Master Lease Option

A Master Lease Option (MLO) may be a good way to purchase real estate. A MLO consists of a lease, usually 1-3 years to rent the property; and an option to purchase at a future date at an agreed-upon price.

Master Leases may be used for a variety of reasons, and most are legitimate. For instance, an owner may not want continue to operate a building day-to-day, but does not want to pay capital gains on a sale if they have a low basis. An option would be to lease the entire building to someone who is more willing to operate the building and take on the management. Presumably, the master lease rate will be lower than the market rent so the "operator" can make a profit and justify investment in upgrades and leasing costs for the building.

Capital gains would be paid by the Seller on the eventually sale of the property, but an MLO allows for the taxation to be deferred by controlling the date of sale.

Sometimes a master lease is used when there is a ground lease on the land. This would allow someone other than the fee owner to build a building and "sublease" it to a tenant. This structure is more frequently used for corporate clients who have good bankable credit but do not want to build, own or operate their own building.

A master lease is just another tool for managing control of real estate. Determine the motivation of the seller to ascertain whether a MLO is a good way to go. Finally, before you enter into a master lease, seek professional advice on how best to structure your deal.

Happy Investing!

Pro-Seller Option Form

Here is a form that might be used by a Seller planning to lease option a property they own. While I am not an attorney, this should not be construed as legal advice. Laws of each state vary, and it would be good to have this document reviewed by your attorney prior to use. But it may be a good template to begin discussion.

OPTION TO PURCHASE

THIS AGREEMENT made this day of , 20 between,

, Optionor, and

Optionee.

IN CONSIDERATION (which will be applied toward purchase price) of the sum of

paid by Optionee (the receipt of which is hereby acknowledged by Optionor) the Optionor gives to Optionee the exclusive option, right and privilege of purchasing certain Real property located in the

County of and State of , described as:

This option is subject to the following terms and conditions:

1) This option is not assignable by Optionee unless Optionor agrees separately and in writing.

2) There shall be additional option consideration of $ per month given to Optionee. The

monthly option consideration shall be credit toward the down payment/purchase price of the

property. The credit will only apply to months when the rent amount and any outstanding fees

owed (in the attached Rental Agreement) is paid on or before the due date and in full.

3) Optionor grants Optionee the right to exercise this option for a period commencing on

, 20 and terminating at midnight, , 20 . If not exercised, this

option shall expire midnight , 20 , and Optionor shall be released from all

obligations hereunder, legal or equitable. The obligation shall cease and the consideration here

above receipted for the Optionor, shall be retained by Optionor.

4) If Optionee elects to exercise this option the sale shall take place according to the terms of the

attached offer to purchase agreement, which have been signed by Optionee and Optionor

this same day.

5) Notice of election to Purchase shall be given by Optionee in writing, and by registered mail,

addressed to Optionor, at:

6) All provisions of the Rental Agreement between Optionor and Optionee pertaining to the

aforementioned property shall be performed by Optionee or this option may be withdrawn by

Optionor and Option consideration will be forfeited by Optionee.

7. OPTIONEE agrees to accept subject property in current “as is” condition. OPTIONEE agrees

to make all repairs major and minor to the above named property. Should OPTIONOR

be required to make repairs of any kind whatsoever to the property, the cost of such repairs

shall be added directly to the purchase price stated in the purchase agreement.

If there is a septic system, Optionee agrees to pay for and have the septic tank pumped out

on June 1st of each year this agreement covers.

If there is a pool Optionee agrees to open and close pool each year, and to maintain the pool.

8. OPTIONEE agrees to pay for any and all additional assessments incurred during occupancy

And prior to ownership (example but not limited to: water, sewer, sidewalks, or road paving)

9) The option consideration is for the sole purpose of granting the OPTIONEE the exclusive

right to purchase the subject property at the stated price and terms.

