Hulk with the Louisville gals real estate blog here today with my friend Bill Boston of Bill on business net and we are going to talk about master lease options this is a great strategy for real estate investors but it’s one that I think a lot of investors especially new investors aren’t really familiar with so we’re going to get bill to clear up everything about doing master lease options today thanks for coming on today bill you’re welcome Sharon how are you doing I’m good most people know you but let’s start off by having you tell everybody a little bit about yourself just in case we’ve got some new folks on here sure thing I kind of like to refer to myself as a reformed CPA my my background is in accounting and finance and I have a graduate degree in tax law so I spent a lot of years in an accounting practice that’s how I actually first got started and kind of gravitated towards real estate investors those were my favorite clients and it didn’t take too long to find out that the profits were on the other side of the desk so I left that practice started real estate investing and since then I’ve been able to kind of combine the two I don’t actually do the tax work anymore but I do a lot of tax strategies and most of those tax strategies involve real estate investors I’ve also an author a coach but I think more importantly especially for what we’re going to be talking about today is I’m a real estate investor as are you and I think that’s really important when we’re talking about some of these strategies these master lease option strategies are the same strategies that I use every day in my own business it’s the same strategies that has allowed me to close over 51 master lease option deals in the last gosh just shy of four years this isn’t some theory that you’re going to be talking about today listen these are actual strategies that you use all the time in your business and exactly so I’m anxious to dive into what exactly is master lease option for those folks that might not know okay by a strict definition okay a master lease is just a primary lease that controls all the subsequent leases so basically it it’s a lease between an owner and a primary tenant and then that tenant is direct with the with the owner of the property and then there are a lot of leases subleases underneath that so it’s a lease that actually allows you to sublease property and when we talk about a master lease I know a lot of people are familiar with lease option deals with single-family residences and if you do what is called a sandwhich lease option you really have a master lease with that particular property to is just that we usually don’t use that terminology for it usually we reserve master lease for commercial properties a little bit later on but for different types of properties so what they do just have to go into master lease options I think was the commercial bug just like everybody else I’ve been investing for almost three decades and I started with subject to deals single-family homes a lot of lease option stuff I hate banks I think you know that from from working with me and honestly that was another reason that I went to master these options with with commercial I don’t have to deal with the banks but the major reason is like with anyone else I wanted to do commercial deals but I didn’t have the financing just like anybody else says you run up against that obstacle that financing obstacle or that’s how I think most people that’s the first obstacle they run run up to and with master lease options you don’t have to worry about the financing because you’re not going to go with two banks you’re going to be dealing directly with the sellers do you typically have to make a down payment on a master lease option do I don’t know and it depends on what you negotiate with the seller I did make a mistake on one of my 51 deels and i put down $500 but most of the time i can do it without any type of large upfront payment and again it depends on I think the seller that you’re working with you know if you were talking to someone with very large deals and a large number of units then they may want to to have some type of down payment or some type of large option fee but I deal mostly with mom-and-pop investors my niche is like between ten I say it’s between 5 and 50 units but my

average is like between 10 and 15 units and so most the time when I’m negotiating with them I don’t end up having to put down any type of deposit you primarily invest in apartment buildings so what types of properties would master lease options work well for oh gosh you can do a master lease option on just about any type of property retail malls strip malls shopping center you know those type of shopping centers office complex mixed-use buildings where you have residential on the top and the bottom floor is like a restaurant or some type of shopping the multi-family like we talked about marinas I have a friend in Florida that is her niche ok she’s doing marinas with master leaks optional marinas and she’s doing a mass release on the entire marina as well as the restaurant then she’s hired somebody to come in and run and run the rest of area there so it’s working on that mobile home park self storage Senior Living just about anything that you can rent you can do a master lease option on master lease options I typically think about apartment buildings I never really gave a thought to something like a marina or even a self-storage but I guess if you find a sell that once out and they can’t find a buyer with cash then they would be a good candidate possibly for an extra lease option absolutely would okay so how do you find your properties can you give folks a couple of ways they might what you know they might look for properties for master lease option sure they’re they’re both online and offline ways that you can use to find properties for instance online you have a loop net and I know that you know loop net everybody says loop net is where where a good deal goes to die but that’s not really true for mass police option because we want deals that haven’t been able to sell you know we want motivated sellers so for us that’s a good place to start looking for deals so you can find stuff on loop net there’s a site called city feet prop bot is a good site costar is a good site so there are a lot of commercial sites that are available basically what you want to do is just find good motivated sellers offline you can look for expired listings so if you have a broker commercial broker who can send you expired listings because they’re expired with commercial properties just like their expires with residential property