Commercial Property Virtual Boot Camp

Ron LeGrand’s

Event Manual

V.062620

www.RonLeGrand.com

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Table Of Contents

Commercial Property Types 2 Locating Prospects 5 Prescreening Prospects 23 Cap Rate Quiz 29 Constructing Offers 43 Presenting Offers 63 Follow Up 75 Financing 85 Exit Strategies 134 Glossary 162

Commercial Property Types

Multifamily Retail • Garden Apartments • Old Town Center • Hi-Rise Apartments • Strip Center • Mid-Rise Apartments • Outlet Mall • Low/Mod Income • Free Standing Stores • Student Apartments • (Big Box)

Industrial Raw Land • Heavy Manufacturing • Commercial Development • Light Manufacturing • Agricultural • Warehouse/Distribution • Residential Development • Self Storage • Golf Course • Special Purpose • Mixed Use

Office Mobile Home Parks • Single Tenant • Hi-Rise Tower • Mid-Rise Office • Office Over Retail

Health Care • Congregate Living • Nursing Home • Rehabilitation • Ambulatory Care • Hospital

Commercial Property Advantages and Disadvantages

Advantages • Big profits • Some are non recourse debt • Less competition • More appreciation • Can create your own value • Higher prestige • Hang around rich people

Disadvantages • Long time to get paid • Up front cost of due diligence • Fewer deals • Bigger deposits required • Harder to get started • Up against the big players

5 Steps To Success

1. Locate Prospects

2. Prescreen Prospects

3. Construct and Present Offer

4. Follow Up

5. Sell or Refinance Quickly

Locating Prospects

Where To Find Commercial Deals

• Commercial Brokers • FSBO Signs • Engineers • Architects • Bankruptcies • Foreclosures • Referrals • Auction Houses Auctions.com Hudsonandmarshall.com Seizedrealestate.com Dempseyauction.com Woltz.com Usalandsale.com Eaglestar.net • Attend Planning And Zoning Meetings • Letter Campaigns And Calls To: Run Down Properties Vacant Land Owners Out Of Town Owners All Target Commercial Property Owners • Commercial Websites

Finding Commercial Deals on Websites

➢ Cimls.com Allows you to enter your criteria by the property type, price range, city, and state. Once you enter the criteria you will get a Cimls # and it will give you financial summaries, income expense information, cap rate, and all the contact information for the listing agent. There’s a professional directory for Commer- cial Properties by state, and will display the contact persons name, address, phone, fax, and e-mail address. Free to use website.

➢ CityFeet.com Access thousands of office, retail, industrial, multi-family, and vacant land listings with contact details. Free to use website.

➢ ConstructionLists.com This site has construction sales leads for sale, such as architects, builders, building inspectors, appraisers, engineers, developers, property managers and owners and more.

➢ CraigsList.com Properties for sale nationwide. Free to use website.

➢ Dealmakers.net Lists properties for sale, financial resources, referral data base, links to other useful Real Estate sites, and Commercial Real Estate publications. Free to use website.

➢ Ebay.com Find land for sale by owner and listings of Commercial Properties for sale. Free to use website.

➢ Elandusa.com This is North America’s land for sale website. Free to use website.

➢ GoogleEarth.com Satellite imagery and maps free to use basic website or you can order a subscription version.

➢ Land.net Commercial land and Property for sale. Free to use website.

➢ LandAndFarm.com This site is the global market place for rural property, and also offers a monthly newsletter to registered users who wish to receive it, letting them know about pertinent site news recent advertisements, and other information that may be of interest. Free to use website.

➢ Landbluebook.com Land for sale Nationwide. Free to use website.

➢ Loopnet.com Operates the largest Commercial Real Estate listing service online. Search for land, office, retail, industrial, apartments, hotels and other types of properties. There’s a key field on the site where you can enter words such as subordination, motivated seller, or seller financing etc., All the listings in that city with those terms will come up. Free to use the basic website, and a minimal fee for premium membership.

➢ Mobilehomeparkstore.com You can pull up a community with a mobile home park for sale by city, and state. There’s information given on each property, listing the number of units, price, contact person, phone number, and date of listing. Free to use website.

➢ Nareit.com National association of Real Estate investment trust, it gives industry news on Real Estate. Free to use website.

➢ REE.com Real estate exchanges by private parties, including planes, cars, yachts, notes, etc. You can view properties to exchange or trade and they provide you with contact information for the owner as well as what the owner is looking to exchange/trade for. If new properties are added that meet your criteria, you will be notified.

Also has a listing of article of interest and useful financial tools and information, as well as many useful resource links.

➢ ReMax.com Properties for sale nationwide. Free to use website.

➢ RVParkStore.com RV parks and campgrounds nationwide for sale. Free to use website.

➢ TerraServer.com This is a satellite site. Free to use website.

➢ TM1031exchange.com Listings nationwide for 1031 exchange. Free to use website.

Key Words To Search On Websites

One of the key ways we use to buy real estate without using our own money and borrowing all the capital we need is called subordination. It’s where the seller takes a second mortgage and allows us to get a new first mortgage.

We go to websites, which allow us to type key words in a search field. We use words like seller financing, terms, and subordination. Even though we don’t get very many hits, when a hit does come in it means the seller has openly disclosed they’ll do seller financing or take a second mortgage. Obviously, this cuts through a lot of nonsense to get to a real prospect.

For example, we use loopnet.com and ccimnet.com because they have a key search field where you can enter key words such as:

• Subordination • Terms • Seller Financing • Motivated • Owner Financing • For Sale By Owner • Willing To Carry • Reduced • Bankruptcy • Must Sell • Below Market • Out Of Town Owner • Inheritance • Retiring • Divorce

All the properties with these key words will appear and it’s your job to determine whether they’re a prospect or a suspect.

✓

✓ ✓ ✓

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Commercial Websites

One of the best sources of finding deals is to build relationships with those who work with them daily. You won’t be in commercial real estate long before you begin dialoging with agents.

Like all prospects of business, this requires a prescreening process and you won’t be able to work with most agents unless you want to pay retail price and comply with conventional wisdom. Most agents seek buyers who will pay too much, have big down payments and a strong financial statement or companies who write a check for the full amount. You can’t blame them for looking for the low hanging fruit. This same thing holds true for residential agents. You can’t work with the majority.

There is two ways to locate agents you can work with. The first is to find a problem property that’s listed and back into the agent. The second is to talk with cooperative agents first and let them seek out properties you want.

You shouldn’t do both.

It only takes one or two good agents in your area to lead you to good properties if you make it clear what you want and convince them you can close. If your credibility is an issue, you can use the ‘result to a higher authority’ approach.

“I am the front man. It’s my job to find and prescreen properties that meet our criteria and turn them over to my boss who will be in touch with you directly to complete the transaction”.

This takes you out of the negotiating and eliminates the need for you to lack experience and financial strength. Of course this hinges on there being a higher authority, which could be a partner or a buyer.

If you intend to be the principal and feel incomplete with your experience you can result to the ‘will you help me’ close.

“This is my first commercial deal and I was hoping you’d help me do it right”.

This close will deflate an education barrier between you and the agent, but it will also dictate that you remain humble and act more like a student than a teacher.

It’s common for a broker you are dealing with to declare themselves as a…Buyer’s Broker.

That simply means they represent you and have so notified both parties. It does not mean you are paying the commission. Many times they may declare they work for both parties. You’re best served if they work exclusively for you, the buyer, when possible. It costs you nothing and created loyalty to you. At least that’s the theory.

Prescreening Prospects

Prescreening

There are four things you must know on any property to determine if you want to know more.

ARV – Asking – Loan – Repairs

ARV: Only an idiot would make an offer on a property if he had no clue what it’s worth. In this case of buildings that means the value in good condition and occupied. With land that means what it is worth right now, as is, and what would it be worth if you changed the use or subdivided.

Asking: Any seller who won’t tell you what they want is a time waster and should be immediately eliminated until they do. The asking price is compared to the ARV is usually the first and easiest identifier of a good prospect.

Loan: If you don’t know what’s owed, you shouldn’t be making an offer until you find out. Many times the offer will hinge on the debt and even when it doesn’t it’d be smart to make sure an all cash offer is higher than an existing debt so you don’t look foolish.

Repairs: Does it need little or nothing or a major rehab? The answer will have a large bearing on your offer. You don’t have to know the exact number but should have a ballpark figure. Obviously there aren’t repairs on vacant land.

How To Determine The ARV

The value of most commercial properties is determined differently than that of single-family houses. If the property is income producing and large, the value will almost always be determined by the cap rate or net operating income.

If it’s not income producing, it must be determined by comps or replacement cost, usually comps.

Smaller properties such as a six-unit apartment building or a 3,000 square foot office building will be valued by a price per square foot comp comparison and adjustments for amenities just like a house.

Here’s a list of property types and appraisal methods, which may vary by area:

Homes: comparable sales (comps) Apartments: cap rate and comps by unit Office Buildings: cap rate and square foot comps Retail Centers: cap rate and square foot comps Mobile Home Parks: cap rate and land comps Raw Land: comps

Cap Rate

A cap rate (capitalization rate) is nothing more than an investor’s return if he bought the property for all cash. It’s determined by dividing the net operating income by the purchase price.

Cap Rate = Net Operating Income Purchase Price

This number is critical in determining the market value of income producing buildings and will be the driving force behind the asking price pub- lished by brokers when income producing properties are selling at or close to retail.

In arriving at the property’s net operating income (NOI) be sure to include a factor for vacancy, replacement reserves and management.

Remember, the property will be valued assuming offsite management is hired even if the owner is currently managing. Be sure to check to verify these numbers are included in the financial analysis before the NOI was determined.

In other words, an erroneous NOI will give you a fictitious cap rate, which will affect your offer. Garbage in… garbage out.

Today, cap rates will run from 7 – 11% on most properties in good condition.

Your Objective Is To Buy At A High Cap Rate And Sell At A Low Cap Rate

For example: You can buy an apartment building for $1,000,000 with a 10% cap rate, which means it has an NOI of $100,000.

NOI - $100,000 Purchase Price - $1,000,000 = 10% Cap Rate

NOI = Cap Rate Purchase Price NOI = Purchase Price Cap Rate

You know the expenses can be lowered some and the rents can be raised to get the NOI up to $125,000. What have you done to the value assuming the market is buying at a 7% cap rate?

Using The Cap Rate To Determine The Value

You must know the net operating income and the cap rate the market is paying to arrive at a reasonable value.

In our explanation of cap rate we used a $125,000 NOI and a 7% cap rate, so its formula is simple.

NOI - $125,000 Cap Rate - .07 = $1,786,000

You’ve raised the value $786,000 for two reasons. First you bought it cheap at a high cap rate, and then you increased the NOI.

In my world, the cap rate is pretty much useless when I buy except as a negotiating tool if there isn’t one. Many properties we buy come with high va- cancies, poorly managed and in despair. Therefore, they are losing money or closed.

If The Property Has No Net Income, It Has No Cap Rate

That’s a good thing when you’re buying and obviously the reason you can get so much free equity.

Only you can produce the NOI by listing the income and expenses and plugging in a vacancy, maintenance and management figure.

You can get the market cap rate from any good commercial broker.

Cap Rate Quiz

1. An apartment complex has an NOI of $726,000 a year and they’re asking $9,000,000. What’s the cap rate? ______Should you buy it? ______

2. An office building has an NOI of $285,000 a year and seller wants $2,200,000. What’s the cap rate? ______Does it sound like a good deal? ______

3. A strip center has an NOI of $125,000 a year and the broker says he can get a sale approved at $1,000,000. Does it look good? ______What’s the cap rate?______

4. An apartment building has 180 units and needs $500,000 in work and it’s 60% occupied with an NOI of (- $84,000). The seller wants $2,600,000. You feel you can raise the NOI to $450,000 a year. What will the building be worth at a 10% cap if you do? ______7% cap rate? ______Would you pay the asking price? ______

5. You want to sell a building with a $210,000 NOI at a 7% cap rate. What is the asking price ______? If you raise the rents first and increase the NOI to $260,000 a year, what would your asking price be at an 8% cap rate ______?

Pro Forma Operating Statement

Income: Gross Scheduled Income ______Laundry Income ______Other Income: ______

Total Income: ______

Less _____% Vacancy Allowance

Effective Gross Income: ______

Expenses: Advertising ______Cleaning ______Electricity ______Fees & Licenses ______Gardening ______Gas ______Insurance ______Legal & Accounting ______Management-Offsite ______Management-Onsite ______Painting & Decorating ______Payroll ______Payroll Taxes ______Pest Control ______Pool Maintenance ______Real Estate Taxes ______Repairs & Maintenance ______Reserve for Replacements ______Sewer ______Supplies ______Telephone ______Trash Removal ______Utilities ______Water ______Miscellaneous ______

Total Expenses: ______

Net Operating Income: ______30

Reserves For Replacement

Roofs wear out. So do HVAC units, ovens and refrigerators. Parking lots need to be resurfaced every few years as well. Buildings need to be main- tained. Every time a landlord receives a dollar in rent, he can’t consider 100 cents of that dollar a return on his investment. Some of that dollar has to be put back into the building to keep it going.

Almost every Pro Forma Operating Statement, should include a line item called “Reserve for Replacements”. This is different and separate from “Repairs and Maintenance”.

Multi-Family: Sometimes replacement reserves are not included when preparing a pro forma operating on a multi-family property. They’re included in the line item for repairs, typically 6 – 10% of effective gross income.

Retail – Office – Mobile Home Parks – Healthcare: Traditional: 3 – 5% of effective gross income.

Industrial – Self-Storage: Traditional: 2 – 4% of effective gross income.

Hotel/Motel: Traditional: 5% of effective gross income.

Net Leases vs. Full Service Leases

Commercial and industrial properties can be leased in a variety of lease agreements. The tenant might be responsible for the real estate taxes, the insurance premiums, and the repairs; or the lessor (owner) may be responsible for all of them. Another possibility is for the owner to be responsible for the rest of the operating expenses. In fact, there are a number of possibilities.

A Full Service Lease is a lease in which the lessor (owner) is responsible for all of the operating expenses, including but not limited to taxes, insurance, repairs, and utilities.

A Net Lease is a lease in which the tenant pays some of the operating expenses. A net-net lease is a lease in which the lessee (tenant) pays the two major expense items: taxes and insurance.

A Triple Net Lease is a lease in which the tenant is responsible for “all” of the operating expenses. This includes the three most significant expense items: taxes, insurance, and utilities; hence the term Net-Net-Net lease, or triple net. A true triple net lease is one in which the lessee (tenant) pays off all of the operating expenses and lessor (owner) simply receives his one check every month. Unfortunately, the term is often misapplied to leases in which the lessee (tenant) pays for most, but not all of the operating expenses.

Many multi-tenant office and retail buildings are leased on a “triple net” basis where the real estate taxes, the insurance, the common area utilities, and the common area maintenance expenses are prorated among the tenants on a pro rata basis. The basis most commonly used is the net rentable square footage of each tenant’s space as a percentage of the total net rentable square footage. Net rentable square footage means the space actually available for rent as opposed to the gross square footage, which includes hall- ways, stairwells, elevator shafts, and lobbies.

What Is CAM? Common Area Maintenance

Most retail centers, large and small are leased with the tenants splitting the cost of common area expenses such as:

• Parking lot electric • Parking lot cleaning • Other utilities used by the project • Exterior maintenance of common areas including lawn care

The landlord will have a clause in the lease that simply says what ever these costs are will be divided on a pro-rata share based on square footage usage. The tenant then pays rent plus CAM monthly.

How To Identify Good Target Prospects

Here is an easy reference chart to help you identify a good prospect. This is the most important thing you should learn to avoid a lot of wasted time and focus on the low hanging fruit.

