Lease + Option vs seller financing?

Question

Up to this point I haven't done seller financing at all, however in order to grow my rental business I think I might need to start looking at it more.

A investment colleague was telling me the absolute wonders of master lease with a option fee paid up front. He said he thought it was preferable to just about any other method, and has been doing it for well over 30 years. To this point, he has bought many, many houses , apartments and even several strip malls by getting them tied up in lease with options.

Looking around, there's tons of property to be had, however in many cases sellers want to get rid of em (or at least do 'something' with them that takes their hands out of it). Seller financing isn't always a good option because banks specifically forbid it, because the buyer has to take a deed transfer and that would cause a lien position loss on their end.

My concerns with leasing would specifically be between property owners who already have tenants in place (And i'm mostly worried about HUD type rentals) which then would require the current lease be terminated, me to come in as new lessee, then to re-lease to the current tenant as a new sublease. This all of course could be done via contracts but it also seems a bit messy, granted anything other than seller financing is going to look messy anyway.

Any thoughts on this vs seller financing would be appreciated.

Don Konipol · Answer

It is somewhat "messy", which is why it isn't utilized more.  While a number of investors utilize this strategy for SFR, I feel a better fit would be commercial property.  An acquaintance of mine was interested in purchasing a deteriorating office building in a gentrifying area, that was at breakeven with about a 55% occupancy.  The property has a non assumable mortgage in place.  While a master lease MAY have been a technical violation of the deed of trust, it is less likely to be flagged by a lender than a transfer by warranty deed.  Further, the owner felt that by remaining in title ownership he was in a stronger position, so he was much more willing to forgo a significant down payment.

The master lessee was able to bring the occupancy up to 80% by providing periods of free rent.  Once the full tenant payments kicked in he had significant cash flow with a small investment.  His purchase option price was lowered each month by about 35% of the master lease payment.  He operated this way for four years.  He was then able to obtain new financing and exercise his option.  At such time the price of the dirt has appreciated so much that he was able to sell out for over twice the purchase price to a major home builder who tore down the office building and build a 24 unit townhouse development.

Brandon Schlichter · Answer

That's an awesome story. The individual I've been talking to is mostly involved in Commercial, but was talking to me about using it for residential, which is what I'm involved in.

Lease + Option vs seller financing?

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