Lease Option to purchase a portfolio?

Question

I posted about a month ago about this new opportunity and still need some guidance! An investor is looking to offload his 5 rental properties and I am very interested. I already have a property in the area and this is the perfect opportunity to scale. At the moment, I have enough funds for a downpayment (20%) on 2 properties, but I don't want to tie up all my money so I think I will purchase just one with a DSCR loan. Although these properties cash flow very nicely, the seller's main motivation for selling is that he doesnt want to deal with the "headache" anymore. As these are student rentals, it takes him a lot of time and effort to manage and fill each of the 9 units - time that he does not have as he has a demanding day job. He admits that some units are vacant simply because he doesnt answer the phone when prospective tenants call.

As I don't have 20% of the portfolio in cash, I need to get creative with the financing. I was thinking about a lease option and was curious to hear everyone's thoughts on this, especially if you have arranged one successfully. Specifically, I was thinking I could pay him an option fee, which will give me the right to purchase the property at a later date (and gives me time to source funding). I can pay monthly rent on each of the properties, but something less than what I can ultimately rent them to students for. This way, he gets passive income and he doesnt have to worry about finding tenants, and I can pocket the difference between my monthly rent payments to the owner and the students' rent payments. Maybe I increase the rent on some units and find tenants for the vacant units (not many) to ensure there is a reasonable spread. My thinking is that because the owner wants out as soon as possible, he might agree to this arrangement that frees him from essentially all responsibility at least for the duration of the option. At the end of the option period, I can choose to purchase the property for the agreed-upon price. For background, the portfolio was on the market about a year and a half ago and he did not find a seller at the price he wanted.

What are your thoughts on this? Am I thinking about this in the right way? Any other suggestions out there? I feel that this is a good opportunity and there is a way to make this work, especially because the owner has been very transparent and flexible, but not sure exactly how.

Thanks for the help!

Pierre Guirguis · Answer

A lease option could work in a situation like this, especially if the seller’s main motivation is simply getting out of the day-to-day management.

One thing I’d think about here is whether the real goal is ownership immediately or just control of the portfolio. If the properties already cash flow and the owner mainly wants relief from the operational side, sometimes structuring something that transfers management responsibility first can buy you time to line up the longer-term financing.

Your idea of improving occupancy and operations during the option period makes sense. If there are vacant units simply because the owner hasn’t been responding to tenants, there may be a quick opportunity to increase the income before ultimately financing the portfolio.

Another thing worth looking at is whether the portfolio could be acquired in stages rather than all at once. Sometimes purchasing one or two properties initially and structuring a future purchase agreement on the others gives both sides some comfort.

It definitely sounds like there’s an opportunity here given the seller’s motivation and the fact that the properties are already producing income.

Don Konipol · Answer

“ He admits that some units are vacant simply because he doesn't answer the phone when prospective tenants call.“

I see these types of seller claims ALL the time, in different forms; you can easily raise the rents; I am too busy to keep expenses under control; there’s room on the lot to build two more units, etc.

After 50 years of investing I can state unequivocally that 99% of the time it’s THE OTHER WAY AROUND; the seller is “hiding” expenses (think family doing a lot of the work for “unrecorded” compensation) and or current rent rates were only achieved thru “no deposit required” marketing or “free rent months” added to the lease.

Seller “projections” and most broker projections bear no resemblance to reality.

Abel Curiel · Answer

Hey Victoria!

A lease option would get the responsibility off their hands asap and put you in a good future position to purchase via right of first refusal.

This option would be faster than him selling; he already tested the market and couldn't find a buyer. Even with a seller finance deal, it could take some time to close.

I'd recommend connecting with some RE attorneys to get different opinions on the lease option terms. As @Drew Sygit hinted, option fees and other fees/terms are negotiable.

Sounds like a great opportunity to expand the portfolio, all the best to you!!

Abel

Drew Sygit · Answer

Paying an Option Fee when he hasn't asked for one?

Why don't you offer him a 3-5 year land contract?

Lease Option to purchase a portfolio?

Lease Option to purchase a portfolio?

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