Prescreening out suspects quickly and focusing only on prospects is the difference between making a living and making a fortune. Learn it well and learn it quickly.

I will go through each type of property and list the things I look for that get my attention and create excitement about the project, but there’s one underlying message throughout…

If You Can’t Buy It Cheap, You Don’t Want It.

All the factors above are simply signs the property can be bought below market value, which is the number one objective and a basic principal you should never violate. If you want to pay retail price for real estate it wouldn’t be hard to find. If you want to create instant wealth and big fat checks, never violate this rule.

Prescreening Apartments

What to look for

• Large vacancy factor, 20% or more * • Run down condition * • Property in foreclosure • Funding partners • Distressed owners • High cap rate – 10% * • Low asking price per unit * • Large debt – small equity • Sellers offering to owner finance • Low rents and other signs of mismanagement

What to avoid

• Pretty properties, fully occupied where seller wants retail value • Any property where sellers asking price is in la-la land • Any property where the agent is advertising a cap rate below 10% and no apparent problem exists • Sellers who want all cash for more than you can borrow or know how to raise.

If the property or the owner doesn’t have a problem, you won’t be buying it.

* Easy Identifiers

Prescreening Office Buildings, Retail Centers, And Other

What to look for

• Large vacancy factors or totally vacant * • Run down condition * • Property in foreclosure • Feuding partners • Distressed owners • Low asking price per square foot * • Sellers offering to owner finance • Excess land to cut off to sell or build

What to avoid

• Properties without a problem • Properties in a war zone • Properties with unrealistic owners • Sellers who want more cash than you can borrow

* Easy Identifiers

Prescreening Mobile Home Parks

What to look for

• A property full of junky mobile homes * • Seller financing offers * • Low asking price per pad • Rents below market • Poorly landscaped and overall mismanaged • Additional land • High expenses you can reduce such as separating utilities, installing sewer lines to eliminate a waste treatment plant, excess labor costs, etc.

What to avoid

• Pretty parks at retail price • Parks too far away from population • Sellers who want all cash for more money than you can borrow • Parks in a war zone

* Easy Identifiers

PRESCREENING Property Information Sheet

Office - Retail Space (Circle One) You’ll Get Most Of These Answers From The Agents Package

Submitter’s Name: ______Date: ______Phone: ______Cell Phone: ______Fax: ______Email: ______Address/Location of Property: ______City ______County ______State ______Zip______Is Property Listed? ____Y____N How many days? ______Realtor’s Name: ______Phone: ______Cell Phone: ______Email: ______Brokerage Firm: ______Fax: ______City: ______State: ______Zip: ______Asking Price: ______Total Square Feet: ______Asking Price per Square Foot: ______Seller’s Motivation: ______Total Units: ______Asking Price/Unit: ______Current Cap Rate: ______Occupancy Rate: ______Current NOI: ______Any Repairs Needed? ____Y____N If Yes, How Much? ______

Do you have photos of the property you can email? ___Y___N Required Is there Seller financing available? ____ Y ____N All cash required? ____ Y ____ N “Free and Clear”? ____Y____N

A Current P&L And Cash Flow Proforma Is Required

Where can we find an online info package?: ______

In Foreclosure? ______Auction/Sale Date: ______Bankruptcy? ______Type: ____7____11____13

Mortgage Info Mortgage Balance? Monthly Payment? Payment Current? Amount in Arrears? 1st ______Y ____ N ______2nd ______Y ____ N ______3rd ______Y____ N ______

PRESCREENING Property Information Sheet

Hotels You’ll Get Most Of These Answers From The Agents Package

Submitter’s Name: ______Date: ______Phone: ______Cell Phone: ______Fax: ______Email: ______Address/Location of Property: ______City ______State ______Zip______Is Property Listed? ____Y____N How many days? ______Realtor’s Name: ______Phone: ______Cell Phone: ______Email: ______Brokerage Firm: ______Fax: ______City: ______State: ______Zip: ______Asking Price: ______Total Square Feet: ______Asking Price per Square Foot: ______

Seller’s Motivation: ______Total Rooms: ______Asking Price/Per Room: ______Cap Rate: ______Number of Rentable Rooms: ______Current NOI: ______

Any Repairs Needed? ____Y____N If Yes, How Much? ______Explain: ______

Do you have photos of the property you can email? ___Y___N Required

Is there Seller financing available? ____ Y ____N All cash required? ____ Y ____ N

Is the Property owned “Free and Clear”? ____Y____N Mortgage Info Mortgage Balance? Monthly Payment? Payment Current? Amount in Arrears? 1st ______Y ____ N ______2nd ______Y ____ N ______3rd ______Y____ N ______

In Foreclosure? ______Auction/Sale Date: ______Bankruptcy? ______Type: ____7____11____13

A Current P&L And Cash Flow Proforma Is Required

Where can we find an online info package?: ______

If debt is carried and financing is in place, really bear down on the Mortgage info

Property Information Sheet

Multi-Family You Will Get Most Of These Answers From The Agents Package

Total Units: ______Asking Price/Unit: ______Current Cap Rate: ______Occupancy Rate: ______Current NOI: ______Any Repairs Needed? ____Y____N If Yes, How Much? ______

Do you have photos of the property you can email? ___Y___N Required Is there short term Seller financing available? ___ Y ___N All cash required? ___ Y ___ N “Free and Clear”? ___Y___N Sellers Motivation ______

Mortgage Info Mortgage Balance? Monthly Payment? Payment Current? Amount in Arrears? 1st ______Y ____ N ______2nd ______Y ____ N ______3rd ______Y ____ N ______

In Foreclosure? ______Auction/Sale Date: ______Bankruptcy? ______Type: ____7____11____13

A Current P&L And Cash Flow Proforma Is Required

Where can we find an online info package?: ______

Property Information Sheet

Mobile Homes and RV Parks Get From Agent Or Seller

Submitter’s Name: ______Date: ______Phone: ______Cell Phone: ______Fax: ______Email: ______Address/Location of Property: ______City ______County ______State ______Zip______Is Property Listed? ____Y____N How many days? ______Realtor’s Name: ______Phone: ______Cell Phone: ______Email: ______Brokerage Firm: ______Fax: ______City: ______State: ______Zip: ______Asking Price: ______# of Acres: ______Cost/Acre: ______Total Pads: ______Asking Price/Pad: ______Cap Rate: ______

Seller’s Motivation: ______Current NOI: ______Number of Mobile Homes Included in Purchase? ______Occupancy ______Number of Rentable Units: ______Occupancy Percentage: ______Condition of Mobile Homes? _____Excellent _____ Good _____ Fair_____ Poor

Any Repairs Needed to the Park? ____Y____N If Yes, Estimated Cost? ______Utilities Owner Pays: ___Gas ___Electric ___Water ___Sewer ___Phone ___Internet ___CAM Is There Additional Land Available? ___Y ___N If Yes, How Much? ______Distance to nearest Wal-Mart, Home Depot, or Lowes? ______Is the property within the city limits? ___Y___N If no, how far away? ______Do you have photos of the property you can email? ___Y___N Required Is there Seller financing available? ____ Y ____N All cash required? ____ Y ____ N “Free and Clear”? ____Y____N

Mortgage Info Mortgage Balance? Monthly Payment? Payment Current? Amount in Arrears? 1st ______Y ____ N ______2nd ______Y ____ N ______3rd ______Y____ N ______

In Foreclosure? ______Auction/Sale Date: ______Bankruptcy? ______Type: ____7____11____13

A Current P&L And Cash Flow Proforma Is Required

Where can we find an online info package?: ______

Constructing Offers

Buying Strategies

If you want to buy property without using your money, there are old standby methods commonly used by creative buyers and some that require a little more training to learn and can be used only when conditions warrant. The following list is worth a fortune to you and should be scanned every time you’re in the process of constructing offers.

Most conventional commercial property buyers don’t know what’s on this list, even the big boys. The techniques discussed make the difference between a deal that makes sense to buy and an ordinary deal that requires a down payment and bank financing to acquire.

Here’s the list:

1. Subordination 2. Private loan for down payment 3. Partners 4. Borrow down on seller’s property 5. Cash out with hard money 6. Subject to 7. Borrow down on your property 8. Additional collateral 9. Trade your assets 10. Sell part of seller’s assets to close 11. Your credit line 12. Equity sharing 13. Finance purchase and rehab

Subordination

This technique will be used frequently and is one of my favorites to make a property easy to fund. It simply means the seller will take back a second, allowing you to get a new first to cover down payment and other costs.

The big advantage is it sets the stage for you to negotiate a deal that’s easy to fund, because you can borrow the first at a low LTV making a hard money loan easy to get.

Example: Seller wants $1,000,000 for an apartment complex that needs $100,000 in work. She owns it free and clear and fixed up and rented, you feel it’s worth $1,800,000. Seller says she’ll take $100,000 down and the balance within 18 months but will subordinate to a new first and take no payments or interest on the $900,000 second.

Purchase price $1,000,000 Down payment $ 100,000 Seller second $ 900,000

New hard money 1st $300,000 Less down payment -100,000 Less rehab costs -100,000 Cash to you $100,000

Financing structure New 1st $300,000 Seller 2nd +900,000 – no payments $1,200,000

Your exit it to buy, fix and refinance with a good, permanent loan. You should be able to get a $1,350,000 loan (75%) or more and pull out cash. Subordination can also be used in a more common manner by borrowing as much as you can on a first and getting the seller to take back a 45

© 2020 Heritage Financial, LTD of Jacksonville LLLP second for the difference with a longer payoff period. In this case, the financing is your permanent financing, so the first will be on good terms through an institutional lender and no short-term balloons on the second.

Example: You can buy an office building for $1,000,000 and if you get the seller $750,000 he will take back a second for $250,000 with monthly payments over a fifteen year period.

Purchase price $1,000,000 New bank 1st $ 800,000 Seller 2nd $ 250,000

The total new debt will be $1,050,000 and there will be an extra $50,000 to cover costs. Of course, the new first is a qualifying loan so the borrower and the property must conform to the lenders standards.

Here are some notes on subordination: • Make sure you do your best to lower the amount of new financing and increase seller financing. • Won’t work well on properties with high existing debt. • Be sure the property will easily support both payments if applicable. • Don’t over borrow and get yourself in a trap.

Private Loan For Down Payment

If you get a good deal on a property where you can buy at 75% of value or less but can’t borrow enough money from one source to cash out the seller you may structure the financing to borrow a new first for as much as possible and use your private lender to make a second for the difference.

Here’s a real example: I bought an office building from a bank for $550,000 that was in good condition and worth $750,000. I got a new first from the same bank for 75% of the $550,000 ($412,500) and borrowed $137,500 from an individual. That left the LTV at less than 75% LTV.

I structured the private loan with no payments, accruing interest and refinanced the building two years later when it appraised for $1,200,000.

Notes: • You must get a lot of free equity to make this work • You must use your own private lenders since a commercial second is difficult to get even with hard money and the LTV will violate most loans offered by loan brokers.

Partners

Since I began doing real estate deals, and even before I’ve used partners in one form or another and still do today.

The most common relationship is a money partner and a working partner and it’s on a deal by deal basis. For a long time, I was the working partner and someone else put down payments or borrowed the money and waited for me to get them a bigger check.

Somewhere along the line, I became the partner to make the financing work and started getting others to do the work. Obviously, that should be your goal as well.

If you’re reading this manual, you know I do deals with students nationwide, which have turned into a hybrid of both. Sometimes I put up the earnest money deposit, but then work to get the deal closed by structuring financing that doesn’t require my money or the students I guess that means I’m a money partner and a working partner.

If you have the ability to seek out and negotiate good deals and know how to get most of the money from a lender of some kind, a partner to put up the rest won’t be hard to find.

The usual split on a money partner/working partner relationship is 50/50, but the combinations are endless. I make it clear to my partners who expect me to put up money and provide expertise and some work a 50/50 split isn’t fair. That’s why my working partners who can do all the work but not put up money or financing get 25% and those who need none of my money or credit and can do the work get 50%.

I’ve also done deals where the partner puts up a small amount of money to take over an existing loan or do some repairs and he got less than 50% because the capital required was small in relationship to the profit potential.

Example: An apartment complex worth $3,200,000 was purchased by taking over a $2,300,000 loan with $50,000 to the seller as full payment. I told the partner if he’d put up the 50k, I’d give him back 100k within one year. It actually took me fifteen months to pay him off when I sold the complex for $2,700,000. He was happy and so was I.

Use Part Of Sellers Property To Borrow Down Payment

I use this technique frequently. In fact, it’s the first thing I look for when structuring an offer on deals where it makes sense, such as raw land. It will only work where the asset can be split to free up a piece of the property as collateral for a new loan large enough to cover the down payment on the whole piece.

Any large tracts of land or buildings with excess land are good targets.

Example: An existing subdivision owner is in trouble with a 100-lot development. He’s close to being able to resell, but must bale out due to a major financial setback. He needs $1,000,000 ASAP and he has an $800,000 debt on the land. You learn the sell out value is about $7,000,000 and he’ll sell it for $3,000,000 if he can get $1,000,000 down plus $800,000, he’ll take a note for the $1,200,000 difference. After considering his plat map and concluding you can get a hard money loan for $2,000,000 if you can use $4,000,000 of land as collateral, it’s simply a matter of determining how much of the tract the seller must release at closing for the $2,000,000 and how much he can use to collateralize his $1,800,000 second to him. You conclude it will take about 2/3 of the total for the new first, so your offer is he gets about 1/4 or 25 lots to be safe.

When you apply for the new first it’s simply a matter of telling the lender what lots to use as collateral and letting the closing agent do the rest.

Here’s a smaller example on a different type property:

You’re buying five, 4-unit apartment buildings on five separate lots. Each is worth $160,000 for a total value of $800,000. Your seller is a lousy landlord and happy to unload for $500,000. You can borrow 75% of the $480,000 ($360,000), which is 3 buildings times $160,000, from a bank so you simply write the contract showing you’re paying $480,000 for the 3 buildings leaving the other two free and clear, worth $320,000 so you can easily borrow the $140,000 needed for the down payment to close the loan of $360,000.

1 2 3 4 5 ARV ARV ARV ARV ARV $160,000 $160,000 $160,000 $160,000 $160,000

A different contract says Contract to buy for you get these two free if $480,000. Borrow you close on the other $360,000 three. You borrow $140,000 or more on them and close simultaneously.

Cash Out With Hard Money

Using hard money to cover the entire purchase price will only work if you create a low loan to value ratio and find the right lenders. Buying properties like this can be very lucrative because you’ll get a lot of free equity, but you won’t like the cost of these hard money loans.

The key is to make sure the LTV is low enough to make it an easy decision for the lender and to allow room for a reduction in value most lenders will apply for a fast sale in case of default.

You should have a good idea of where you’ll get the money and their requirements before structuring an offer.

Example: Apartment Building ARV $3,500,000 Purchase price $1,700,000 cash Repairs $ 200,000

You borrow $2,000,000 (57% LTV)

Take Over Debt Subject To

Some properties come with a loan you can take over if you can work out the equity with the seller so you put up little or no cash. Obviously, the seller or the property would have a problem and you are the solution. A good example is an apartment complex with bad management and an owner who’s more than happy to wait for payment of their equity if the property will go away.

Example: Office building worth $4,000,000 and fully occupied, but comes with two problems. There’s a balloon due on the $2,000,000 loan in 18 months and one tenant will be moving out within a year who occupies half the 50,000 square feet. My offer was I’d take over the debt and give the seller a $500,000 second, no payments or interest, due in two years. My plan was to get a new tenant and refinance for $3,000,000 within 18 months. The seller wanted $3,000,000, so I quit. My guess is the property will be on the market until the seller gets real or fixes their problem.