IN THE EVENT THAT OPTIONEE DOES NOT MEET THE TERMS AND CONDITIONS CONTAINED IN THIS AGREEMENT ALL OPTION CONSIDERATION PAID WILL BE FORFIETED BY OPTIONEE AND WILL BE KEPT BY OPTIONOR.

Initial ________

10) This option to purchase will be terminated and all option consideration forfeited, if payment

required on option agreement or any payment required on rental agreement is late for more

than ten days past the due date. Optionee understands that Optionor will be required to supply

their mortgage company with an accurate record of payment history including all instances of

late payments. Optionee understands such information could affect their ability to secure a

mortgage

11) This option to purchase shall apply to and bind the heirs, executors, and administrators

of the respective parties.

12) Optionor may be doing a 1031 exchange on this property and needs 30 days notice of closing

to work out the details with the title company and purchasing of another property.

13) If option money is forfeited by Optionee, for any reason, then the rental agreement will

automatically revert to a month to month agreement, so that Optionor may sell or re-lease the

property.

14. Optionee agrees that they will not record anything against the title, of said property, prior to

closing and owning this property.

15. Optionee understands that Optionor does not hold title (own) this property, but is transferring

their interest in the property. If Optionor can’t transfer title due to something out of their

control (ie.owner refuses to close or can’t transfer clear title). Optionor will reimburse Optionee the entire option consideration plus an additional A$500 for their inconvenience, as full and complete liquidated damages for Optionor not being able to close on this property.

15. EQUITABLE MORTGAGE: This Option to Purchase is not, and shall not be construed as, or

interpreted as any form of EQUITABLE MORTGAGE. It is hereby declared that it is not the intent of the parties to create a loan of any nature or to create a mortgage of any kind. In the event that the Optionee hereunder should ever raise such an issue in a court of law or otherwise this Option shall terminate immediately.

15. Optionor has advised the optionee to seek the advice of a mortgage lender and attorney prior to

signing this document.

18) Time is of the essence in this agreement.

The parties have executed this agreement on the date first above written.

Optionor(s): Optionee(s):

Witness: Witness:

Happy Investing!

Land Installment Contract

Rather than doing a lease-purchase or lease-option agreement, some real estate investment trainers recommend using a land contract.

What is a land contract? and what does it look like?

A contract for deed (aka installment land contract) is an agreement wherein the buyer makes installment payments towards the purchase of a property. The seller holds legal title to the property as security for payment, while the buyer has equitable title. When the buyer pays the full amount due under the contract, the seller delivers legal title to the buyer.

Equitable title gives the buyer the right to live in the property, improve it, rent it and otherwise enjoy all of the benefits of ownership. However, since the buyer does not have legal title, he cannot use it as collateral for a home equity loan (although in some states, banks will lend against an equitable interest in a contract for deed).

The IRS generally treats a contract for deed as a sale, which means the buyer has the tax benefits of ownership. Thus, the payments of interest that are made by the buyer in possession are deductible as mortgage interest, even though the buyer does not have legal title to the property. A contract for deed seller must report the transaction as an installment sale on form IRS Form 6252. Once sold, the seller cannot claim depreciation or any other tax benefits of the property. If the buyer defaults on the contract and the seller exercises his legal option to reclaim the property, the tax code treats the transaction as a foreclosure.

Keep in mind that I am not an attorney, and investors should always consult their own legal counsel on legal matters. Nevertheless, here is a sample Land Installment Contract that you might want to discuss with your attorney:

LAND INSTALLMENT CONTRACT

This Agreement made and entered into by and between _____________________________________, hereinafter called the Vendor and __________________________________, hereinafter called the Vendee.  Witnesseth: The Vendor, for himself, his heirs and assigns, does hereby agree to sell to the Vendee, their heirs and assigns, the following described real estate ______________________________ together with all appurtenances, rights, privileges and easements and all buildings and fixtures in their present condition located upon said property.

