How to purchase your first commercial property if you do not have 35% down payment cash, ideal credit, and millions in net worth? You must get creative. One way to do this is with a master lease.
Master lease contracts have been around for hundreds of years. Think of a master lease as the “lease with the choice to buy” but over some sort of property. The term lease option is used in reference to single family homes, but for apartments and commercial property, it is usually called a master lease agreement.
In simple terms…
You will purchase the seller’s property by giving him a minor (or no) down payment in exchange for all rights and freedoms of possessing and running the property without legal title exchanging hands. At closing, you get equitable title, instead of a legal title. You are authorized to the property’s cash flow above the master lease payment, all new equity, tax benefits, and every day managing.
Because your fees and conditions are set, all of the benefits are yours to keep. The more competent you are, the more you will make. As the Net Operating Income (NOI) grows, the property’s increase in worth becomes yours. The seller only receives a monthly payment from you on the interest of the difference concerning the lease agreement price and what he owes. Once you sell the property, any amount over the lease agreement price is yours to keep.
In simpler terms…
The Seller gets:
- easy sale of the property
- lease payments on the equity of the property paid every month
- freedom from participation in the operation of the property
The Buyer gets:
- a purchase without banks, loans, or appraisal
- all Gross Income above the lease payment
- Option to purchase the property at a pre-fixed price within a set period of time despite how much the property value has gone up
- any profits above the master lease agreement price
Master Lease Upsides:
- no banks needed
- The seller and you can be as creative as you’d like on the deal terms
- speedy closing, small closing costs, closing as hastily as 7 days
- seller can create easy interest income every month
- buyer can receive a nice income flow as the equity builds-up
Master lease Downfalls:
- foreclosure by seller is easy if purchaser does not perform per lease agreement
- It might result in a due-on-sale clause on the seller’s current mortgage
- seller might not perform his end of the agreement
Master lease Must Haves :
- Must get an attorney to form the master lease agreement. Real estate law and contract law vary by state. Do not download master lease agreements online or buy them from office supply stores
- Must complete a title search to make sure the title is without liens or you are aware of what liens do exist
- Must involve the services of a holding company to preserve ownership of an executed deed and the original documents
- Must record the master lease agreement involving the property
- Must get an appraisal
- Must have a foul-proof exit scheme planned out beforehand. It should be conventional with nominal to no guesswork based on proper research and guidance
- To safeguard that the mortgage and taxes are paid when they should be, you must have a third party pay them (e.g. title company or another type of payment company)
When you see these words, jump on the chance speedily…
Here are important words and phrases to look out for when trying to find properties perfect for the master lease method: owner motivated, seller financing, owner will carry, master lease option, creative offers welcome, open to all offers, JV partner wanted, investor wanted.
In conclusion, here is the secret to doing creatively financed deals, whether it’s a big or small deal…ask!