Borrow Down Payment On Your Property

You’ll find it easy to get free equity in all types of real estate and anytime you get enough you can use it as a lever to buy more real estate. When you find a good deal but the only way to buy it is take over a debt and come up with cash or get a new loan that won’t cover the purchase, ask yourself… “Do I have any property I can use to borrow enough to cover the cash needed?”

You can borrow a hard money second, institutional second or refinance the whole property. You may even need to combine two or more to make it work or use a combination of these techniques to raise some cash, get a private loan for some or get seller to carry a small second.

Add Additional Collateral

Sometimes sellers don’t mind taking back a second, but are concerned about the fact you have no money in the deal and therefore nothing to lose. This problem is easy to fix if you have another property you can use as additional collateral. That means you’ll use the seller’s property as collateral and add a second or third lien on your property as well. This is called a blanket mortgage.

All it takes to make this happen is for the closing agent to add the legal description of your property below the legal of the seller’s property on the mortgage or deed of trust.

Note: • Negotiate a release clause when your property is removed from the mortgage at some point. This can be after you pay in X dollars or a few months expire and you make payments on time.

• Before I offered a note on both properties I’d offer one on mine only. This is called Substitution of Collateral. The seller would still feel you have something to lose and may not need both properties as security.

Exchange Assets

Whether you’re taking over debt subject to, originating a new loan or getting the seller to finance you should always ask yourself what you can trade the seller in lieu of a cash down payment. It doesn’t have to be real estate you’re trading.

This is a good time to get rid of a boat, motor home, business, receiva- bles, other personal property and certainly other real estate you have.

Your property doesn’t have to be free and clear to make this happen. You can borrow enough money on the property you’re buying to pay off the asset you’re exchanging and any additional capital needed.

I recently attempted this technique in reverse. I found a plane owner who had a $4,000,000 plane I wanted. I offered him $5,000,000 in free and clear land for the airplane, but I owed $1,700,000 on the land. I knew I could easily borrow the $1,700,000 on the plane to pay off the land and I also knew I only had $1,700,000 in the $5,000,000 land so in effect I would have paid $1,700,000 for a $4,000,000 plane.

Unfortunately, the seller owed too much on the plane and simply wasn’t smart enough to closely analyze the offer and I didn’t have the time or patience to educate him. It was a good deal for him and me but fell on deaf ears.

Sell Part Of Sellers Assets To Close

Always look for items you can sell that come with the deal. Many times sellers either aren’t aware of the value or just don’t care enough to take action.

I recently made an offer on a large tract of land with a house on it but what got me interested was the fact the Realtor told me it had $3,000,000 worth of coal and other minerals on it. Since the asking price was only $1,500,000 it made the property easy to analyze. The offer of $1,000,000 cash is still pending as of the time of this writing.

A common item to sell is trees and dirt but it could be as simple as finding a buyer for part of the property who will pay as much as you’re paying for the whole, or at least a good part of it.

This tactic is common in business acquisitions and it’s rather normal for a buyer to sell off some of the business assets for more than the whole business costs.

Credit Lines

As simple as it sounds a personal credit line you can secure from your bank on your assets or just your signature can provide the capital needed for acquisition money and it’s cheap money to borrow and you only pay for it while it’s being used.

Make sure you clearly know your exit here so you have a plan to payoff the credit line from the money raised by refinancing or selling the property quickly. Many banks want to see credit lines paid off once a year and remain paid for a thirty-day period.

The time to apply for credit lines is when you don’t need the money and you should secure more than one if possible.

Don’t forget credit cards, too. You could easily get $250,000 or more available on a few credit cards if you’re credit worthy. Just think, no points, no prepayment penalty, no time delay and no hassle. Just use the checks that come with the cards.

Equity Sharing

Make the seller your partner by letting him keep an interest in the property in lieu of a down payment. This is especially easy when you intend to develop or turn around a troubled property and the seller can see the upside. Be careful you don’t give away the farm here and the more you can get the seller to leave in the deal and the less you have to borrow, the better the deal.

The variations here are endless. If the seller doesn’t need cash you can simply create an agreement making them your partner and they wait until you cash out to get paid.

If they need cash you can ask them to borrow on their own asset or allow you to and they can collect the balance later.

For example: If the seller has a piece of land worth $1,000,000 and you want to build a project on it worth $5,000,000 when done, let the seller contribute the land for 20% - 30% of the deal and you get a loan to do the rest. That will cover the skin in the deal a lender wants to see.

When you find a seller with an apartment complex that’s under occupied and needs work, instead of buying the project, make a deal with the seller to put it in an LLC so one or both of you can get new short term financing to rehab and get occupied so you can then go for permanent financing after increasing the value and pay off the seller with a premium kicker and pull cash out yourself.

Anytime you find a seller who can see the upside, but can’t get to it himself, you have a potential joint venture.

Note: This technique is best used for short-term relationships. Look long and hard before making the seller a permanent partner. You must maintain control of the deal to avoid a seminar. You can do this easily by acquiring 51% vot- ing control of the LLC regardless of the equity split percentage.

Finance The Entire Purchase And Rehab

Some properties can be bought with no down with institutional financing when the rehab loan is combined with the purchase. The lender will escrow for repairs and disburse on a predetermined schedule. This is especially common on government-backed loans on low income and special project properties in targeted areas, usually apartment complexes.

The 221d HUD loan for apartments is a good loan for this purpose. Even though the max LTV is 90% sometimes you can and should get the rehab done for less than the projected costs, thus building in the 10% shortfall.

HUD will want you to use quality contractors and will almost always approve repair costs higher than you can actually get it done for with little work picking labor and materials.

Make sure you build in enough time to get this loan closed and make the offer contingent upon approval.

Buyer Beware

Commercial transactions are generally treated much differently by governing agencies than residential. You’re playing with the big boys now and there is no RESPA or HUD to watch over you and create rules to protect uned- ucated consumers.

You’re on your own and it’s Caveat Emptor. (Buyer Beware)

If you buy a building with asbestos or lead base paint or one sitting on a toxic waste dump and you find out after you bought… tough luck. It’s your problem, not the seller’s.

If you put up a big earnest deposit and can’t get a loan to close… you lose it unless your contract was contingent on financing.

If the seller lied to you about anything, and they always do, and you have no written proof… good luck collecting.

It’s your responsibility to do your own due diligence and make sure your contracts protect you as much as possible. For this reason only an idiot would buy a commercial property without hiring competent professionals to complete the due diligence and close the transaction. This is no place for self- appointed lawyers and contractors or buyers who are afraid and unwilling to advance the upfront money necessary to do proper due diligence. This will cost several thousand dollars even on the small projects and it’s not a place to try to save money.

It could cost you a million trying to save the money and you must be prepared to lose these fees if the deal doesn’t close, and many won’t.

Don’t Let LTV Kill Your Loan

All institutional loans have a cap on loan to value and the lower the LTV the easier it will be to get approved. Regardless of the DCR the loan will not go more than their max LTV. So, raise the price so you can borrow more.

If the seller is taking back a second, the larger it is, the smaller the first. And, don’t forget closing costs.

So, if I’m buying a million dollar property, I’d raise my offer to $1.2 million and borrow $900k (75%) and give the seller $750k and a $450k second (25%) with a discount provision if paid off by agreed upon time. This gives you cash at closing for repairs or other uses.

If the seller gets $750k at closing and you agreed on a million dollar price, you really only owe $250k. Therefore, the discount would be $200k built into the note. If the balloon is 5 years, perhaps the discount could apply within 4 years. This assumes the property will appraise for $1.2 million and your exit is clear to pay off early.

I’d make the second with no payments and accruing interest, if any, to make sure the property has better cash flow. The discount must be in the purchase and sale agreement so it’s fully disclosed to the bank, but it shouldn’t kill the loan. The actual price is $1.2 million.

The more you can get the seller to take back on a second, the lower the LTV needed on the first and the easier it will be to get the loan.

Some lenders may still require you to have some skin in the deal, (down payment), but even then, 10% down is better than 25% down.

Presenting Offers

Due Diligence Checklist Before You Make An Offer

1. Is the asking price well below the value as is? Is this project worth the grief?

2. Can you buy it without using your money or if you do can you get it back quickly and safely?

3. Can you borrow enough to buy and fix from a private lender. If not, can you borrow at least enough to buy it so you can get a development loan from a soft lender? Or, a loan from the government to buy and fix? Where will the equity capital come from?

4. Will the seller/owner finance part or all, at least on a short-term basis? Where will the capital come from for the down payment and rehab cost?

5. Do you clearly see your exit strategy and is your offer setting it up? Are you dealing with realistic numbers or are you in La-La land? Can you make good money if it doesn’t work out perfectly?

6. Can you get all the financial information on current and projected in come, expenses and debt?

Don’t Make An Offer Until You Can See How To Fund It

Report Checklists

• Current and projected income and expenses. • How will it get funded? • Projected net profit when sold or projected loan proceeds if refinanced based on current DCR required by a lender.

Due Diligence Periods

Most sellers of commercial property expect buyers to perform due diligence and will allow a reasonable time to do so. However, this request could make or break the deal. The seller is aware the agreement is non-binding until the due diligence period expires and all brokers know many deals fall out here.

A 60 day due diligence is acceptable on most projects with a 30-60 day closing thereafter. Some sellers and brokers will push for a shorter period and some sellers will insist on it to sign the contract. It’s case by case and you may have to accept a shorter period on the good deals.

Some projects will require longer due diligence periods if conditions have to be met that would kill the purchase such as the offer being contingent on rezoning or getting approvals to build.

If you’re not certain you should buy at the end of the due diligence period, you can always ask for an extension and justify the request. The seller will say yes or no. If no, you’ll either have to back out or risk your deposit. It’s usually better to back out.

Again, an unreasonable due diligence request could easily \persuade the seller to decline your offer, so don’t ask for more time than you need. Your deposit is not at risk until you release the due diligence provision or the time elapses and you do nothing.

Earnest Money Deposits

In the world of commercial property, you expect and should be prepared to submit substantial deposits. Keep in mind, the deposit is not at risk until you release it after your due diligence is complete and it goes hard (Non- refundable.)

Deposits will range from $5,000 on small deals less than $1,000,000 to $50,000 or more on larger deals from $1,000,000 to $20,000,000. Beyond that it’s normal for sellers to require larger deposits. This deposit is the only thing the seller has at this point to show you are serious. Larger deposits will separate you from time wasters and get serious consideration from brokers and sellers. The largest I’ve put up to date is $450,000 on a $14,000,000 purchase and we feel that has a lot to do with the seller’s decision to work with us, and why we currently own a very desirable property.

Make sure the arrangements to release the deposit are clear in the contract and it’s always a good idea to use your escrow agent, Title Company or attorney to hold the money.

When dealing with real estate agents, expect them to ask you for a larger deposit than you’d like to submit. Remember, you are the buyer. You make the rules, not the agent.

Getting An Offer Accepted Step By Step

1. Collect information from broker or owner you need to make a decision.

2. Discuss basic requirements you’ll need to make the deal work with broker or owner, i.e.: • Will seller accept some owner financing? If so, what’s the least they feel would be acceptable as a down payment? • Does it appear you can buy below current market value? How did the broker or owner arrive at what they feel is current value and their asking price? • Do you see a way to buy without using your money? Will the facts allow you to propose an offer acceptable to you? What obstacles stand in your way and can they be removed? Do you have a plan to buy, fix or develop, and refinance or sell and what will hinder this plan?

3. If possible, visit the property after it appears you have the making of a deal if you haven’t done so prior.

4. If it’s a go, prepare a Letter Of Intent, (LOI), to submit to the broker or seller or you may give the broker the terms and have them prepare for your signature.

5. Submit the LOI and wait for a response and adjust your offer if necessary, then submit a revised LOI.

6. Once LOI is signed, have a contract prepared by your attorney unless the seller or broker insists on sending their own, and some will.

7. Once contract signed, begin your due diligence and submit your earnest money to your escrow agent, if possible.

Note If the property is out of town, you may choose to visit only after you get a signed LOI or contract.

Contents Of A Letter Of Intent (LOI)

1. Buyers name

2. Property address or description

3. Your offer including purchase price, down payment, terms, conditions, due diligence time, closing time, other general provisions and when you expect to submit a contract if LOI is approved

4. A non-binding clause

5. Your signature and a place for seller’s signature and date

An LOI is not the place to get specific on all the minor details or load up with contingences. It’s only meant to create a meeting of the minds to determine if you should proceed to contract. It’s non-binding on both sides and doesn’t mean you have a deal yet. Don’t leave out critical items you feel could kill the deal, such as a request for the seller to subordinate to new financing, Get all the major items on the table now.

Commercial Letter of Intent (For Purchase Of Property)

Date:______, 20___

Dear ______:

Re: ______(Address)

This letter is to set forth the basic terms upon which ______(“Buyer”) would be willing to purchase the above referenced property (“Property”). The terms, including the purchase price, amount of earnest money deposit, inspection rights and purchase contingencies, along with closing date are set forth below:

Purchase Price –

Terms –

Due Diligence –

Closing –

Contingencies –

 Mark box if additional pages are necessary.

It would be the intent of the Buyer to enter into a purchase and sale agreement not later than the _____ day of ______, 20__. The agreement would incorporate the terms set forth herein, together with such terms as may be agreed to by the parties.

This letter is intended as a non-binding expression of interest on the part of the Buyer to purchase the Property and not as a purchase offer which, if accepted, would create a legally binding contract.

If the terms set forth herein form an acceptable basis upon which you would sell the Property, and you would like to move forward to negotiate a purchase contract, please so indicate by signing in the space below.

______Buyer’s Signature

______Print or Type Name

Title: ______

Agreed to and accepted this _____ day of ______, 20___

______Seller’s Signature

______Print or Type Name

Title: ______69

Here’s A Deal Saver

Here’s a clause you may add to your contract that may solve several issues, such as:

• Seller doesn’t want to tie up the property as long as you wish.

• Seller wants a shorter due diligence period.

• Seller wants a large earnest money deposit.

First Right of Refusal (Bump) Clause

Seller may continue to market the property during escrow and if a bonafide buyer is located and seller produces a copy of the contract to buyer, buyer will have five business days to release this agreement in full or designate the earnest money as non-refundable and proceed under the terms outlined herein. Seller shall release all earnest money deposits and reimburse buyer for due diligence expenditures and all due diligence works will be turned over to seller in the event buyer chooses to void this agreement.

Follow Up

Due Diligence Checklist After Contract Executed

Properties With Buildings And Mobile Home Parks

1. Order title search and deliver copy of contract to your attorney. He/she may want to order title.

2. Collect all financial information on the property including: * Current income and expense * Past two years tax returns on property, if available * Mortgage information, if applicable * Copies of rent roll and leases

3. Visit the property if you haven’t done so. Talk to the manager and maintenance people and learn everything you can, especially the dark secrets. Go through every unoccupied unit and some occupied. Take a lot of photos. Talk to some tenants while management not present. Decide what you’d do to improve the property and get a feel for what it would cost. See if the information on the income and expense statement makes sense. Make a list of what you’d do to raise the rents and lower expenses.

4. If the deal looks good, take it to a lender or equity partner or begin marketing if it’s a flip.

5. If your clear on how to get it funded discuss the due diligence required with lenders or partners and your attorney - If you are in charge of closing. This may include a Phase One report survey, appraisal, feasibility study, renovation estimate, lead paint, asbestos.

6. If it’s a go, make sure your attorney notifies the seller or agent you have released the contingencies so your deposit will now go hard. Make sure you feel confident the financing is available first and your attorney approves all the above reports. If it’s not a go, have your attorney notify seller or broker you’re canceling the deal and to send back your deposit, or you can renegotiate.