1. CONTRACT PRICE, METHOD OF PAYMENT; INTEREST RATE: In consideration whereof, the Vendees agree to purchase the above described property for the sum of __________________________ Dollars ($____________ ), payable as follows: The sum of __________________________ Dollars ($____________ ) as down payment at the time of execution of the within Land Installment Contract, the receipt of which is hereby acknowledged, leaving principle balance owed by Vendee of __________________________ Dollars ($____________ ) together with interest on the unpaid balance payable in consecutive monthly installments of ________________________ Dollars ($____________ ) beginning on the _______ day of _________________ 20    , and on the ___________ day of each and every month thereafter until said balance and interest is paid in full, or until the _______ day of ____________ 20   whichever event occurs first. The interest on the unpaid balance due hereon shall be __________(   %) percent per annum computed monthly, in accordance with a ______month amortization schedule during the life of this Contract. Payments shall be credited first to the interest, and the remainder to the principle or other sums due Vendor. The total amount of this obligation of both principle and interest, unpaid after making any such application of payments as herein receipted shall be the interest bearing principle amount of this obligation for the next succeeding interest computation period. If any payment is not received within ________________ (_____) days of payment date, there shall be a late charge of ______________ (  %) percent assessed. The Vendees may pay the entire purchase price on this contract without prepayment penalty. The monthly installments shall be payable as directed by the Vendor herein.

2. ENCUMBRANCES: Said real estate is presently subject to a mortgage and the Vendor shall not place any mortgage on the premises in excess of the then existing Land Installment Contract balance without first obtaining the written permission of the Vendees. In the event the Vendor should become delinquent in payments on the mortgage, the Vendees may pay the same and credit said payment to the contract price.

3. EVIDENCE OF TITLE: It not being the custom in this area, the Vendor shall not be required to provide an abstract or guarantee of title, state-merit of title, title insurance, or such other evidence of title, but said responsibility shall rest entirely with the Vendees.

4. RECORDING OF CONTRACT: The Vendor shall only cause a copy of this contract to be recorded in the_____________                County Recorder's Office within a period of twenty (20) days after the execution of this Contract by the parties hereto if the laws of the state of ____________________ require recordation.

5. REAL ESTATE TAXES: Real estate taxes shall be prorated to the date of the closing. When the real estate taxes become due and payable, the Vendees shall pay same directly to the ________________________ County Treasurer and provide proof of payment to the Vendor, or at the Vendor's election. Vendee may be required to pay 1/12th the annual amount for taxes to Vendor and allow Vendor to pay taxes when due.

6. INSURANCE AND MAINTENANCE: The Vendees shall keep the premises insured for at least ______________________ Dollars ($____________ ) against fire and extended coverage for the benefit of both patties, as their interest may appear, and provide a copy of the said policy to the Vendor or any mortgagee. Vendor may elect to collect 1/12th of the annual premium each month and pay for the insurance policy annually. Vendor herein shall have the right to enter the premises at least once per year with twenty-four hours notice to Vendees of his interest to exercise his right.  Vendees shall keep the building in a good state of repair and well painted at the Vendee's expense and no major additions or alterations shall be made to the building without the Vendor's permission, which shall not be unreasonably withheld. At such time as the Vendor inspects the premises and finds that repairs are necessary Vendor shall request that these repairs be made within sixty (60) days at the Vendee's expense.  The Vendees have inspected the premises constituting the subject matter of this Land installment Contract, and no representations have been made to the Vendee by the Vendor in regard to the condition of said premises; and it is agreed that the said premises are being sold to the Vendee as the same now exists and that the Vendor shall have no obligation to do or furnish anything toward the improvement of said premises.

7. POSSESSION: The Vendee shall be given possession of the above described premises at Contract execution and shall thereafter have and hold the same subject to the provisions for default hereinafter set forth.

8. ASSIGNMENT: The Vendees shall not sell, assign, or pledge their interest in this Land Installment Contract without the Vendor's written consent.