apartment owners association is a good place to start networking so that’s a good good place property managers also a good place and bird dogs I love bird dogs and you can use bird dogs for commercial deals just as you can use bird dogs for residential deals so a lot of various ways and then my favorite offline of course is direct mail so you’re a big fan of direct mail just as I’m a big fan of direct mail and you can use you can use direct mail for for property deals as well craigslist you find a lot of deals on craigslist i do i use search tempest which is a craigslist aggregator so basically what search tempest does is it will let you search all of the craigslist craigslist listings in a particular area so i go to search tempest dot-com and put in my search criteria but it searches Craigs list and yes I do I use Craigslist and then I will either contact the seller through either email or text message you know and get them to give me a call back so they’re you given folks really quite a few free ways they can find properties certainly we know Direct Mail works but if you’re just getting started and you really don’t have the money for direct mail that’s just a of tools that we just gave you that are free I think there are both for the most part they’re free aren’t they before the but yeah I’ve in fact almost all the ones yeah almost all the ones now loopnet does have a paid membership I don’t use it I use the free membership and there are a few that I didn’t mention I think prop bot has a pro program as well but I think every single one of the online areas that I mentioned have free sources we can maybe put a list of these sites for folks in into the blog post so they can check them out too for thing let’s say you found your lead now and you want to go and start a conversation

with this seller I’m pretty sure you don’t just go in and say hey mister seller you’re the guy who’s looking for cash then I don’t want to give you any kid would you do a master lease understand this process of how you go from talking to a seller who thinks he’s going to get cash and you somehow get them to not get any cash into a master lease option yeah you’re yeah and you’re exactly right about that I don’t know of anybody who wakes up and says I’m gonna match the lease option in my property day right yeah what what they want to do is sell it and so I and I teach all of my students that you need to approach the seller as a buyer okay and that’s how you begin every negotiation I actually do you know everybody says you start your negotiations with with a letter of intent with commercial property and you do and my first letter of intent nearly always is a letter of intent that that lets out the turret or states out the terms and conditions in which i would buy the property and i start negotiating that way and a lot of times you’re going to find that what you’re willing to offer based on the numbers that the seller gives you is not going to be what he’s asking for okay so that allows you to move over into the transition and and talk about mass release option because I approached it some way by saying okay mister seller based on the numbers you gave me the most I can offer you for the property is X you know and they and you know based on our conversations that’s just not going to work for you and I understand that however if we can structure the deal a little differently then I can probably come closer to your asking prices that’s something we should talk about okay so far I told him re told him we’re going to structure the deal differently and you know if he says no then I know he’s not open to anything creative and I say well good luck to you and selling your overpriced building and when you don’t sell it get back to me or but if he does say yes and I know he’s open to some more negotiation and then I move into talking about a MASH Lease Option deal these folks have to know that there are not that many great big cash buyers with all the financing issues going on do you think that the the fact that they can’t get loans as easily folks can’t get financed as easily has made master lease options a better option for people well I think so I think that it’s better for both commercial deals as well as single-family deals I think the tightening of the credit has made people a little more amenable to a creative situation you know so I think they’re willing to say okay you know getting out of what I’m in right now whatever is motivating them to sell is better than staying in it and getting the cash because they’re not always going to be able to a lot of these deals are not going to be financed at what the seller wants to sell the property for you know if they’re willing to take a deep discount then they could probably get a cash buyer to come in okay but for someone like me it works really well because I’m not going to offer cash right now okay but I do offer them a solution to their problem like a low cash offer then you’re going to just go ahead and straight out buy the property but they usually want their bigger and more inflated price yeah yep that’s what I’m saying and that’s how I approach most of my my deals and I do approach all of them as a buyer and sometimes Believe It or Not you’ll make your deal or you will make your offer what you think is lowball and they’re never going to accept it so you’re all ready to talk about a math lease option deal and lo and behold they’ll sign the LOI and send it back to you and you go oh crap now I’ve got to decide how I’m gonna buy this thing right it is a very good problem to have sometimes but it’s surprising okay I’ve had that happen to a few of my clients and they say now what am I going to do so okay well we’re gonna buy instant yeah right that’s when you do your due diligence right analyzing properties because people know with single family homes is pretty straightforward you look at comps you know you look at your criteria but we’ll just say apartment buildings let’s use that for an example that’s a whole different ball game the way they’re valued the way you look at what they’re worth so let’s talk about analyzing deals a little bit okay for me a deal is all about the numbers right which works out pretty well because I’m

