This is Part 2 of a 3-part series on how to control AND profit from commercial investment property with a Master Lease Option
Part 2 – [You Are Here] – How to Find Motivated Sellers and Get Them to Agree to Master Lease Options
Ok, here we are with part 2 of this Master Lease Option series.
Good stuff, right?
In this post, I’ll share with you several ways you can find motivated sellers AND the motivating reasons for these sellers to have an interest in an MLO deal.
Let's kick it off with finding the motivated sellers!
This is how this works. Contact three to five commercial real estate brokers. You find their names and their contact information from Google or LoopNet.
All you have to do is go to Google and type in “commercial real estate broker [city],” like “commercial real estate broker Dayton” in order to get a listing of commercial real estate brokers.
This search will bring up real estate brokers who have listings for those property types in that area.
When you’ve compiled the list of about three to five of them with their contact information, you call them on the phone and say…
“I represent a company that’s buying multifamily in Dayton. Can you send me info on any active and expired listings you have for 20-unit buildings at/or below $2 million?”
Obviously you’ll ask for the area that you want and the number of units you want and whatever price point you're looking for.
Typically I’ll say between 10 and 50 units at/or below $3 million but you can determine your criteria.
And then you work the expired listings.
They’re going to send you the active and expired listings but you’re going to work the expired listings by doing some research to find the owner’s contact information via Google, LinkedIn or Facebook and contacting the owner directly to present a Master Lease Option.
You can also get access to expired listings lists for a fee with services such as RedX.
Now, LoopNet isn’t the best place to look for MLO properties because we want to deal with the seller directly and these properties are usually listed by a real estate broker.
But I like to mine LoopNet for old listings and seller financing listings.
If a property is listed on LoopNet offering seller financing, that my friend is the definition of motivated seller.
Go to LoopNet.com and register for a free account. Then go to the Search Properties for Sale and then under Property Type just highlight Multifamily.
If you’re going to do office, then you highlight office. If you’re going to do industrial, highlight industrial and on down the list but I just highlight multifamily.
I could also click Show Property Subtypes if I want a subset of multifamily like low-rise apartments, government-subsidized apartments, high-rise apartments, mobile home or RV parks but I just want all of the multifamily properties.
Then under Location I click the state that I want.
You can see in this case, I’ve clicked Ohio. I don’t put anything in county, nothing in city, no zip codes, nothing.
Over on Property Criteria I don’t put anything in the price range, no building size, no lots, no units, no nada.
The only thing that I do is under Keywords over there on the right-hand corner I type “seller financing” and then I hit search.
And that’s going to return all of the multifamily listings in Ohio that are being offered with seller financing, i.e., have motivated sellers.
Next, I find out who owns the building by searching the public records and/or secretary of state website if it’s owned by an entity and contact the owner directly to negotiate our master lease option.
If the owner refers you back to the real estate broker, I teach you how to deal with this in the Master Lease Option Method system.
What this site does – it's really cool – is it gives us a list of all of the HUD multifamily REO sales.
And that just means that it’s going to give us a list all of the foreclosed apartment buildings that HUD has sold.
And that list is going to include the property name, the property address, the buyer name and address, the date purchased, the purchase price and the number of units.
So why do we care about this list?
Here is why.
These buyers bought a foreclosed apartment building.
Now there are two ways typically that people invest in apartment buildings.
They’re either a value investor – which means that they’re buying undervalued properties and they’re rehabbing them and fixing them up.
Or they’re buying Class B or A properties just for the cash flow and they’re not interested in doing any rehab whatsoever. They’re paying close to the market.
Value investors buy foreclosed properties.
Value investors typically like to get in and out of deals quickly.
So that means that they’re probably busy doing the next deal and they don’t want to be bothered with the day-to-day operations of these buildings.
So these owners are typically another source of motivated sellers because you can offer to take over the day-to-day operations, the boring stuff, and free them up to go on and do their next value deal.
You contact a local title company and tell the sales rep that you’d like to set up an account to have online access so that you can check comparables and pull direct marketing lists.
Typically they will give you online access and give you the ability to do that.
Then you log in and either build the leads list by yourself, or you can call the title company and ask for the marketing department or the person who handles the farm list requests and place your order over the phone.
I typically select the asset class multifamily between 10 and 50 units that were purchased before the year 2005 in 3-5 zip codes.
That usually gives me a couple of hundred leads or more to work with.
Now if you want to go fewer units – that’s cool.
If you want to go more units – that’s cool.
If you want fewer zip codes, more zip codes – it's just like Fonzie… cool!
The key here is to make sure that it was purchased a while back.