9. DELIVERY OF DEED: Upon full payment of this contract, Vendor shall issue a General Warranty deed to the Vendees, free of all encumbrances except as otherwise set forth.

10. DEFAULT BY VENDEES: If any installment payment to be made by the Vendee under the terms of this Land installment Contract is not paid by the Vendee when due or within one (1) installment thereafter, the entire unpaid balance shall become due and collectable at the election of the Vendor and the Vendor shall be entitled to all the remedies provided for by the laws of this state and/or to do any other remedies and relief now or hereafter provided for by law to such Vendor; and in the event of the breach of this contract in any other respect by the Vendee, Vendor shall be entitled to all relief now or hereinafter provided for by the laws of this state. Waiver by the Vendor of a default or a number of defaults in the performance hereof by the Vendee shall not be construed as a waiver of any default, no matter how similar.

11. GENERAL PROVISIONS: There are no known pending orders issued by any governmental authority with respect to this property other than these spelled out in the Land Installment Contract prior to closing date for execution of the contract.

It is agreed that this Land Installment Contract shall be binding upon each of the parties, their administrators, executors, legal representatives, heirs and assigns.

Witness: _____________________________________    Vendor:  _________________________________________

Witness: _____________________________________    Vendor:__________________________________________

                                                                                         Vendee:__________________________________________

                                                                                         Vendee: __________________________________________

IN WITNESS WHEREOF, the parties have set their hands this _______day of _________________ , 20____.

STATE OF:_______________

COUNTY OF:______________

On this ______day of _______________, 20____, before me, a Notary Public in and for said county and state, personally came _______________________ ___________________________________________, Vendors, and ___________________________ __________________, Vendees, and acknowledged before me the signing thereof to be their voluntary act and deed.

WITNESS my official signature and seal on the day last above mentioned.                         ___________________________________                                                                                                                                                                                          Notary Public

(SEAL)                                                                                                                                    State of ____________________________

                                                                                                                My Commission Expires: ______________                          LICTS

Happy Investing!

What is an Option?

What is a real estate "option?"
In a previous blog we talked about "control without ownership." Options are a great way to do this in real estate. Here is a tutorial on how they work.

More on Options – The Right to Buy

A real estate sales contract is a bilateral or two-way agreement. The seller agrees to sell, and the purchaser agrees to buy. Compare this agreement with an option; an option is a unilateral in which the seller is obligated to sell, but the purchaser is not obligated to buy. On the other hand, if the purchaser on a bilateral contract refuses to buy, he can be held liable for damages.

A bilateral contract with contingency is similar to an option. Many contracts contain contingencies, which, if not met, result in the termination of the contract. Essentially, a bilateral contract with a contingency in favor of the purchaser turns a bilateral contract into an option in that it gives the purchaser an out if he decides not to purchase the property.

Though the two are not legally the same, an option and a bilateral purchase contract with a contingency yield the same practical result. The receiver of the option (optionee) typically pays the giver of the option (optionor) some non-refundable option consideration, that is, money or other value for the right to buy.

If the option is exercised, the relationship between the optionor and optionee becomes a binding, bilateral agreement between seller and buyer. In most cases, the option consideration is credited towards the purchase price of the property.

If the option is not exercised, the optionee forfeits his option money. An option can be used to gain control of a property without actually owning it:

• A speculator who is aware of a proposed development can obtain options on farmland and then sell his options to developers.
• To take advantage of appreciation in a hot real estate market, an investor can use a long-term option to purchase property.
• To induce timely rental payments, a landlord can offer the tenant an option to purchase.

There are literally hundreds of ways that an option can be structured and every detail is open for negotiation between the optionor (seller) and optionee (buyer).