a numbers guy but the the holy grail of commercial is net operating income that is going to depend in large respects what the property is going to be worth and you know everybody says the value of properties in its cash flow all right so it’s in its cash flow it’s in its net operating income and that’s how a lot of properties are valued with the net operating income and the cap rate and I know most people who are familiar with commercial at all I’ve heard of those terms so they know a little bit about how the two relate I know there are other ways some use a gross rent multiplier but it for me it boils back down to analyzing the net operating income so I always upfront get the numbers and then you could have to go through and take a look at those you’ve got to be able to to review those and say yes this seems reasonable this doesn’t seem reasonable a little bit about knowing what the average expenses are going to be so that you know that the seller is not pulling your leg when he says he has a 15% expense ratio right but it but at large respect it starts with the numbers and if the numbers work then I’m going to go a little further make my offer based on those numbers and with commercial it’s a little different in that your initial offer may not be your final offer okay because we do it a little differently than residential we don’t always you know in residential you run the comps you make sure that your offer is going to be the best offer and that’s what you go with right in commercial we do our best offer right what we think is going to be our best offer but after we do our letter of intent and have an offer in principle that’s when the work really starts and we do our due diligence and then based on the due diligence we may find something that will cause us to go back and renegotiate that offer about completely virtual investing do you go and physically look at the properties or do you have someone to look at the properties before I do a letter of intent or before I finish the deal during your due diligence after you think you’ve got a deal okay after I think I’ve got a deal yes I’m gonna want somebody to either go in and take a look and send me pictures or I’m going to go down there and take a look myself however when I get ready to make my initial offer a lot of times I’ll make that offer and send out that letter of intent before I’ve even set foot on the property or had anybody take a look at the property because it’s based on numbers so I guess I thought one thing just popped in my mind they can say well it’s been everything was renovated ten years ago and what happens if you know you do your numbers I guess that’s when you figure this out when you get there and it actually hasn’t had anything done to it in thirty years you’re going to say wait a minute my numbers are no longer my numbers right and and and what’s kind of interesting is the numbers are the numbers okay and so when you’re analyzing the revenues and you’re analyzing the expenses that doesn’t always take into consideration whether renovations have been made whether they’ve not been made that’s still the cash flow now there are some types of what we call deferred maintenance that may affect whether the properties can stay rented how long they can stay rented that type of thing so it might affect those okay but some you know it doesn’t always affect the numbers itself so so when I’m looking at a deal one of the hardest things that I had to get used to and some of the things that my clients have to get used to is we’re not gonna live there right so it might not be the most elegant looking property in fact we don’t look for any properties right we look for what we call B and C properties and so most of it depends on the numbers you want to make sure that it’s going to cash flow think about the new investor is there after you get your net operating expense and all of that is there a perder amount that’s good a good amount like if you’re talking about single-family homes I know people that say I don’t want a house that won’t cash flow at least to two hundred dollars after two hundred dollars I think that’s going to be a very personal decision what you need to look at because remember with with with a master lease option we’re doing it a little bit differently than if we were making the commitment to buy and we’re stuck with the property yeah one of the things I like about massive lease options we we have the old saying maybe it’s not an old saying that you could try it before you buy it

basically so you have yeah you have the ability to go in there and check to see what those numbers are check to see how the property stays rented all kinds of things before you ever commit to finally buying the property right so all you need to do during the term of your master lease is to make sure that the property cash flows and you don’t go in the hole every month paying that guaranteed net operating income to the seller okay so when I’m analyzing a deal I’ll take a look at it it’s okay I want to be able to do value plays and my value plays that’s something that will increase revenues decrease expenses so that the net operating income goes up okay I want to be able to do enough value plays that this property is going to be cash flowing the $50 per door within the first 30 to 60 days because if it’s cash flowing me $50 per door and that’s after I’ve paid the guaranteed net operating income to the seller that I promised him every month then I’m okay and I’m not going in the hole that’s that’s yeah that’s my personal minimum and that’s within the first 30 to 60 days before I’ve even had a chance to get in there and really do what I want to do and do what value plays I want to do you’re valuing your property in that manner you’re talking about the value place if a property is at a certain level where the interior is declining let’s say it needs needs some carpet needs some countertops or whatever in order to maintain or to maybe even attract a little bit better renter is there a level of repairs or upgrades or renovation that you’re willing to do or do you pretty much want it done the day you buy it what it to be okay yeah I when I go in I will be willing to do some cosmetic stuff as long as my cash flow will justify cause bill ain’t coming out of POC for none of these expenses okay so I will not commit to doing anything structural and basically what’s considered to be a capital improvement I won’t do anything with ya like if the roof has to be repaired or if a furnace has to be replaced or if an apartment needs all appliances replaced that’s still the responsibility of the owner of the property and that spelled out very carefully when we go into contract I just tell them say hey this is stuff that you would have to do if you’re going to sell it anyway either in a repair allowance or before you know before the sale is done so if it comes up during the term of the lease then you’re going to have to take care of that okay I will do the other ordinary repairs and maintenance painting that has to be done in between