7. Have your attorney send you the closing documents to examine in advance and before sending to seller’s attorney. Make sure it matches the contract and true intent.

Appraisers

Not all appraisers are equally qualified. A fee appraiser is an appraiser for hire by the general public, as opposed to a staff appraiser working for a lender. As a general rule, most lenders will not accept an appraisal from a fee appraiser unless that particular fee appraiser was designated in advance by the lender. This is to prevent collusion between the borrower and the appraiser to bring in an inflated property value.

There are certain professional “designations” that an appraiser can earn that will give him more universal acceptance by the lenders and therefore increase the demand for his services. These designations are earned by a combination of classroom instruction and supervised work experience according to very strict standards established by professional associations of appraisers.

The most highly coveted is the M.A.I. designation, which stands for Member, American Institute of Real Estate Appraisers. Most commercial lenders will require that the appraiser be an M.A.I. This designation requires years of study and thousands of supervised appraisals, and is somewhat equivalent to the C.P.A. designation in accounting. Because of the demand for their services, M.A.I.’s often command appraisal fees of two and three times those of the average fee appraiser for appraising the same property, and most M.A.I.’s won’t risk their designation by conspiring with a borrower to over-value a property. The M.A.I. designation is the one designation that most lenders will accept, even if they do not know the appraiser personally.

Another highly respected designation is the SREA designation. This designation stands for Senior Real Estate Appraiser and is issued by the Society of Real Estate Appraisers. In theory, the SREA designation is supposed to be directly comparable to the M.A.I. designation, the only difference being that it’s issued by a different trade group. While in theory, an SREA designation is supposed to mean expertise directly comparable to that of an M.A.I. designation, the reality is the SREA designation has never achieved the same universal acceptance.

Here’s your double-edged sword. If you order an M.A.I. appraisal, it’s likely a lender will want to order their own. You may get hard moneylenders to accept yours with a review.

The problem is you must verify the value as part of your due diligence before you release your deposit. So here are your options:

1. Order your own appraisal immediately and the lender may order another, both of which you’ll pay for. 2. Know where you’re getting the money in advance and ask lender to order immediately. 3. Close your due diligence without an appraisal and risk your deposit.

I’ve done all three but prefer number two when possible. It’s obviously the less risky choice.

Toxic Liability

Modernly, all commercial mortgage lenders (with the possible exception of small, unsophisticated hard money brokers) require some sort of toxic report on a commercial property before they will lend on it, commonly called a Phase I. The reason why is because various state and Federal laws now require the owner of an environmentally contaminated property to clean it up. This clean up cost could run into the millions of dollars.

This liability is strict liability. In other words, the judge doesn’t care if you were even born when the contamination was created. You own the property. You clean it up. This includes mortgage lenders who take back properties in foreclosure.

Many gas station sites are contaminated. The old tanks were of single-wall steel construction, and they all leaked. The average clean up bill can be as low as $60,000 if the water table is deep to $600,000 for a single rusted out tank if the water table is high, to several million dollars if there were a number of tanks on the property. Clean up is preformed by aerating the contaminated soil (the bad stuff evaporates!) or inserting oil eating bacteria (very expensive but cheaper than hauling), or hauling away all of the contaminated soil (very, very expensive).

Old dry cleaning plants are a big problem, too. The law used to allow them to pour their used cleaning solvents down the drain – until it was discovered most underground water pipes leaked at the joints. Watch out for old dry cleaners down the street.

The common polluters are truck storage yards and heavy industrial sites. The solvents used by furniture refurbishers are also particularly nasty. The heavy metals from such manufacturers are extremely water- soluble (they show up in the water table miles away) and they are very carcinogenic.

Most commercial mortgage lenders always require a clean Phase I toxic report as a condition of making the loan.

A Phase II (typically $8,000 and up) toxic report is usually only required by a lender if the Phase I toxic report asks for drilling and soils analysis. If contamination is discovered after drilling, your deal will frequently be dead.

Proration Credits At Closing

When you’re buying any building with existing tenants it’s common for you to receive all the security deposits and prorated rent at closing.

The deposits alone could add up to several thousand dollars. The rent credit will be determined by what day of the month you close. If you close on the 30th you’ll get no rent credit. You’ll be expected to bring more cash to closing even though you’ll be collecting rents a few days later to recoup some cash.

However, a smart buyer will let the existing owner collect the rents and give you a huge credit at closing. All you have to do to make this happen is…

Set Your Closing Date For The 5th Of The Month

Several things happen when you do.

1. You have a full month to get to know your rent rolls, send out notices or make changes before you have to worry about collecting most of your rent.

2. You get a huge credit at closing for rents collected this month and you normally don’t have a payment due for at least a month. If you don’t think this is big money do a little math on a 200-unit complex. If the average rent is $800 and 90% have paid by the fifth, that’s 180 units x $800 = $144,000 less you bring to closing. Of course you’ll lose five days of it to seller proration. To avoid that simply put in the contract:

Rent Credit To Buyer Will Begin From The First Day Of The Month If Closed By The Tenth

You’re the buyer. You dictate the terms. It’s totally negotiable and of little concern to a seller who Needs To Sell. 83

Another proration you’ll get is taxes if they aren’t escrowed, or even if they are if you write the contract accordingly. I usually take over escrow account with no proration because it’s in my favor. Remember, if the seller gives you a tax credit and has an escrow account you’ll be expected to buy the escrow account so it’s pretty much a wash. If no escrow account exists you certainly want a proration. If one does exist you may want to mark out the tax proration paragraph in the contract.

Financing

4 Types Of Financing You’ll Need

# 1 Hard Money Loan

This type of loan comes from individual lenders, group of lenders, investment funds and sometimes institutions but not from banks and commercial lenders. It will be high interest and high cost money that may make you cringe when you hear the cost. That’s the bad news.

The good news is, it’s much easier to get than institutional money and makes your business of acquiring commercial and residential property without money possible. It’s really this simple.

Without hard money you or your partner will come out of pocket with big down payments or you’ll lose the deals. With it, you are limitless to how many deals you can do.

Hard money loans are used mostly for acquisition and holding costs and sometimes rehab. Here are the reasons why it’s critical:

1. Loans are made mainly on LTV ratios and lenders look to the property for repayment if borrower defaults. This eliminates a great deal of the rules from conventional lenders and requires a lot less paperwork and much shorter closing time and it’s easier to get approved since the property does most of the qualifying. 2. Conventional lenders will loan on the lesser of purchase price or value. Hard money lenders loan on LTV and can loan you more than you paid for the property even though a hard money LTV will always be lower than a conventional lender. 3. Without this availability of acquisition capitol, most deals would never materialize because the seller can’t get funds at closing unless you write a check. Unlike residential houses, it’s rare to buy a commercial property with the seller getting no money at closing.

Advantages Disadvantages Easier to get Higher cost Low qualifying criteria Short term No down payment required Can borrow more than you need and more than your purchase price

# 2 Seller Financing

The more seller financing you can get in a deal, the better the deal. There is no better financing available anywhere.

Many times seller financing will be required to make the deal work and you’ll lose deals because the seller won’t cooperate. Get over it and move on rather than committing to a purchase you can’t or shouldn’t finance.

Short term financing is all you need in most cases. It can be as short as six months, a year or two years, or it could be for a longer term if seller is willing. It’s very easy to get sellers to finance with no interest and no payments on short- term notes and that should always be your first offer.

Much of the time, the note to the seller will be subordinate to new financing, usually hard money, and the seller is aware of your exit strategy, which is to buy, fix and refinance or sell to pay off seller and hard money loan.

Advantages • No points • No application • No interests or payments when applicable • No personal liability • Makes the deal fundable • Reduces over all cost of funding • Flexible lender, possible discount, substitution of collated, term extension or exchange later • Recourse if you get surprises after closing

Disadvantages • None

#3 Permanent Financing

This is where conventional lenders come into play, but usually only after the property has been purchased and renovated or other problem fixed. You may use conventional financing for acquisition, but usually not without skin in the deal (your money invested).

These loans will vary in cost, qualification and loan parameters on a lender-by-lender basis, but most play by the same rules and restrictions discussed in this section.

You’ll need numbers that make sense, a clear plan of repayment and a built in safety factor to appease the lender’s appetite to make good loans. They will look to reduce the risk by analyzing the income, the property and the borrower because the LTV ratio will almost always be higher than hard money and sometimes be at the top of the ratios allowed.

Permanent financing is critical to any deal unless you sell it because it provides the exit strategy to pay off short term hard money and seller financing and it may provide the capital for building or improvements and… Your Tax Deferred Cash Flow From The Deal. Usually, your biggest payday while holding a property will come from excess proceeds of a permanent loan.

If you’re building or developing this loan may be called a Temp-Perm because it covers land acquisition and initial development costs and converts to permanent financing when the project is built. If you’ve already acquired the land using hard money or seller financing or both, this loan will pay off both and then some if structured properly.

Usually an initial funding amount is determined for up front costs and the loan is left open ended and funds are advanced as construction is completed. In addition, larger loans are non- recourse (no personal liability), if requested and the project makes sense.

HUD has a loan program for apartment complexes to build or renovate called the 221D (4). Attached is a description of its use and restrictions and contact info to learn more. This loan can be very useful for apartments. Note the 90% LTV discussed.

Advantages • Long term, low payments and low interest rates • Higher LTV then hard money • Can pull out tax deferred cash if done correctly

Disadvantages • Much more qualifying and documentation • Much longer to close • Lend on lesser of value or appraisal purchase money • Project must show proper cash flow to qualify or have a plan to get there quickly

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#4 Equity Capital

In today’s market, this has become a favorite way to finance all kinds of projects. It’s simply putting one or more people together to fund all or part of the project from private investors.

Traditionally the top 20% - 30% is raised from equity investors and the balance from a bank loan. However, you can raise the full amount and eliminate banks and lenders. This works especially well if you get the seller to finance part and the equity investors to put up the rest, especially when the seller is subordinating.

The investors are well protected if you create a first mortgage on the property to the entity you formed to pool their funds if seller subordination is applicable.

Raising private money from several investors in one entity is called a Private Placement. It can be done with minimal legal costs and SEC registration, but certainly not without the help of an attorney.

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Forming A Private Placement

Step 1: Ask yourself how you intend to sell it once it’s formed. If you don’t know the answer, no need to move forward.

Step 2: Decide how much you need to raise, how much equity you’re willing to give up, how your investors will get paid and when. Is the project profitable enough to get their interest? Are the returns high enough to sell?

Step 3: Prepare a spreadsheet with a proforma using realistic, conservative numbers and compile the rest of the package on the property to put into an offering package.

Step 4: Meet with your attorney on your intent to discuss what you can and cannot do and cost to complete PPM (Private Placement Memorandum) and set up a new entity. You may not need a PPM if all investors are accredited and you only need a few.

Step 5: When docs are ready you are ready to sell shares.

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Jumpstart Our Business Startups Act Frequently Asked Questions About the Exemption from Broker-Dealer Registra- tion in Title II of the JOBS Act Division of Trading and Markets

February 5, 2013

In these Frequently Asked Questions (“FAQs”), the Division of Trading and Markets (“staff”) is providing guidance on the exemption from broker-dealer registration in Title II of the Jumpstart Our Business Startups Act (“JOBS Act”). These FAQs are not rules, regulations or statements of the Commission. The Commission has neither approved nor disap- proved these FAQs. The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.” In addition, the Commission is soliciting public comments on regulatory initiatives under the JOBS Act. For Further Information Contact: Any of the following at (202) 551-5550: David W. Blass, Chief Counsel; Joseph Furey, Assistant Chief Counsel; Joanne Rutkowski, Branch Chief; or Troy Stoddard, Special Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

Background These FAQs address questions about the exemption from broker-dealer registration in Title II of the JOBS Act. Section 201(a)(1) of the JOBS Act directs the SEC to revise its rules issued in Rule 506 under the Securities Act of 1933 (“Securities Act”) to provide that the prohibition against general solicitation or general advertising contained in Securi- ties Act Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Section 201(a)(1) further states that such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. Section 201(c) of the JOBS Act adds new paragraph (b) to Section 4 of the Securities Act. Section 4(b) of the Securities Act states that: (1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under [the Securities Act], no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 15(a)(1) of this title, solely because— (A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means; (B) that person or any person associated with that person co-invests in such securities; or (C) that person or any person associated with that person provides ancillary services with respect to such securities.

(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if—

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(A) such person and each person associated with that person receives no compensation in connection the purchase or sale of such security; (B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and (C) such person is not subject to a statutory disqualification as defined in section 3(a)(39) of this title and does not have any person associated with that person to such a statutory disqualification. (3) For the purposes of this subsection, the term ‘ancillary services’ means— (A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service. * * * Responses to Frequently Asked Questions

Question 1. Can I rely on the exemption from broker-dealer registration in Securities Act Section 4(b) before the SEC adopts rules to eliminate the ban in Rule 506 on general solicitation? Answer. Yes. The exemption from broker-dealer registration in Section 4(b) does not require the SEC to issue or adopt any rules. You cannot permit an issuer to conduct a general solicitation of a Rule 506 offering on your platform, however, until the SEC’s rules permitting those activities for a Rule 506 offering are adopted.1

Question 2. Broker-dealers are required to register under the Securities Exchange Act of 1934 (“Exchange Act”), but Securities Act Section 4(b) provides an exemption from the broker-dealer registration requirements in the Securities Act. Does that mean that the exemption from broker-dealer registration in Section 4(b) is not operational?

Answer. No. Congress exempted persons described in Section 4(b) from the broker-dealer registration requirements under Sec- tion 15(a)(1) of the Exchange Act. The staff views the exemption to be fully operational.

Question 3.

Is the exemption in Section 4(b) available to a platform that offers and sells securities other than those offered and sold under Rule 506 of Regulation D? Answer. No. The exemption from broker-dealer registration in Securities Act Section 4(b) only applies when securities are offered and sold under Rule 506 of Regulation D. 105

Question 4. Section 4(b)(1)(A) allows a person to “maintain a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means.” Would an Internet website or social media qualify as a “platform or mechanism”? Answer. Yes. We believe that Congress specifically intended to capture social media and Internet websites when it enacted Sec- tion 4(b)(1)(A).

Question 5. The exemption in Securities Act Section 4(b) is not available to anyone who receives (or whose associated persons receive) “compensation in connection with the purchase or sale of such security.” What forms of compensation would cause me to be unable to rely on the exemption? Answer.

Congress conditioned the exemption on a person and its associated persons not receiving any “compensation” in connection with the purchase or sale of such security.” Congress did not limit the condition to transaction-based compensation. The staff interprets the term “compensation” broadly, to include any direct or indirect economic benefit to the person or any of its associated persons. At the same time, we recognize that Congress expressly permitted co- investment in the securities offered on the platform or mechanism. We do not believe that profits associated with these investments would be impermissible compensation for purposes of Securities Act Section 4(b).

Question 6. May an entity, such as a venture capital fund or its adviser, operate an Internet website where it lists offerings of securities by potential portfolio companies (in compliance with Rule 506), co-invest in those securities with other investors, and provide standardized documents for use by issuers and investors, rely on Securities Act Section 4(b) to not register as a broker-dealer? Answer.

Yes. These activities are permitted under Section 4(b), subject to the conditions set forth in Section 4(b)(2), including the prohibition on receiving compensation in connection with the purchase or sale of securities. As a practical matter, we believe that the prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption from broker-dealer registration.