An Option Can Be Sold or Exercised

An option, like some real estate purchase agreements, is a personal right that is assignable. If you were able to obtain an option to purchase at favorable terms, you could sell your option. The assignee of the option would then stand in your shoes, having the same right to exercise the option to purchase the property. As with a lease, an option is freely assignable absent an express provision in the option agreement to the contrary.

Alternative to Selling Your Option

Rather than sell your option to purchase, you may wish to exercise the option yourself, then sell the property to a third party buyer. However, in today's market we see most consumers who seek Lease Options doing so as they work to repair their credit and take advantage of a rising market.

The Lease Option

A lease option is really two transactions: a lease and an option to purchase. Under a lease, a tenant may have the option the buy the property. The option itself can be structured in various ways. For example, the option may be that of a right of first refusal in the event the landlord intends to sell the property. The option may also be an exclusive option for the tenant to buy at a certain price. When combined with a lease, a purchase option may also include rent credits, that is, an agreement that part of the monthly rent payments will be applied to reduce the purchase price of the property. There are literally hundreds of ways that an option or lease/option can be structured and every detail is open for negotiation between the landlord and tenant.

Lease Option vs. Lease Purchase

The primary difference between these terms is that a lease option provides you the OPTION to buy, if you so choose. A lease purchase on the other hand commits you to the purchase, however, it is a delayed purchase. For example, a lease purchase might work well for someone who has a large bonus being paid 8 months from now and wants a home but simply needs to delay the close date, while allowing them to take occupancy before closing with a lease.

Options can be valuable tools in the arsenal of creative acquisition techniques for a real estate investor. If you are interested in learning more, please send a private message to HomeLandInvestment@gmail.com

Happy Investing!

My Most Profitable Deal

Back in 2008, while the housing market was crashing all around the country, I managed to do my fastest and most profitable fix-and-flip deal. The deal began as part of a mail campaign I was doing in my neighborhood. Here is the letter that I sent out:

I am writing this letter to you today because I am interested in buying your house located at XXXX Yesler Way in Seattle. I live in the neighborhood and run by it almost every morning. I would love to work on a property like this. Would you consider selling it?

I spent 25 years working in the arts, and recognize that there is much more to life than making a profit! My real estate involvement provides not only a means of support, but a way to improve the neighborhood and the community, while offering affordable housing options to individuals, couples and families. This has given me great satisfaction and reward in pursuing real estate, in that I can often buy houses and properties in “as is” condition that other realtors would not want to list. I am willing to fix up and improve properties, thereby improving the neighborhood and offering new buyers or residents the chance to live in a nicer community.

I promise you that I am a serious buyer. I bring in partners to help on properties that require additional funds to purchase or restore, when needed. I won’t waste your time. I hold a Washington real estate license, so you understand that I am serious professional. I pay fair prices for properties based on current condition —with no commissions whatsoever.

If now is not the right time to sell, please keep my information and feel free to contact me at 206-355-1706 any time. Our conversation will be kept completely confidential. Financial, professional and personal references are available upon request.

I look forward to hearing from you!

After the second letter, the Sellers responded and agreed to meet. I followed all of the creative finance training I had been given, and structured my offer as follows:

$245,000   Purchase Price, with a private lender providing the $35,000 down payment, and the Seller providing a $210,000 note at 6.4% interest. I could not get the Sellers to agree to a Substitution of Collateral clause, but I tried. So there was no money down from me to purchase.

$   1,700   Buying Costs

$ 16, 663  Fix-up costs for roof, gutters, exterior paint and carpet

$ 14,867   Holding and sales costs

$364,000   Final sales price, after 44 days of ownership and multiple offers to purchase. Advertising was all on Craigslist, and showing appointments occurred while we were working on the improvements.

$ 92,733   Net profits

So it is possible to get great deals, by following the techniques and training that we have blogged about here.

For more information or consultation on your real estate investment strategies, please message me privately at HomeLandInvestment@gmail.com or call our 24/7 real estate investment hotline at 888-621-4999.

Happy Investing!