tenants that’s that’s part of the operating expenses which I am responsible for and that’s figured into the operating expenses when I’m analyzing my deal roof repair like shingles or something like that I will probably do I I will do some cosmetic fix up like you know paint the mailboxes put new signs things like that that make the property a little more attractive that will keep tenants there or maybe bring in new tenants I will do those but I don’t do anything structural okay so you’re doing just things and in your agreement it’s written in there that say that was a question that came to mind my it’s my home inspector background coming out and you know what if the furnaces go out yeah what if you have right all the furnaces go out so that’s a responsibility of the owner and then you take care of the smaller types of things right anything that is considered like for those who are familiar with anybody anything that’s considered an operating expense okay is the responsibility when I take over the property because I take over the property management as well okay but anything that is considered a capital expenditure which usually has a life of over you know over a year you know that type of thing for tax purposes the seller is still responsible for that yes lease option is you know how you find the properties a little bit about you know ago she ation and analyzing so what is the typical term of a lease option where you get to try it before you buy it then you got to make a decision yeah I go I like to go with five years and the reason for that is one of the biggest mistakes that I see people making when they try to do something like this is thinking they’re gonna be able to go in and turn around the building and in one or two years not

going to be able to do it okay you really need more time than that I have one deal that I went three years on and that was because the property was already in good condition and it just worked out well three three-year term was really good but most of my master lease option deals are five years or less okay five years or more I’m sorry five years or more do you ever get in a situation where you’re not ready to cash out that maybe you’re not ready to throw in the towel on the property and you go back to the seller and say would you extend it does that ever happen I will tell you it hasn’t yet because I remember I just started these like just shy four years ago so most of mine have not even that haven’t even had to run into it yet I have anticipated that yes and so there are clauses built into the contract where you can negotiate an extension right I even had a guy one time who said I don’t want to give five years know five years won’t work and I said okay I said what about a three year term with two one year extensions will that work oh yeah that’s fine okay so go figure I got my five years that way so yeah you can negotiate a lot of those things with the sellers it’s just whatever motivates them and so yeah I think there may be some that I might go back and and do that with do you do have an idea since you’re just coming up on that five-year term if you were to venture and guess what would you say you’ll exercise most of the options or 50% yes do you have any idea how that’s going to play out right now based on the numbers all of my properties are running really really well okay and I only have one that I know that I’m not going to do anything on I’m not going to exercise my option just gonna turn the sucker back over and it’s not because it’s not cash flowing because it is okay it’s just in an area that I don’t want to be in you know I went into the deal because the the owner was a friend of mine wanted to get rid of the property and I have no desire to own a property in Anderson South Carolina so that’s that’s one that I’m going to going to get rid of and probably what I’ll do is I’ll just flip it to another investor because it’s still a good deal in South Carolina hit me up in just about redo this whole master lease option well bill we just I think we’ve pretty well covered the scope of the master lease options do you have any advice for people that would want to work in this strategy you have any special words of wisdom to get them with master lease options absolutely go ahead and get started I think the biggest fear that most people have is the numbers okay and then going into commercial property they have the fear of numbers making a mistake not having to cash to be able to do the deal right those are the usual objections or obstacles that people have well you can do a master lease option with very little risk okay you’ve got just got to make sure that your contract is is structured correctly very little cash exposure you know and then when you get ready to to exercise your option there are a lot of ways or exit strategies that you can use that don’t even involve going to the banks to get money so I would say get started okay and you’re gonna probably need someone like I did who-who knows what they’re doing and can help you out and answer the questions yeah and I think I want to point that out to everybody that bill does a lot of coaching for folks that want to learn how to do master lease options and all other sorts of real estate strategies so you can hit him up over at Bill on business net and I know that he has a freebie for you a free audio download you want to tell folks about that bill sure the audio download is actually on residential lease options because I started with those and a lot and I think that’s really still a very good strategy especially now with the way financing things like that is is going so it’s an audio called talking lease options and they can get it at Bill on business net slash flipping that’s FLI PP ing bill on business net flipping and it’s just an audio where a friend and I were talking much like sharing you and I are about how to do my lease options on single-family residences link in the in the other

resources that bill talked about I’ll get him to shoot me over a list of those so that I think if the advice he gave you was great just just take the move and make a move and get started because you’ll look up 12 months 18 months or two three years down the road and you’ll still be in the same spot you’re in today and that’s where you don’t want to be you want to exactly you want to do something well thanks again bill for coming on and I’m sure this is a topic that will go back over down the road but for today I’m sure we will with the legal GAO’s real estate blog and Bill walleston with Bill on business dotnet and we’ll be back soon with another episode thanks for coming thanks Sheriff