Question 7. Could an associated person of an issuer of Rule 506 securities rely on the exemption under Section 4(b) to maintain a “platform or mechanism” for the issuer’s securities? Answer. Yes. Assuming the associated person otherwise qualifies for the exemption, including the condition prohibiting the re- ceipt of any compensation in connection with the purchase or sale of securities, Section 4(b) does not limit the types of persons who are permitted to maintain a platform or mechanism. 106

Question 8. In some instances, a complex of privately offered funds may have an internal marketing department or use the investor relations department of an affiliated adviser or other entity whose staff is paid a salary to promote, offer, and sell shares of the privately offered funds. Can these persons rely on the exemption from broker-dealer registration in Section 4(b) if the funds are offered and sold pursuant to Rule 506? Answer. No. Any salary paid to a person for engaging in these activities is compensation to that person in connection with the purchase or sale of securities. As a result, that person would not be able to rely on the exemption from registration as a broker-dealer provided in Section 4(b). The Commission has previously noted that persons who market interests in a private fund may be subject to the registration requirements of Section 15(a)(1) under the Exchange Act.2

Question 9.

Does the exemption from the requirement to register as a broker-dealer mean that the persons engaging in the activities described in Section 4(b)(1) are not brokers or dealers? Answer. No. Section 4(b) provides an exemption from registration, not an exclusion from the definition of the term “broker” or “dealer.” Whether someone is a broker or dealer requires a separate analysis based on the particular facts and circumstances presented. The Guide to Broker-Dealer Registration provides staff guidance on the types of activities that may bring a person within the meaning of the term broker or dealer. Although an exemption from registration means that a person would not have to comply with obligations incumbent on a registered broker or dealer, some portions of the federal securities laws apply to brokers or dealers regardless of registration.

Question 10. Does the exemption in Section 4(b) also provide an exemption from state registration requirements?

Answer. No. Title II does not exempt the persons described in Section 4(b) from any state registration requirements.

1 The Commission has proposed rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as required by Section 201(a) of the JOBS Act. See Securities Act Release No. 9354 (Aug. 29, 2012), available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf. 2 See, e.g., Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With less Than $150 Million in As- sets Under Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 (Jun. 22, 2011) 76 FR 39646, n.9 (Jul. 6, 2011) (to be codified at 17 CFR pt. 275), available at http://www.sec.gov/rules/final/2011/ia- 3222.pdf. http://www.sec.gov/divisions/marketreg/exemption-broker-dealer-registration-jobs-act-faq.htm 107

There Are Rules

Never sell a private placement until you are familiar with the rules. Here are a few:

• You cannot openly solicit for investors. • You cannot accept their money until they have all the documents. • States and Provinces have their own rules on how many and how much and reporting. • Be careful of representations you make. Never promise any rate of return or make any guarantees.

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What’s The Best Way To Find Hard Money And Conventional Loans?

The answer to this one is easy. Hire a professional commercial mortgage broker.

There are so many combinations of commercial loans and lenders you’d have to spend most of your productive time looking for money. Your Job: Find Deals Their Job: Find Money

If you try to do their job, you’ll be lousy at your job.

Yes, brokers actually want to get paid for their work, but they won’t collect until you get a loan. Without one or more good loan brokers on your dream team it will be very difficult for you to succeed in real estate.

A professional loan broker will tell you what it takes to get a deal funded, tell you if it’s a loser and help you get a proper package for the lender and then plead your case. Remember, if he/she doesn’t get you funded, they don’t get paid.

Here are some Dos and Don’ts when dealing with loan brokers.

Do • Tell them all the facts, no secrets. • Get them the docs they need quickly. • Make sure you have a clear understanding of their duties and yours. • Follow up to see the loan is getting worked timely without being a pest. • Get legal help before signing a commercial loan brokers agreement. • Ask for a couple of names of satisfied customers before committing. • Do a background check on the firm before committing. • Limit the time a broker has to get you a commitment and then to close thereafter.

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• Add a clause that says if the property appraises low, you aren’t obligated to pay the broker fee or a commitment fee to the lender. Watch this one closely • Give yourself enough time to close so the broker isn’t under duress to rush a loan.

Don’t • Try to convince them a turkey is really an eagle. • Apply for a loan with several brokers simultaneously without disclosing. • Pay a large commitment fee up front. Cost they incur OK. • Assume the deal is done until you see the check. • Try to go behind the broker’s back and steal the lender. • Do a second loan with the same lender and not pay the broker. • Ask a broker the name of his lenders before you sign an agreement. • He’d rather give you his bank account number. • Put all your hopes on one broker until he/she has proven their value. • Sign two commitment letters for the same loan. OK as long as you install an escape clause if another gets approved.

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Ron’s Rules Of Hard Money

Rule #1: ALWAYS BORROW MORE THAN YOU NEED (or think you need)

Rule #2: If you can’t borrow more than you need, fix the offer, find a new lender or consider killing the deal.

Rule #3: Never forget rule #1

Note: Your loan should cover cash needed to purchase, closing costs, rehab costs if applicable and holding costs including payments for plenty of time to fix, refinance with a permanent loan or resell.

Violate These Rules At Your Own Peril

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What Do Mortgage Brokers And Lenders Charge?

Answer: All they can get. It’s all negotiable and based on the type of loan. Hard money means more fees. Soft money means less fees. Frankly, the only reason this is true is supply and demand. A hard money loan is a fraction of the work as a conventional loan but usually commands higher fees, probably because soft money is easy to find.

Many times the broker will get paid by the lender and the borrower but should disclose if that’s the case. Beware, the rules governing commercial loans are relaxed compared to residential. The broker may not be required by law to disclose anything to you. It’s up to you to ask, if you care. Frankly, it shouldn’t matter if you get what you want.

Here’s a rule of thumb range of fees but certainly not fixed: Hard money – 1-3 points to broker plus lender fees Soft money – ½-2 points to broker plus lender fees

Hard moneylenders charge anywhere from 1-10 points. Sometimes it’s points up front and more when paid off.

Permanent or soft moneylenders are in a much more competitive market, therefore the fees range from 1-3 points as a rule plus any other fees they wish to charge and label under a different name.

Whether it’s hard money or permanent, you’ll be given a loan proposal with estimated fees at the beginning of the process. When you sign it, the lender will begin their due diligence. If your project passes, you’ll be issued a loan commitment with the final numbers. Once you sign it you’re responsible to pay the broker fees whether you close the loan or not unless the loan doesn’t close due to lenders withdraw. Most commitment letters are contingent upon a punch list of items to be provided before or at closing, any one of which the lender can use for an escape route if they get cold feet. 112

Don’t spend the money until it’s in your account and always have a plan in case the loan doesn’t close as planned. They rarely do.

Most fees are deducted from the loan but it’s common with commercial loans for the lender to require money up front to cover the cost of due diligence. Some brokers will do the same. These costs should not exceed $10,000 and usually aren’t that high. Beware of brokers and lenders who request more and never send it without an attorney approving your agreement. It’s common in the industry to command big up front commitment fees that are non- refundable and the loan never closes, especially with hard money loans.

Rates on hard money loans will range from 10-18% in addition to the points and fees and usually bear interest only payments with a one or two year term. Some will even escrow the first year’s interest at closing.

Soft money loans are tied to a current index and are almost always adjust- able to interest fluctuations.

All loan rates, terms and costs are negotiable. The stronger the borrower and property the more power you have to get the best deal. You should do everything you can to get as much time as possible without killing the deal and make the loan as easy as possible to approve by submitting a property with good numbers. The more you learn about what lenders want, the easier it be- comes to construct offers to buy and prepare your exit strategy.

For example: If you know you need a 1.2 debt to income ratio to get an apartment complex funded, then you know not to submit a loan until you achieve that number or ask for a smaller loan. If you know a private lender won’t loan more than 50% LTV on a tract of land then you know not to make an offer where the seller gets 60% of the value in cash.

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How Long Should I Expect It To Take To Close A Loan?

Hard Money Any loan that’s truly a hard money loan should close in less than thirty days if you have the necessary documents. Some close in a week. Beware of lenders who wait longer. Usually that means they want a lot of documentation or they’re not really lenders but sub brokers who have to shop for the money after another broker submits the loan. Ask your broker if his hard money source actually writes the check.

You can reduce this risk by specifying a deadline date for commitment and closing in the broker/client agreement. This would make a case for two or more loan requests at the same time to hedge your bets but tell the broker and make sure you have an escape clause in the agreement if another loan comes through.

Permanent Financing There’s no such thing as a fast conventional loan despite claims made by brokers. The minimum is thirty days (and that would be unusual), and the maximum could be ninety to one hundred and twenty days. Of course, the time will depend on the package and the lender’s sense of urgency and your broker’s relationship with the lender.

This is the reason you will want to build yourself enough time into your offer to purchase before the hard money and seller are paid off. You must first fix the project if applicable, and then wait a few months more to get permanent funding. A one- year balloon to the seller or hard moneylender can be a short fuse if there’s a lot of work to do such as an apartment rehab and refill, or a construction project that requires months of planning and permitting.

Man Plans – God Laughs

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Commercial Underwriting Guidelines

Commercial Financing is underwritten on a case-by-case basis. Every loan application is unique and evaluated on it’s own merits, but there are a few common criteria lenders look for in commercial loan packages and different types of property are screened differently by the lenders. Here’s a list of how lenders will determine what to loan.

Apartments: Current cash flow and loan to value Other Buildings: Current cash flow, loan to value, and turn around plan Construction Projects: Future cash flow and loan to value Raw Land: Loan to value Mobile Home Parks: Current cash flow and land loan to value

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Loan Proposals

The processing of a commercial mortgage loan application involves a significant amount of paperwork. Often the amount of paperwork involved exceeds that of a residential mortgage loan by several fold. Therefore neither the lender not the broker wants to waste a lot of time processing a deal that is not going to close.

It’s customary in commercial mortgage lending for the borrower or broker to initially submit to the lender a mini-package in hopes the lender will issue a loan proposal.

A loan proposal is not a commitment. It’s merely an expression of interest by a lender in making the loan and an estimation of the eventual terms. Fi- nal loan approval will be subject to many factors, including a satisfactory appraisal, approval of the borrowers’ financial statement and credit report, and more detailed analysis of the property’s cash flow. Therefore a loan proposal is legally worthless.

In practice, however, a loan proposal is very encouraging. Once a loan proposal has been issued by a lender and accepted by the borrower, there’s a good chance your deal will close on terms very close to those agreed upon.

It’s common for lenders and loan brokers to ask the borrower to post a non-refundable good faith deposit as evidence of his interest in the loan.

Unless the lender is a household name, you should investigate the lender thoroughly before tendering your deposit. Good faith deposit scams are rampant in the industry.

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Filling Out The Executive Summary

Project Loan Name: Simple name recommended – i.e. NYC Building Acquisition Name of Borrower: Both the individual and the company name Borrower’s Address: The complete address for the borrower – not the property Telephone: Where the borrower can be reached Fax: Where the borrower can be faxed Email: Where the borrower can receive emails

Executive Summary

Scope: A simple summary that covers all the high points of the project including the amounts. This should be no longer than about 15 to 20 lines. It must be short, descriptive, and to the point.

Location: The exact location of the property.

Loan Type: Acquisition, bridge, etc.

Loan Request: The amount needed. This amount should include all fees, closing costs, and the entire interest to be paid upfront.

Term: How long do you need the money?

Value: The appraised value, or your estimate.

Contract Price: This is the amount you paid or will pay for the property. You will not keep your purchase price a secret when doing a refi.

Loan To Value: 1) Loan to Value of the Appraised value. 2) Loan to Value of the contract price. 3) Loan to cost if a development or construction loan. All need to be figured.

Borrowers Infusion: All the capital you intend to invest in the project. This includes seller carry seconds and all capital used regardless of where it came from.

Use Of Funds: A general summary use of funds is necessary. This should include the points, interest, closing costs, acquisition, rehab, construction, etc.

Exit Strategy: What is the borrower going to do if the planned project fails? Can they sell the property to be able to cover the loan amount? Sell it to a developer in the area? Etc. Do you have a plan two and three? Are they feasible?

Guarantor(s): The name of each individual that will be guaranteeing this loan. 117

Loan Application

The following list will help you identify the types of information a banker or private lender will need to make an informed decision about your property loan.

All loans • Three years income tax and financial statements on borrower and guarantor • Year-To-Date Profit & Loss and Balance Statement • Executive summary

Existing Multi-family, Office, Retail, Industrial • Property pro forma for next 12 month – 60 months and current P&L • Survey if available and aerial photo • Actual income and expenses • Executive summary of your plans for project and how you’ll pay back the money, your history, other pertinent facts • Appraisal if available. Must be MAI. Photos if not available • Phase one environmental study if available • Rent Roll

Raw Land • Al the above • Site plan (proposed or approved) • Development cost estimate • Evidence of entitlement, if applicable • Due diligence report

You should have the above items to submit, if available but all lenders will provide a list of what they want. Provide only what they want, when they ask for it. Mortgage brokers will provide their own list of what they think the lender will request based on the type of loan. Do not submit a box full of worthless paperwork that may serve only to slow down the process and cause confusion.

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Three Ratios

Most of real estate lending can be boiled down to the results of the three ratios:

• Loan-To-Value Ratio (LTV) • Debt Ratio • Debt Coverage Ratio (DCR)

The bulk of the energy spent “processing” a loan is merely an attempt to verify the numbers that go into the numerator and denominator of the above 3 ratios.

The Loan-To-Value Ratio (LTVR) is defined as follows: Loan-To-Value = Total loan balances (1st mtg + 2nd mtg + 3rd mtg) Fair market value (as determined by appraisal)

The second ratio lenders use when underwriting a loan is Debt Ratio. The Debt Ratio compares the amount of bills the borrower must pay each month to the amount of monthly income he earns. More precisely, the Debt Ratio is defined as: Debt Ratio = Monthly Debt Obligations Monthly Income

The final ratio used in lending is the Debt Coverage Ratio (DCR). The Debt Coverage Ratio is a sophisticated ratio only used for large loans on income producing properties. It is defined as: Debt Coverage Ratio = Net Operating Income Debt Service

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Loan To Value Ratio (LTV)

The loan-to-value (LTV) ratio is probably the most important of the 3 underwriting ratios.

The loan-to-value ratio is defined as: LTV Ratio = Total Loan Balances (1st mtg + 2nd mtg + 3rd mtg) Fair Market Val- ue of the property.

First let’s look at the numerator. If the borrower is only applying for a first mortgage, and there will be no other loans on the property, the beginning balance of the new loan requested should be inserted in the numerator.

However, if the borrower is applying for a second mortgage, the “underwriter” (the person who determines whether or not the loan qualifies) should insert the sum of the first and second mortgages into the numerator.

When the borrower is applying for a second or third mortgage, the loan- to-value ratio is often known as the combined loan-to-value ratio (CLTV ratio).

Now, let’s look at the denominator. Generally the fair market value of a property is determined by an appraisal. There is one important exception, however. When the proceeds of a mortgage loan are used to buy the same property that is securing the loan, then that mortgage is known as a “purchase money loan.”

If the appraisal comes in lower than the purchase price in a “purchase money” transaction, the lender will use the LOWER of the purchase price or appraisal.

Mortgage brokers are often asked by real estate agents and buyers to base their loan on the appraised value rather the purchase price. This will not happen with conventional lenders. Only private lenders (hard money lenders) will base a loan on value, which is the biggest reason hard money is frequently used in acquisition. In fact, you’re ability to find and secure hard money is 120

When you’re trying to calculate the largest loan you can acquire on a commercial project you’d be safer to use a 75% LTV and make the deal work using that number. Anything higher should be considered a bonus.

Even though the net operating income will be the largest factor a lender uses to determine a loan amount most will use a LTV factor to cap the loan. Therefore, you can’t assume if the NOI indicates a 90% loan would work that the lender will agree.

