Negotiating the Master Lease Option (MLO) begins long before the offer is made. A MLO is a contract between a seller and a buyer that does two basic things. It allows the buyer (you) to control the operations of the asset and the future sale of the property.
All good negotiations begin with gathering information, and it’s no different with an MLO. The first bit of information you gather will help you determine the motivation of the seller. If a property is a distressed asset (low occupancy, deferred maintenance, etc.), the seller is more likely to be motivated to sell the property. If a property is a money maker, the seller is less likely to be motivated to sell.
Not all motivated sellers are motivated because the property isn’t making money, but most are. Take a close look at the property itself. If you find, in your first analysis, that the property is distressed or the seller is motivated for other reasons, then this is a prime situation for an MLO.
Demonstrate the Big Picture
As I stated in the realtor section, do not approach a seller or agent and directly ask for an MLO deal. This can make it seem like you have no money.
A good negotiation will be based on your ability to make the seller see the big picture. You need to make the seller aware they have a problem without rubbing their nose in it. Create an objective situation with which to leverage your position. You will do this with your analysis of the deal. Gather all the financial data you can and calculate the cash flow or lack thereof. Gather all the data you can about repairs needed for the property, including the approximate cost of repairs. Calculate the value of the deal using the income approach.
You want to understand the value of a deal and be able to gently educate your seller on the value. Most sellers have an unrealistic view of their property’s worth. Your job is to bring their value back in line with reality and, at the same time, get them to realize the MLO is the solution to the problem.
It’s Up To You to Educate the Seller
Once you calculate the property’s value, you have its worth derived through logic and the property’s income. Your offer and valuation will be based on numbers that are logical and explainable. Otherwise, the seller may feel you are making a lowball offer just to steal a deal. Once you have an objective value for the property, make the seller aware of a few things:
- A lack of cash flow will not allow the property to qualify for a bank loan.
- If the property will not qualify for a bank loan, then the seller is looking for an all-cash offer.
- If the seller gets a cash offer, it is likely to be about half of what the asking price is because it’s all cash.
- If a buyer (besides you) were to come to this market with cash, would they buy something distressed, or would they leverage their money and buy something that is currently operational? Make the seller realize that all buyers will approach the asset the same way as you.
You also need the seller to understand that you did not create this problem, but you are willing to help them solve it. This is where the offer for an MLO comes in. You can gently make the seller realize the magnitude of the situation and then suggest the master lease as a possible solution to the deal. This takes time, but if you don’t spend time getting your seller to this point, your MLO offer may be misunderstood. Remember, a confused mind says no.
Educate the Seller if Necessary
Now you must put on your sales hat and get ready to sell! After all of this negotiation, all you are selling is yourself. You’ll need to convince the seller that the MLO is a way to solve their problems and you are the person for the job.
Also, keep in mind that sellers may not admit that they don’t know how MLOs work. If you think they don’t, then your job will be to explain how it works without making them feel stupid.
For more advice on negotiating master lease offers, you can find Creative Cash on Amazon.
What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company. With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.
