Investing In Commercial Real Estate – Using A Lease Option To Buy Commercial Real EstateBy Rob Powell
Greetings from the lush green grass of a football practice field…..
I am sitting here watching my oldest son (Colt) at football practice. Colt is only ten years old and he has practice four times a week and a game every Saturday. And…he loves it….and I love it too. But for some reason I find myself complaining about it….hmmm.
Today’s topic is all about lease options. I love using lease options to purchase commercial real estate. Not because it is ideal, but because it is a great way to leverage yourself into a deal with “pseudo” owner financing if the “ideal” does not work. Not having to deal with a bank for a loan just makes life easier…especially the way banks are today.
One of my early commercial deals was a lease option on a 108 unit mobile home park that I still have today. The seller was not willing to sell the property with “true” seller financing. But also knew I would not be able to buy it cash or find a lender to loan on it (39% occupancy). So the seller and I settled on a lease option…and the rest is history. Well…there is a lot more to that which I will write about later on but if it were not for the lease option….I probably would not have the deal. It was and still is a great deal.
I started using lease option when I first started investing in residential real estate. I never thought that knowledge would help me leverage into commercial real estate. The lease option is a great tool to have in your tool belt.
The Commercial Lease Option: Making Deals Work in Rough Real Estate Waters
Not too many people know about the commercial lease option as a means to make a deal happen. The real estate market is a dynamic entity that demands you constantly be on your toes and has a wide array of weapons in your arsenal to deal with whatever comes up. By having a firm grasp on the many different ways to skin the proverbial cat you will be able to work deals out that others simply give up on.
If real estate in general requires that you be willing to find creative solutions, then commercial real estate hammers that point home. By not knowing the ins and outs of commercial real estate you are ignoring a huge part of the market and a potential windfall. Knowing how to negotiate these difficult waters can make the difference between success and failure. The commercial lease option is a great example of this.
A commercial lease option gives the tenant the right to buy the property at the end of the lease if they like, for an additional fee. By buying the option the buyer/tenant has the right but not the obligation to buy the property at the end of the lease. The lease normally lasts one to three years and during that time if the market or the buyer’s circumstances change then they can choose not to buy. In addition to paying the monthly rents and fees agreed upon, the buyer usually pays extra which goes towards the purchase price. This forced savings plan makes it so the tenant has a vested interest in the property and has a reason to make the deal work. If they choose to not exercise the option then the money they spent on the option and the money towards the purchase price all goes away.
If done appropriately and with non-predatory intentions the commercial lease option can be a win-win situation. The seller gets a tenant to cover the expenses of the property plus passive income in the form of the option premium. Usually the purchase price negotiated is higher than current market conditions to compensate for not selling the property to another. These deals are usually done when a traditional deal can’t be reached due to market conditions so having an interested buyer with “skin in the game” could be a godsend for a motivated seller.
Of course a commercial lease option or other advanced real estate deals should not be done without consulting a professional or two. Make sure you know the lease option laws in your state and the market conditions. If you’re new to this game we suggest you check out more on this blog about real estate investing and our awesome investing courses, of course!
Until next time……rob