Loan Value = LTV

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Personal Debt Ratios

When analyzing the personal budget of a borrower on smaller projects, lenders use two different debt ratios to determine if the borrower can afford his obligations. These two debt ratios are:

1. Top Debt Ratio 2. Bottom Debt Ratio

The “top” debt ratio is defined as: Top Debt Ratio = Monthly Housing Expense Gross Monthly Income

By “Monthly Housing Expense” we mean either the borrower’s monthly rent payments, or if they own their home, the total of the following –

Monthly Housing Expense • 1st mortgage payment on home plus • Real estate taxes (annual cost/12) plus • Fire insurance (annual cost/12) plus • Homeowner’s Association Dues (if home is a condo or townhouse) plus • Second mortgage payment (if any) plus • Third mortgage payment (if any).

You’ll often hear the term P.I.T.I. (P)rincipal, (I)nterest, (T)axes, and (I)nsurance. While P.I.T.I. is not exactly the same as Monthly Housing Expense because it doesn’t include Homeowner’s Association Dues, the two terms are often used interchangeably.

Lenders have learned over the years that a borrower’s “top” debt ratio should not exceed ¼ of his income. While lenders will often stretch this number to as high as 28%, traditional lending theory maintains that anyone with a debt ratio in excess of 25% stands a good chance of developing budget problems.

The second ratio that lenders use to determine if a borrower can afford her obligations is the “bottom” debt ratio. It’s defined as follows: Bottom Debt Ratio = (Total Housing Expense + Debt Payments) Gross Monthly Income

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The only difference between the two ratios is the inclusion in the numerator of non-property related “debt payments.” Debt payments include the following:

Debt Payments • Car payments • Charge card payments • Payments on installment loans • Any other monthly obligation shown on credit report

What is not included in the “debt payment” is utilities such as electric, water or telephone and payments on rental real estate loans. Rental real estate loans are usually offset first by the net rental income from the property.

If the borrower had a net positive cash flow from all his rentals, the net income is usually added to his “gross monthly income.” If the borrower has a net negative cash flow from all of his rental properties, the amount of the negative cash flow is usually added to the numerator of the “bottom” ratio as if it were a monthly debt obligation, like a car payment.

Traditional lending theory maintains that a borrower’s “bottom” debt ratio should not exceed 33 1/3%. In other words, the total of the borrower’s housing expense and debt obligations should not exceed 1/3 of his/her income. Lenders often will stretch on this ratio to as high as 36%, and some have even been known to stretch as high as 40% or more. Obviously, a loan with a debt ratio of 40% is far more risky than a loan with a debt ratio of 32%. Again, these ratios are important in making small loans both residential and commercial, but of less importance, if any, on larger loans where the properties performance is expected to pay back the debt.

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Debt Coverage Ratio (DCR)

The most important ratio to understand when making income property loans is the debt service coverage ratio. It’s defined as: DCR = Net Operating Income (NOI) Total Debt Service

To understand the ratio, it is first necessary to understand the numerator and the denominator. Let’s take a look at the Net Operating Income (NOI) first.

Net Operating Income is the income from rental property left over after paying all of the operating expenses:

Gross Schedule Rents $100,000 Less 5% Vacancy & Collection Loss $ 5,000 Effective Gross Income: $ 95,000

Less Operating Expenses Real Estate Taxes Insurance Repairs & Maintenance Utilities Management Reserves for Replacement Total Operating Expenses: $ 40,000

Net Operating Income (NOI) $ 55,000

Please note lenders always insist on some sort of vacancy factor regardless of the actual vacancy rate in an area to cover collection loss. In addition, lenders want a management factor of 3-6% of effective gross income, even if the property is owner managed. Their logic is they would have to pay for management if they took back the property. Finally, NOTE THAT WE HAVE NOT INCLUD- ED LOAN PAYMENTS AS AN OPERATING EXPENSE.

Next, let’s look at the denominator, Total Debt Service. This includes the principal and interest payments of all loans on the property, not just the first mortgage. NOTE WE HAVE NOT INCLUDED TAXES AND INSURANCE. They were already accounted for above when we arrived at net operating income. (NOI)

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To calculate the debt coverage ratio, simply divide the net operating income NOI) by the mortgage payment(s). For the sake of simplicity, let’s assume there’s only one mortgage on the property: $500,000 First Mortgage 7% Interest, 25 Years Amortized Annual Payment (Debt Service) = $42,406

Then: DCR = Net Operating Income (NOI) = $55,000 ÷ Total Debt Service $42,406 DCR = 1.3

Obviously the higher the DCR, the more Net Operating Income is available to service the debt. From the lender’s viewpoint, it should be clear they want as high a DCR as possible.

The borrower, on the other hand, wants as large a loan as possible. The larger the loan, the higher the debt service (mortgage payments). If the net operating income stays the same, and the loan size increases, the debt service increases and the lower the DCR will be.

A DCR of 1.0 is called a breakeven cash flow. That’s because the Net Operating Income (NOI) is just enough to cover the mortgage payments (debt service).

A DCR of less than 1.0 would be a situation where there would actually be a negative cash flow. A DCR of say, .95 would mean there is only enough Net Operating Income (NOI) to cover 95% of the mortgage payment. This would mean the borrower would have to come up with cash out of his personal budget every month to keep that project afloat.

Generally, lenders frown on a negative cash flow, but some will allow it if the Loan-To-Value ratio is less than around 65%, the borrower has strong outside income and the size of the negative is small. Your objective is to make sure the project will produce a DCR of at least 1.2 so you’ll have no trouble with this number when refinancing.

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Loan-To-Cost Ratio

The loan-to-cost ratio is defined as the ratio of the construction loan to the total cost of a construction project.

Loan-to-cost ratio =

Construction Loan Land costs + Hard costs + Soft costs + Contingency Reserve

= Construction loan Total Project Costs

A low loan-to-cost ratio means the developer has a lot of his own money into the project. A higher loan-to-cost ratio means the developer has very little of his own money into the project.

In the past, this ratio was not allowed to exceed 80%. However, depend- ing on the economic climate now it may be allowed to increase to 85% to 90% to 95% and even to 100% of total project costs!

The cost of a project should always be at least 15% less than the appraised value of the property upon completion, and preferably the total project cost should be 20% to 25% less. This means that the developer stands to earn a profit of at least 15% to 25% of the total cost of the project. I wouldn’t do one with less than 25% and would have to look hard at that.

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Operating Expense Ratio

In negotiating an income property loan, the size of loan the borrower can obtain is usually more of a sticking point than the rate or the loan fee. Since income property loan sizes are generally limited by the debt service coverage ratio (i.e., cash flow) rather than the loan-to-value ratio, the operating expense figure that the lender uses in his calculations is critical.

Suppose a property has the following pro forma operating statement:

Gross Scheduled Rents $100,000 Less 5% Vacancy & Collection Loss - 5,000

Effective Gross Income: $ 95,000

Less Operating Expenses Real estate Taxes $12,500 Insurance 2,500 Repairs & Maintenance 5,890 Utilities 7,345 Management 4,865 Fees & Licenses 987 Painting & Decorating 3,986 Reserves for Replacement 1,900

Total Operating Expenses: 40,023

Net Operating Income $54,977

Then we hereby define the operating expense ratio as follows:

Operating Expense Ratio = Total Operation Expenses Effective Gross Income

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Or in this example:

Operating Expense Ratio = $40,023 $95,000

= 42.1%

While it might be possible to operate an apartment building in the short run at an operating expense ratio of less than 30 – 45%, in the long run the end result will be a seriously deteriorated building. It might be possible to get a lender to accept an operating expense ratio as low as 28% on a very new building, if it had fewer than 10 or so units, and if it had no pool and very little landscaping, and if you had authentic source documents to back up your claim. But in general, lenders will very seldom accept an operating expense ratio on apartments of less than 30 – 35%, and have often been known to use 40 – 45%.

The following are factors that will influence the lender to use a higher operating expense ratio:

1. Lack of individual metering of utilities 2. Swimming pool 3. Elevator 4. Extensive landscaping 5. Low income area and/or tenants 6. Large presence of families with children

The larger the project, the larger the required operating ratio. Large projects usually entail extensive recreational facilities and pools, and often require full-time on-site management teams.

Operating expense ratios are not as useful in evaluating commercial or industrial properties. The reason why is because the space can be rented on a triple net basis, a net basis, or a full service basis.

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How To Take Title

The only way to take title to a property that’s off limits is in your own name. If you want to risk all your assets needlessly, let some attorney or Real- tor convince you it’s OK to do so. It’s not.

I suggest to students buying houses to use a land trust for each house and put several trusts into one of the entities below. I do this because a land trust requires no tax ID number or tax return or bank account or special accounting. It’s foolish to create an entity that requires all these things for each individual house or small commercial properties when they can be separated so easily on public record and yet combined into one mother entity that does require it’s own tax return.

In case of larger commercial properties, it’s rare to find one property that’s not an entity of it’s own. The risk would be too great to combine two $5,000,000 properties into one entity. Each is truly a separate business of it’s own.

Most commercial properties are held in one of the following entities:

1. Limited Liability Company Pass through income Protection for managers Protection from predators seizing assets Member liability protection

2. Limited Partnership Pass through income Predator can’t seize assets Reduces estate seize after death Limited partner liability protection

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3. S Corporation Pass through income Liability protection for shareholder Limited liability protection for officers

4. C Corporation Income does not pass through Liability protection of shareholders Limited liability protection for officers

All have advantages and disadvantages and you should seek legal help and advice from people you trust to determine what’s best for you. Get to our Entity Structuring Boot Camp as quickly as possible for a complete review of each and personal consultation on what’s best for you. The attorneys there will set up your entities if you wish. The most common entity used is a LLC, but that doesn’t mean you should or shouldn’t.

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© 2020 Heritage Financial, LTD of Jacksonville LLLP Commercial Lenders Here are some lenders I’ve talked to and notes I made. I don’t endorse any of them and have not personally done business with any of them. All were recommended by others.

Atlantic Business Capital Eric Steward—321-615-8919 [email protected] • All kinds of commercial property • Specializes in multi-family and bridge loans • 75%-80% of cost and rehab never over 75% of ARV • Seller seconds OK with 10% equity from principal • No minimum loan • Non-recourse over 1 million • No up front fees, lenders will want expense deposit once loan looks like a go. • Located in Orlando and Central Illinois

Southwind Capital Partners Brian Nowak—512-267-1167 [email protected] • All types including development • Can help get the equity and the debt with descent borrower • 70%-80% of land acquisitions • Seller 2nd OK • Minimum load 5 million but will do less if deal makes sense • Primary fee of $2500—$4500 after vetting the deal and looks good to go • Secondary fees up to $7500 with credit for primary

Self Storage Specialist Noel Cain—847-778-4661 [email protected] • Purchase or refer, stabilized or not • Up to 90% loans, standard deal 75% • Seller second OK on some, 10% cash equity • No up front fees, lender will require some after it looks like a go • Recourse and non-recourse • DCR—135 132

RCN Capital Jeff Tesch [email protected] 860-432-5858 Ext.1301

Watermarq Capital Partners Josh Koperwas [email protected] 732-229-8696

Helvetica Group Jaden Jeter [email protected] 760-607-5411

Franklin Mortgage Holdings Tim Safransky [email protected] 913-244-7057

APEX Mortgage Corp Kevin Vanic [email protected] 267-470-1917

Silver Hill Funding Pablo Vega [email protected] 305-341-3690

CV Capital Funding LLC Tara Scott [email protected] 949-296-8359

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Exit Strategies

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Exit Strategies

Fortunately, there are only a few exit strategies, unlike buying strategies, so that should make it easier for you to understand the back end plan before you construct front end offers.

You Should Never Construct An Offer On A Project Unless You Know How To Get It Financed And What Will Be Your Exit

The offer to buy hinges on the exit and the financing. Only a fool would go around firing out offers with little or no idea of where the money will come from or what he/she will do with the property after purchase. You may never have all the answers you’d like but operating on a wing and a prayer doesn’t build big bank accounts. By now you should be armed with numerous buying strategies to apply to applicable deals and know the difference between a deal and a dud, so here’s a list of exit options to scan as you’re constructing offers:

Apartments, Office Buildings, Retail Mixed Use, Mobile Home Parks, Land

1. Put under contract and wholesale before you close. 2. Purchase so you can buy time and sell as is. 3. Fix the problem then refinance with a non-recourse loan if possible and keep for yourself. 4. Fix the problem and sell so you don’t need to refinance. 5. Get a new temp to perm development loan to do construction or development to provide the capital so you can finish the project and then sell or keep some of both. 6. Sell off part of the asset to pay for the whole and keep the balance free and clear. This can be done anywhere, before, during, or after you buy. 135

Ron’s Rules To Ponder Before Selling

1. Is the property ready to sell? Is the NOI good enough? Is the appearance where it should be? Have you done all you could to raise the value?

2. Have you gotten professional help to determine the current market value?

3. Have you examined the tax consequences and done everything you can to reduce taxes?

4. Do you really need to sell or is it just a bad habit? Why are you selling? Are you sure it’s your best choice? Have you looked at what you’ll gain and compared to what you’ll lose? Are you killing the Golden Goose? Would you be better off refinancing and keeping?

5. Have you prescreened and found the right agent? Have you prepared the proper package of information so the agent can skim the early cream from the market of buyers and not turn off good prospects?

The Best Time To Sell Or Refinance Is… When You Don’t Need To

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The Best Way To Sell Commercial Property

Like any and all the other details involved in buying and selling real estate, you could accept the responsibility of selling your property without professional help so you can save money. Most thinker brains will take this approach unless they can suc- cessfully fight off the urge.

If you have been approached by a buyer and you like the offer, the answer is easy. Simply turn it over to your attorney to prepare a contract and handle the closing.

Even that should not be done unless you are acutely aware of the true market value and convinced the offer is the best you’ll get. Frankly, that’s not likely to be the case without the help of a good commercial agent who has his/her hand on the pulse of the current market place.

You’re in the big leagues now and could easily make a stupid decision that cost you six or seven figures trying to save the cost of hiring an agent. Here’s some good reasons to justify the cost:

1. It’s probably worth more than you think. If so, you’re giving away money. If not, you’re asking too much and killing the early lookers. Either way, you lose. 2. The agent does all the work so you can do what you do best… buy deals, not sell them. The Less I Do – The More I Make 3. The agent acts as a mediator keeping you away from the buyer so they won’t pick up your weaknesses. No confrontation, no negotiation, no feelings of inferiority and no stress. 4. The agents you use to sell are now obligated to bring you deals. It’s the law of reciprocity. 5. If your margin is so thin you can’t pay an agent you made a mess of the deal by paying too much, borrowing too much or lousy management. Now’s not the time to continue your bad habits and crawl out of this hole by yourself. Get help and get over it. Quit Crying Over Spilt Milk and Go Milk Another Cow. 137

Choosing The Right Agent

Here’s what I look for in an agent. If it’s not there, I’d rather keep looking than create a mismatch I’ll just have to fix later.

1. Must be skilled in the marketplace and plenty of experience to back it up. No newbies here. List with the best, not the new licensees because they’re cheaper.

2. Must have an existing network of buyers and sellers they can tap into immediately. Not interested in chasing rainbows. Certainly they can advertise but I want convinced they can sell to their existing network, even if it’s a lie, I want to hear it.

3. Must have a personality I can deal with, which in my case means they think fast, talk fast and have a sense of urgency to get things done quickly. Reptile brains should hire reptile brains. Thinker brains should hire thinker brains. If I can’t stand to have lunch with them, I won’t be happy working with them either.

4. I’ll list for 90 days only. If no progress has been made in 90 days, there’s little chance 90 more will help. If they want longer, it could mean they’re not sure of their ability to sell quickly. If you’re not in a hurry to sell, it’s a non-issue.