You don’t want to get the contact information of somebody who’s just bought an apartment building because chances are they’re not going to be a motivated seller.
I get deals that were done before the year 2005, which means these people have owned these properties for several years and maybe they’re a motivated seller now.
The title company marketing rep will send you an Excel spreadsheet that includes everything. It will include the property address, the owner’s name, the owner’s address.
Sometimes the owner’s phone number is already included. I’ve even seen the mortgage company information on lists – the amount of the mortgage they have on it and who the bank is.
Then you just contact the owners and offer your Master Lease Option.
This is also known as an absentee owner’s list and if you have a tough time getting a farm list from a title company, you can also buy the list at ListSource.com very inexpensively.
This is my favorite way of finding leads online.
SearchTempest.com is what’s known as a search aggregator for Craigslist.
Within 30 seconds or less, you get a list of all of the apartment buildings on Craigslist for sale by owner in every single city across the country.
This is a Craigslist “scraper” – a lead-generation software – and I have to tell you a story.
I was at a real estate investing seminar a few years ago and some speakers came up and said…
“We’re going to show you the most wonderful lead-generation software in the world and here is how it works”
… and they demonstrated it and it literally was just a Craigslist lead scraper just like SearchTempest.com.
But they were charging $3,000 for it.
And people were buying it!
SearchTempest is the free way to do this. Please don’t spend $3,000 on a special software to do it. Unless you want to buy it from me. 🙂
Under the Category, you're going to select “housing.” Under the Sub-category you're going to select “real estate – owner” and then you're going to input the Keywords, “apartment” and “multifamily” and make sure that “Any” is selected.
This is an actual screenshot from SearchTempest and you can see here I’ve put in my zip code here, 80218 and I said I want to see everything within 250 miles of 80218.
I don’t check anything with the picture or search titles, I don’t put in a minimum or a maximum, no bedrooms, no cats, no dos, no nada and I just hit Search.
And that’s going to return to me all of the listings on Craigslist within 250 miles of me that have apartments buildings that are for sale by owner with their contact information.
Their contact information is listed in the listing and I like to text them – that's getting a much better response than email or voice mail.
Ok, so now that we know a few ways to find sellers, here’s a question most people have…
WHY ON EARTH WOULD A SELLER EVER AGREE TO A MASTER LEASE OPTION?!
In reality, not all of them will.
I find that on average about 10% of the sellers I speak with are willing to do an MLO deal.
And here are 10 reasons why they are open to it.
They will have to deal with only a single tenant
This is obviously HUGE for a tired landlord. Why deal with 10-50 or more demanding individuals when they can deal just with you? That’s why many owners prefer to deal with a “master” tenant.
They receive a guaranteed, monthly rental payment
You negotiate the master lease payment in advance so that the landlord knows what he’s getting each month even if there are variances in occupancy, income, and expenses.
Then what you net is the spread.
Easy sale transaction at end of lease and option term
What a relief it is as an owner not to have to search for a listing broker and have a multitude tire-kickers sifting through all of your financials! With your purchase option in place, they know that there will be no shenanigans on the back end of the deal.
No real estate commission to pay
Hooray! You also just saved him thousands of dollars!
Top sales price (fixed during the term of the option)
Usually, you can offer to buy the property for exactly what he wants when you negotiate the option.
Because you and I know that just by increasing the net operating income, the value of the property will go up exponentially giving you boatloads of equity.
Hands off in day-to-day operations
Not having to deal with the day to day responsibilities of ownership is a huge benefit for most owners.
And the beauty is that you won’t have to deal with it either by having a property management team in place.
No responsibility for general repairs and maintenance
Even though the owner still must pay for repairs and maintenance (you’re a tenant, remember) they don’t have to do the repairs or arrange for it.
Continued tax write off benefits (depreciation, property taxes, mortgage interest) during the lease term
This is the BIG one.
And since most commercial owners you’ll deal with are older, they need these tax shelters so this is a big selling point and benefit.
Defer taxes (ordinary and capital gains) on the sale of property
Capital gains are dirty words to sellers! MLO’s allow them to defer taxes on these gains.
Allows time to identify “like-kind property” for a Section 1031 exchange
This is another giant tax advantage. Instead of just having a few weeks to identify a new property for a 1031 exchange, the seller can take as long as your option is in place to identify a new investment.
There you have several ways to find these motivated sellers AND a few great ways to pitch the Master Lease Option deal that will make you AND the seller very happy!
In Part 3 of this series, I’ll share some tips on how to increase the value of any property in 30 days or less.
Leave me a comment with any questions and let me know what you think!