Structuring a lease option for Apt. Bldg

2 Replies

So i have been working of this deal for a little while. I have talked to the seller a few times. He has a 12 unit apt. bldg. that rents for 425 a month. Each apt. is 1 bed 1 bath, and is almost always 100% occupancy. He also has a 16 unit which is essentially a 12 unit and a 4 unit on the same property. The 12 units are 1 bed 1 bath as well, and the other 4 are 2 beds 1 bath. He wants to try and sell both buildings to the same person. So when talking to him i decided to see if he would sell on a lease option. He said he would consider and that i could meet with him and his friends that know about lease options this Friday. So i was just kinda wondering if anyone could help me figure out a way how i could structure this deal using a lease option with no money down out of my pocket. He wants $425,000 for the 12 unit. Not too sure what he wants for the other 16 units, or what he wants monthly. He was supposed to come up with a figure for me and never did. I could really use some help from someone cause i don't know a whole lot about lease optioning for apt bldgs. Thanks guys!

Typical response from most small multi owners, "I'll consider it" the fact that he can't give a beginning figure to me says, he's not motivated! Dollars to doughnuts, you're spinning your wheels, IMO.

You need two different contracts, one option and one lease that allows sub-letting.

Search here for a rather recent post as to the option rolling into the purchase agreement to guide the transaction when the option is taken.

In commercial, your lease can be NNN, you can be authorized to effect repairs and hire contractors. As an owner, I'd never allow someone to contract for repairs on the entire building without my consent or control, you might address that as you could scare him off.

Much of the lease needs to be building specific, condition is an issue, I would want each major element addressed, roof, exterior walls, hvac, plumbing, electrical, common areas. Look at a HOA agreement to see areas of concern. Point is, you're responsible for the entire property. If you're deal is 5 years in term, what is expected to be repaired? What about damages, insurance claims and proceeds.

You're responsible for compliance and liability issues, are the or would there be any governmental ordinance issues, such can be adopted anytime and owners are responsible.

Frankly, a lease-option if expected for a long term deal, over a year, is not the best way to approach this, IMO. A Sub-2 is more appropriate, an installment sale drafted specifically to the property with terms of a deed of trust would be better.

You really haven't given much information, much of that given is irrelevant to structuring the deal. To design a deal you need the type of property, a price, equity amount, management intent, what are customary sales in that jurisdiction, insurance matters, length of purchase term, exit strategies, what rights might be conveyed, how maintenance and repairs will be handled and how payments are to be designed that are appropriate and how the are applied. You need to consider the risks to both sides to be acceptable which also plays on how you structure a contract. Taxes are another matter.

Investors starting out have problems because they don't really understand RE, the basics of transferring rights to title. You don't pick a strategy and then go out trying to fit a seller and property to that strategy, you find the property and seller and devise a strategy that meets the needs of the seller that are agreeable to you. There are flaws in all the strategies or systems used and spoken about here on BP, other than straight sales. :)

Tim,

You will need 2 documents.
1. Lease agreement
(terms, explains who is responsible for what, how much down, how much paid to seller per month)
2. Option to purchase
(you set the date with a price)

@Bill Gulley nailed it.

It's counterintuitive to fit the strategy to a deal. It's the other way around. You gather the needs and problems to be solved, then find the solution. You are the doctor, you don't prescribe the strategy until you find illness. One of those strategies is a lease option.

In my experience it's usually a property that can't sell due to location, lower occupancy, death/divorce/debt/distress/taxes and the seller wants the buyer to do the work. Buyer would invest his own $$$ in the property to bring up occupancy.

What I find effective to get the "meeting of the minds" is writing out a plan (keep it simple) on how you plan to stabilize the property. Like 5-10 steps. Then present this with your offer. It shows you did your research. Must management company if you're not doing it yourself.

This property is high occupancy, so you would have to ask good questions to the seller on what are his needs and motivation. Why is he selling? Does he have debt on it? Getting the seller to carry a note should also be considered.

Good luck.

Swat

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