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A Few More Rules Of Engagement When Hiring Agents

1. Make sure they are working exclusively for you. No dual agency agreement should be signed or allowed to be signed by them. You want their full loyalty and should make it clear in the beginning.

2. Don’t sign a listing agreement until your attorney reviews. This is an easy trap to avoid.

3. It’s your job to provide the financials and selling tools the agent needs to present the case. Don’t make them do your job. It causes delays and miscommunication.

4. Don’t argue over commission. It doesn’t matter. The agent only collects when they close. Take care of the people who take care of you. If you pay peanuts… you get monkeys.

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Ways To Increase Property Value

Income Producing Property 1. Raise rents 2. Add laundry equipment and vending machines and other income sources 3. Rent appliances to new tenants 4. Property improvements like unit renovation, landscaping, adding perimeter security, exterior decorating, paving, etc. 5. Have tenants pay more utilities 6. Lower expenses like insurance, protest property taxes, lower vendor prices, labor costs, etc. 7. Tighten collection process to reduce lost rents 8. Fill up all the units and create a waiting list 9. Build more units on the property 10. Wait

Vacant Land 1. Change zoning to higher use 2. Get plat approved by all regulating agencies 3. Build on it 4. Plant trees 5. Wait

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Other Ways To Sell

• Online Auctions: EBay, LFC and other sites are designed to make it easy to conduct an open and sealed bid auction. It costs almost nothing and you always reserve the last bid.

• Website: driven by a strong campaign to drive traffic. If it’s selling houses, lots or condos you can ask for reservations on the site giving the buyer time to visit the property and do more research before they commit. It it’s a commercial property you’ll target buyers and tenants the same way, but with more focused campaigns. The purpose is to generate interest and follow up off line. You can take the leads or drive them to your agent to insure they take action. If you do this, you should have a way to count the leads for accountability. You way want to prescreen them in-house and then relay to closers at a reduced commission.

• Letters: to builders, developers and other buyers as well as agents to bring in their buyers/tenants.

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How To Make A Fortune And Never Pay Taxes

If you’re here, you’ve probably heard by now you can use a Roth IRA as the entity receiving the profit from your deals…

And Never Pay Taxes

There are rules you must adhere to if you want to avoid penalties but they’re not complicated and it’s easy to buy or control property and other assets in your Roth IRA or Solo 401k.

First, the rules that matter: 1. There is no limit how much your IRA can make in a year. Only your contribution is limited to $6,000 to $7,000. 2. You can’t do business with yourself or linear family. 3. If an IRA operates a business, the business must pay taxes. 4. You can’t contribute assets you currently own to your IRA. 5. The IRA can’t guarantee debt.

Step-by-step: 1. Open a Roth IRA at QuestTrust.com, one for you and one for your spouse. Contribute at least $1,000 to each. 2. Form a LLC or Corp to use to buy properties. YOU CANNOT OWN A CONTROLLING INTEREST COMBINED WITH YOUR SPOUSE AND LINEAR FAMILY, NOR SHOULD YOU BE THE MANAGER OR OFFICER. Your IRA must own the LLC. Appoint someone you trust. 3. Use this entity to buy a property and handle all the cash flow. 4. Sell the property and make sure the profits go directly to your LLC that’s owned by your IRA.

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SOLO 401k

• For business owners with no employees (other than spouse)

• Can contribute up to $62,000 a year

• Can borrow up to $50,000 or 50% of your account value

• Does not trigger UBIT

• Use any local bank

• No annual filing or returns for any plan with less than %25,000 in assets. Simple form if over 25k.

• You write the checks.

Get professional advice before setting up a SOLO 401k

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1031 Exchange

You are allowed to exchange like kind property, which means any type of real estate for any other type of real estate, and not pay taxes on the gain. There are a few rules but they’re not difficult. Never do an exchange without legal representation and a good CPA and intermediary.

Here are the simplified rules: 1. You must denote your intentions to exchange in your sales agreement. 2. You have 45 days after the sale to identify another purchase and 180 days to close. 3. The proceeds will go into an escrow account until used on another property and will be taxed if you don’t. 4. You are allowed to refinance your purchased property and pull out deferred cash.

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Causes Of Failure 15 Mistakes To Avoid

1. Don’t stop or ignore your cash flow while waiting for the big deal. Single-family houses pay the bills.

2. Don’t try to make an unmotivated seller motivated. Pick the low hanging fruit only.

3. Don’t personally guarantee big loans unless you can handle the debt from your personal income if things go wrong… because they will.

4. Don’t get caught up in long, costly entanglements unless it’s worth the grief and you’re prepared to go the distance.

5. Don’t develop unrealistic expectations on the degree of difficulty on many commercial projects or availability of financing as you see it.

6. Don’t enter into an agreement without the help of a good attorney. Hire the best attorney you CAN’T afford.

7. Don’t risk big deposits without time to do your due diligence and don’t release them until you have. Trust but verify!

8. Don’t try to do tasks you’re not qualified to do, such as engineering, appraisals, title work, legal work, construction, accounting, property management, or other mundane tasks you can pay others to do for small amounts of money.

9. Don’t agree to pay all cash before diligently exploring all other possibilities and only then if it’s the last resort and you can buy at a deeply discounted wholesale price.

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10. Don’t fall for the sales pitch from brokers and sellers who will make a strong case why you should pay retail price for their property be cause it’s in a hot area, has motivated sellers, has a great upside potential, or other worthless reasons.

11. Don’t spend your time with worthless suspects. Learn how to prescreen quickly and focus on the prospects.

12. Don’t buy a deal where everything must work out perfectly for you to profit. Man plans, God laughs. You must make good money with bad results or don’t do the deal.

13. Don’t forget your partner in Washington who expects you to pay taxes on gain. Become a 1031 exchange and ROTH IRA expert.

14. Don’t develop unreasonable expectations of how much money you’ll make and how fast. Be patient and persistent and it will come. You’ll likely lose several potential deals before one produces. Give yourself a break and eat the elephant one bite at a time.

15. Don’t assume you know the validity of your planned exit strategy. Let professionals determine the feasibility and saturation of any project before you assume much risk. Building pretty buildings or lots is worthless if there are no buyers.

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Glossary A

Abatement – Stopping or reducing the amount or value, as when assessments for as ad valorem taxation are abated after the initial assessment has been made.

Absolute fee simple title – A title that is unqualified. Fee simple is the best title that can be obtained. (See also fee simple.)

Absorption analysis – A study of the number of units of residential or nonresidential property that can be sold or leased over a given period of time in a defined location. (See also feasibility study.)

Access – A way to enter and leave a tract of land, sometimes by easement over land owned by another. (See also egress and ingress.)

Accessibility – The relative ease of entrance to a property by various means, a factor that contributes to the probable most profitable use of a site.

Accretion – Land buildup resulting from the deposit by natural action of sand or soil washed up from a river, lake or sea.

Accumulated cost recovery – Total cost recovery deductions taken throughout the holding period of a property.

Acre – A measure of land, 208.71 by 208.71 feet in area, being 43,560 square feet or 160 square rods or 4,840 square yards.

Active income – Income from salary, wages, tips, commissions, and other activities in which the taxpayer participates.

Actual age – The number of years elapsed since the original structure was built. Sometimes referred to as historical or chronological age

Adjusted basis – The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions and partial sales taken during the holding period.

Ad valorem – According to value (Latin); generally used to refer to real estate taxes that are based on assessed property value.

Adverse land use – A land use that has a detrimental effect on the market value of nearby properties 162

Aesthetic value – Relating to beauty, rather than to functional considerations.

Age-life method of depreciation – A method of computing accrued depreciation in which the cost of the building is depreciated at a fixed annual percentage rate; also called straight-line method.

Aggregate – In statistics, the sum of all individuals, called variates.

Air rights – The right to use the open space above the physical surface of the land, generally allowing the surface to be used for some other purpose.

Amenities – The qualities and state of being pleasant and agreeable; in appraising, those qualities that are attached to a property and from which the owner derives benefits other then monetary satisfaction of possession and use arising from Architectural excellence, scenic beauty social environment.

Amortization – The repayment of loan principal through the equal payments over designated period of time.

Annual debt service (ADS) – The total amount of principal and interest to be paid each year to satisfy the obligations of loan contract.

Appraisal – An estimate of quantity, quality or value; the process through which conclusions of a property value or obtain; also refers to the report setting forth the process of estimating value. (See also appraisal process.)

Appraisal foundation – Nonprofit corporation established in 1987 and headquartered in Washington D.C., sponsored by major appraisal and appraisal related professional and trade groups.

Appraisal methods – The approaches used in the appraisal of real property. (See cost approach, income capitalization approach, sales comparison approach.)

Assessed value – The value of real property established by the tax assessor for the purpose of levying real estate taxes.

Balloon payment – The final payment of the balance due on a partially amortized loan.

Base rent – The minimum monthly rent due to the landlord. Typically, it is a fixed amount.

Basis – The total amount paid for a property, including equity capital and the amount of debt incurred 163

Bonefide – Good faith; absence of fraud.

Bond – At events of indebtedness; legal instrument with money penalty fixed that has to be paid only if the party or parties do not fulfill requirements within that instrument.

Boundary – The natural or artificial division of contiguous the estates in land.

Breach of contract – Legally inexcusable failure to perform any promise within a contract one is a party to.

Building code – Ordinances or resolutions rigged regulating building construction and enforced by the local governments building department or inspector.

Bundle of legal rights – Rights conferred by owning real estate property, including rights to mortgage, sell, make improvements, lease, and regained possession at the end of a lease.

Burden of proof – As a matter of evidence, the duty to affirmatively prove facts in dispute of case; plaintiff carries burden of proof in civil case; burdens shifts to defendant once plaintiff has met his/her burden.

Buyer’s broker – The real estate agents representing the buyer and not the seller; fiduciary obligation is thus owed to the buyer.

Bylaws – In condominiums, rules and regulations for the administration of condominium property as a contract between the unit owners as well as between the unit owners as well as between the unit owners association in the unit owners.

Capital gain – Taxable income derived from the sale of the capital asset. It is equal to the sale price less the cost of the sale, adjusted basis, suspended losses, excess cost recovery and recapture of a straight line cost recovery.

Capitalization rate – A percentage that relates the value of an income producing property to its future income, expressed as net operating income divided by price.

Case law – Reported cases is a body of jurisprudence; one of the sources of law.

Cash flow after taxes (CFAT) – The periodic amounts of money received by an investor after taxes from the operations of a real estate investment.

Cash flow before taxes (CFBT) – The periodic amounts of money received by an investor before taxes from the operations of a real estate investment. 164

Cash flows – Investment returns generated by one or two methods: current income (Rents, dividends, etc.) Minus expenses and debt service or cash proceeds received upon the sale of an investment (reversion).

Cash on cash rate – A simple return measure. Calculated as cash flow before taxes divided by initial equity investment.

Cash value – What property would bring at a private, non installment sale ; market value.

Caveat Emptor – Latin for “let the buyer beware”; the purchaser of real estate’s position legally with both the seller and the estate agent. It is continually eroding in the law, although less so in Ohio than other states.

Certificate of Occupancy – Document issued by building department to owner when his/her structure has passed all building regulations.

Certificate of Sale – Document issued by public officer to successful bidder on realty at judicial sale; the certificate entitles the bidder to a deed after the court concludes the sale.

Certificate of Title – Following the examination of public records, a written opinion setting forth the condition of the title of real property.

Certificate of Transfer – Legal instrument issued by probate court to transfer real property to devisee.

Chain of title – Record showing the successive conveyances for a specific partial of land from the originating source to the present owner.

Chattel – Item of personal property.

Citation – Summons issued to defendant compelling his/her appearance in court

Class life – The useful economic life of an asset set by the IRS.

Clear and convincing evidence – More than a preponderance but less than a reasonable doubt.

Clear title – Good, marketable title free from encumbrances.

Clerk of court – The officer of court charged with all clerical court business including records, filing of suit, service a process, and entry of judgment.

Closing statement – An accounting of all credits and debits to seller and purchaser for sale of real property as done by escrow agent, lending institution, or other agents. 165

Cloud on title – Valid encumbrance affecting title of estate in land such as mortgage or judgment.

Codicil – Legal instrument that adds to or changes a will; must meet all the same prerequisites that a will does.

Commingle – In violation of state license law, the broker mixes funds held for purchaser with his/her own funds.

Common areas – In condominiums, those areas of the condominium property owned by all owners in common and for the use of all, not just certain individuals-for example, greenbelts, landscaping, a pool, clubhouse, bike path, and other amenities.

Common assessment – An amount of money paid by each unit owner in a condominium for the maintenance and repair of common areas. The stipend per owner varies commensurate with their percentage of ownership in condominium property.

Common law – Law that derives its authority from principles set forth in court decisions in stead of from statues or other written declarations. Also called case law or judge-made law.

Community property law – Statutory provisions that give either the husband or the wife a one-half interest in property acquired by the labor of the other spouse during the course of the marriage.

Compensatory damages – Damages that return victim to his/her status quo ante.

Competent – One who is not in competent, that is, under eighteen years of age, mentally or physically in firm, mentally retarded, or chemically dependent. Severity of condition is needed for categories other than minority.

Compound interest – Interest computed on the original principal and accumulated interest.

Complaint – The first court pleading, alleging the cause of action within a lawsuit; document that initiates the lawsuit; used in civil law; concise statement giving defendant notice of the causes of action and the relief and remedies demanded by the party filing it.

Compulsory counterclaim – A defendant’s having to sue the plaintiff for any legal wrongs he/she has suffered arising out of the same transaction or occurrence.

Compound interest – Interest paid on both the original investment and accrued interest.

Concealment – The seller’s and/or real estate agent’s hiding a defect in the real estate. This is fraud upon the purchaser.

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Condemnation – In real property law, the private owner’s realty being taken by the state for a public purpose, for which he or she is paid just compensation; forces sale between owner and condemner/government.

Conditional use permit – Approval of a property use inconsistent with present zoning because it is in the public interest. For example, a church or hospital may be allowed in a residential district.

Condition – Qualifier used most frequently in real estate purchase contracts; some event must happen or some act must be performed, after the contract has been formed between the parties, for the contract to be binding; for example, when the financing condition is satisfied, the purchaser is obligated to perform on the contract.

Condominium – Form of real estate ownership wherein it owner has an exclusively owned a fee-simple absolute estate in a portion of the airspace (typically his/her individual unit) and a mutually owned fee-simple absolute estate in all the rest of what is known as the land (typically the common areas).

Condominium conversion – Making realty previously used one way into condominium property pursuant to statutory requisites.

Confirmation of sale – The courts affirming sale after public auction; at that moment, debtor/ mortgagor’s interest in real estate is foreclosed-forever cut off.

Conforming use – A use of land that complies with the zoning laws then in effect.

Conformity, principal of – The principle that buildings should be similar in design, construction and age to other buildings in the neighborhood to enhance appeal and value.

Consent decree – Settlement of a lawsuit whereby one agrees to a certain course of conduct for the future pursuant and the order of the court.

Consideration – Legal detriment bargained for and promised in exchange for legal benefit for both parties, either orally or in writing when required by the statue of frauds.

Constructive eviction – A landlord depriving the tenant of the beneficial enjoyment of the premises, compounding the tenant to vacate.

Constructive fraud – Same as actual fraud except it cannot be proven as an intentional act on the part of the perpetrator.

Constructive knowledge or notice – Not actual knowledge; rather, knowledge imputed to a person because the facts are a matter of public record. 167

Contiguous – Closes or near; touching.

Contingent – Dependent upon an event that may or may not happen.

Contingent legal fee – Percentage fee the lawyer is paid if his/her client wins the case; lawyer is paid nothing if client loses the case.

Contract – An agreement that is legally enforceable, containing a set of promises that the law gives a remedy for if breached.

Contribution, principal of – The principle that any improvement to a property, weather to vacant land or a building, is worth only what it adds to the property’s market value, regardless of the improvements actual cost.

Conveyance – A written instrument, such as a deed or lease, by which title or an interest in real estate is transferred.

Cooperative – A multiunit residential building with title in a trust or corporation that is owned by and operated for the benefit of persons living within it, who are the beneficial owners of the trust or the stockholders of the corporation, each possessing a proprietary lease granting occupancy of a specific unit in the building.

Correction lines – A system of compensating for inaccuracies in the rectangular survey system.

Cost approach – A way to determine the market value of a property by evaluating the costs of creating a property exactly like the subject.

Cost recovery – An annual deduction based on the class life of an asset.

Counteroffer – In contracts, an offer; the word counter signifies that the offeree wants to make an offer going back wants to make an offer going back to the original offeror. Now the offeree is the offeror and the offeror the offeree.

Covenant – Any agreement; in real property includes those full agreements of seisin, warranty, further assurance, and quiet enjoyment.

Covenant not to compete – A contractual provision between broker and salesperson wherein, in exchange for professional training or other advantages from the broker, the salesperson cannot sell real estate in the broker’s area for a given period of time if the sales person leaves the broker.

Covenant of quiet enjoyment – Doctrine requiring landlord to give tenant undisturbed, peaceful enjoyment, and possession of the leasehold. 168

Covenant running with land – Goes with the land; land cannot be separated from or transferred without it.

Criminal litigation – Brought by the government against wrongdoers whose acts pose such a threat to society that governmental intervention and punishment of the wrongdoers are appropriate.

Cross claim – Resembles a complaint but is a pleading a party Makes against another party grouped on the same side of the case, such as one codefendant suing the other code defendant.

Cross examination – Examination by the opposing party of a witness at a deposition, calculated to test and weaken the witnesses’ testimony.

Cumulative zoning – A zoning scheme wherein, as an area is rezoned, all uses that are higher are included as well.

Curtesy – A husband’s life estate interest in his wife’s real property.

Conventional financing – Mortgage loan for real property obtained through lending institution. Has two levels of security: borrower personally, through promissory note, and realty through the mortgage deed or deed of trust; not insured through FHA or guaranteed by VA.

Conversion condominium – Real property formerly used and operated in another way, which is submitted by declaration and other documents to county recorder’s office as condominium property instead.

Conveyance – Transfer of title, whether legal or equitable, in land.

Conveyance fee – State and/or local, county tax levied upon grantors for passing of real estate.

Cooperative – Similar to condominium, but owners own shares of stock in the whole of the cooperative property and reside in their units under an occupancy agreement instead.

Cooperative assessment – Each cooperative owner’s financial obligation to cover the cost of operating and maintaining the cooperative.

Counterclaim – The claim made by defendant against the plaintiff either as a claimed amount or a set off; used in civil cases only.

Damages – Money compensation awarded by court to person who has suffered loss or injury through another person’s illegal act; compensatory damages return the person to his/her status quo ante, whereas punitive damages award the person money greater than his/her loss to punish the malicious wrongdoer. 169

Debt coverage ratio (DCR) – Ratio of net operating income to annual debt service. Expressed as NOI divided by ADS.

Deceit – Intentional, misleading, fraudulent conduct that gives rise to suit in fraud.

Declaration – The legal document that creates the condominium property, filed with the county recorder; remains the controlling document for the condominium property. No other documents may conflict with the Declaration.

Declaratory judgment – States parties rights; court expresses opinion on controversy but does not issue order compelling performance or nonperformance of act.

Decree – Judgment from a court using its equity powers under common law; when made between parties under sanction of the court, called a consent decree.

Dedication – In real property, appropriation by the owner of his/her private land for public use, which use is accepted by the public.

Deed – Legal document executed by grantor that conveys realty from him/her to the grantee; must be a written instrument both signed by grantor and delivered to grantee.

Deed restrictions – Private prohibitions on the use of land found on the deed itself, or by reference to books in recorder’s office, which tie unto deeds filed there.

Default – Failure to perform legal obligation.

Defeasance – Instrument that defeats another estate in land or deed, acts to defeat one estate because of performance of condition within the deed.

Defeasible – Can be undone by occurrence of condition subsequent.

Defendant – Person against whom lawsuit is brought; person plaintiff is suing.

Deficiency judgment – The balance of indebtedness, as awarded by court, that the debtor/ mortgagor owes the mortgagee/creditor; occurs when the price obtained at foreclosure sale is not sufficient to satisfy the mortgage debt obligation.

Demand – Claim to an award at law or in equity by court.

Disposition – The testimony of a witness taken before a person authorized to take oaths wherein such witness can be cross-examined by opposing counsel during discovery or examined and cross-examined by both sides’ attorneys in order to perpetuate testimony.

Depreciation – The loss of utility and value of a property. 170

Descent and distribution, statue of – Statute covering to whom, and in what proportion, a decedent’s property is to be distributed when the decedent dies without leaving a will.

Devise – Testator’s disposition of real property through his/her will.

Direct examination – First questioning of witness, by party who called him/her on merits of case.

Director of Commerce – Ex-officio head of division of real estate.

Disability – Not legally able to perform act; handicap.

Discounting – The process of reducing the value of money received in the future to reflect the opportunity cost of waiting to receive the money.

Discovery – Litigation techniques for finding out the evidence and testimony of an opposing party or a witness in the lawsuit and/or the contents of books and records and/or the state of real property and/or admissions or denials of facts in controversy; all done prior to the actual trial.

Discrimination – Inequality of treatment; making housing unavailable, refusing to sell real property, or creating panic sales based on race, religion, national origin, sex, handicap or family status.

Dispersion of minorities – Fair housing interpretation, usually by cities and their housing boards, that minority group members, especially blacks, should be evenly distributed among all neighborhoods.

Dispossess – Take away the right to use real property. Distribution in probate, dividing and apportioning intestate’s estate among legal heirs after payment of debts and expenses under authority of probate court.

Diversification – A method of reducing risk by investing in unrelated (uncorrelated) assets.

Domestic relations court – A specialized state court that handles divorce and other marital cases, including attendant disposition of real and personal property.

Domicile – Person’s permanent home, which he/she always has ultimate intention of return- ing to.

Dower – A spouse’s one-third life estate interest in real property of his/her husband/wife.

Dower release – Grantor’s spouse releases any right of dower in grantor’s conveyance, usually by deed. 171

Dual agency – Real estate agents representing both the seller and the purchaser in a transaction. This is lawful (but not recommended) as long as the dual agency is disclosed to both purchaser and seller and is unlawful if not disclosed to both.

Due care – Reasonable care; not negligent.

Due-on-sale/Due-on-transfer clauses – Clauses often present in mortgages that give the mortgagee/lender the right to call the entire debt due should the mortgagor/borrower sell, transfer or otherwise change the ownership of the mortgaged realty without first obtaining the mortgagee/lender’s consent.

Durable power of attorney – A power of attorney that is not affected by any subsequent disability of principal.

Duress – Forcing a person against his/her will to perform an act.

Earnest money – Money purchasers pay to sellers or their agents, before closing to demonstrate their good faith, which sellers and/or agents can keep as part or all of their damages if purchasers breach the contract.

Easement – One person’s right to use the land of another for a specific purpose. It is a permanent right, which cannot be terminated unless the person who received these rights agrees to give them up.

Easement appurtenant – Easement wherein one owner of a specific parcel of realty has the right to use and benefit from another landowner’s parcel of realty.

Easement in gross – Right to use realty for a specific purpose, as held by a person or commercial entity.

Economic obsolescence – The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.

Egress – Access.

Ejectment – Thrown out from possession of land.

Emblements – Vegetable chattels annually produced by labor.

Eminent domain – The taking of private property by the government for public use. It is lawful as long as the owner is paid just compensation. 172

Encroachment – Intruding upon another’s real property, such as part of a building that is on another’s real property.

Encumbrance – Charge or lien against real property existing in someone’s favor other than the owner’s.

Enforceable contract – Refers to a contract that the law will uphold and find a breach of if one party fails to perform.

Environmental law – Federal and state laws in effect to protect the public from the effects of pollution in the air, land, and water, as well as to conserve natural resources for the future.

Equal access – Fair housing interpretation, usually by real estate licensees and professional affiliates, that a person, regardless of who or what he/she is, can get housing anywhere.

Equal protection of the laws – A principle holding that no person is subjected to any greater burden, punishment, or restriction to the courts, liberty, or property than other persons within the same jurisdiction.

Equilibrium point – The price at which the quantity supplied equals the quantity demanded.

Equitable conversion – A doctrine giving the purchaser an interest in real property and the seller an interest in real personal property from the time of execution of the real estate purchase contract forward.

Equitable right to redeem – Mortgagor’s right to reclaim the mortgaged realty by payment in full.

Equitable title – Beneficiary of a trust’s interest in property held by trust.

Equity Fairness – Justness; relief granted by the courts under well established equitable principles; used when money damages will not adequately compensate.

Equity investors – Investors making use of what is termed venture capital to take an unsecured and thus relatively risky part in an investment.

Equity of redemption – A period of time wherein a former mortgagor can obtain his/her real property back by paying the entire debt, including interest and costs.

Equity yield rate – The return on the portion of an investment financed by equity capital.

Errors and omissions – Insurance that brokers can carry to cover themselves and their salespersons for negligent or constructively fraudulent activity arising from their performance of real estate services. 173

Escheat – Property reverting to the state when there is no proper heir to inherit.

Escalator clause – A clause in a contract, lease or mortgage providing for increases in wages, rent or interest, based on fluctuations in certain economic indexes, cost or taxes.

Escrow – The closing of a transaction through a disinterested third person called an escrow agent or escrow holder, who holds funds and/or documents for delivery on the performance of certain conditions.

Escrow closing – Transaction in which disinterested third person is chosen by both seller and purchaser to accept all documents and funds necessary to close real estate purchase. When all terms and conditions have been met, this escrow agent closes the transaction; purchaser obtains his/her title to the realty and the seller his/her net sales proceeds.

Estate – The degree, quantity, nature and extent of ownership interest that a person has in real property.

Estate in land – The degree, quantity, nature and extent of ownership interest a person had in real estate.

Estate in remainder – The remnant of an estate that has been conveyed to take effect and be enjoyed after the termination of a prior estate; for instance, when an owner conveys a life estate to one party and the remainder to another. (For a case in which the owner retains the residual estate, see estate in reversion).

Estate in reversion – An estate that comes back to the original holder, as when an owner conveys a life estate to someone else, with the estate to return to the original owner on termination of the life estate.

Excess rent – The amount by which scheduled rent exceeds market rent.

Expense – The cost of goods and services required to produce income.

Expense-stop clause – Lease provision to pass increases in building maintenance expenses on to tenants on a pro rata basis.

External obsolescence – Loss of value from forces outside the building or property, such as changes in optimum land use, legislative enactments that restrict or impair property rights and changes in supply demand relationships.

Externalities – The principle that outside influences may have a positive or negative effect on property value.

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Fair Housing Act – Modern fair housing law prohibiting discrimination in housing, lending, and so on, because of race, religion, national origin, sex, handicap, and family status.

Fair Housing Initiatives Program – Agreement between HUD and the National Association of REALTORS’ for an organized program of testing real estate agents using their mutually agreed-upon standards.

Family status – Anti-discriminatory provision under the Fair Housing Act, protecting persons under age 18 who live with a parent or guardian, or are pregnant.

Feasibility study – An analysis of a proposed subject or property with emphasis on the attainable income, probable expenses and most advantageous use and design. The purpose of such a study is to ascertain the probable success or failure of the project under consideration.

Federal Reserve Bank System – Central bank of the United States established to regulate the flow of money and the cost of borrowing.

Federal tax lien – Lien the federal government has against all real estate in the country when persons owe it money, such as failure to pay income or state taxes.

Fee simple (absolute) – Ownership of land by a person, subject only to public and private controls. The least restricted and most desirable form of ownership.

Fee simple defensible – Any limitation on property use that could result in loss of the right of ownership.

Fee simple determinable – Estate in land that ends automatically upon the happening of a stated event.

Fiduciary deed – Deed used when grantor is trustee, executor, or guardian, which contains limited warranties for the grantee.

Fiduciary relationship – Agency relationship between broker-salesperson and principal, usually the seller, wherein principal is owed high degree of trust, loyalty, full disclosure, due care, no self-dealing, confidentiality, and accounting.

Final value estimate – The appraiser’s estimate of the defined value of the subject property, arrived at by reconciling (correlating) the estimates of values derived from the sales comparison, cost and income approaches.

Finder’s fee – Professional fee paid to broker by purchaser for finding real property for him/her to purchase. This realty usually is not on the market for sale. 175

Fixed expenses – Those costs that are more or less permanent and do not vary in relation to the property’s occupancy or income, such as real estate taxes and insurance for fire, theft and hazards.

Fixture – An item that was once personal property but has become part of the real property according to the fixture tests, that is, attachment, adaptation to use and/or objective intent of landowner.

Forcible entry and detainer – Through summary legal proceeding, giving possession of land back to the person wrongfully deprived of its possession.

Foreclosure – Cutting off the rights of the mortgagor in mortgaged realty by taking and selling the mortgaged real property to satisfy mortgagee’s default; usually ends rights of the mortgagor in the real property.

Forfeiture – Loss of a right or interest by failure to perform.

Formal closing – Meeting of all persons involved in the closing of a real estate purchase contract who show up in person to complete their tasks. At the end of this actual meeting, the purchaser receives title to the real estate and the seller receives his/her net sales’ proceeds.

Form appraisal report – Any of the relatively brief standard forms prepared by agencies such as Federal Home Loan Mortgage Corporation and Federal National Mortgage Association and others for routine property appraisals.

Fourteenth Amendment – Constitutional guarantee of equal protection of the law.

Fraud – An intentional act of falsehood calculated to induce another to act in reliance thereon and to part with something of value.

Fraudulent conveyance – Transferring realty to another to defraud creditors; prevents creditors’ collecting through forced sale of the realty.

Freehold Estate – In fee or for life; if a freehold estate, the right of title to land; estate in land of uncertain duration.

Fructus industriales – Produced on land or by the efforts of people and now considered real property unless harvested.

Fructus naturales – Growing things on land that are capable of living and producing without the efforts of people. There are fixtures and remain with the estate.

Freehold – An estate in land in which ownership is for an indeterminate length of time.

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Frequency distribution – The arrangement of data into groups according to the frequency with which they appear in the data set.

Front foot – A standard of measurement, being a strip of land one foot wide fronting on the street or waterfront and extending the depth of the lot. Value may be quoted per front foot.

Fully amortized mortgage loan – A method of loan amortization in which equal periodic payments completely repay the loan.

Functional obsolescence – Defects in a building or structure that detract from its value or marketability, usually the result of the layout, design or other features that are less desirable than features designed for the same functions in newer property.

Functional obsolescence-curable – Physical or design features that are no longer considered desirable by property buyers but could be replaced or redesigned at relatively low cost.

Functional obsolescence-incurable – Currently undesirable physical or design features that are not easily remedied or economically justified.

Future value – The amount to which money grows over a designated period of time at a specified rate of interest.

General warranty deed – An instrument wherein grantor warrants to protect grantee’s right, title, and interest in subject real property against the world. Grant – Conveyance transfer of real property by deed. Grantee person receiving grant of real property.

Grant deed – A type of deed in which the grantor warrants that he/she has not previously conveyed the estate being granted to another, has not encumbered the property except as noted in the deed, and will convey to the grantee any title to the property the grantor may later acquire.

Grantee – A person who receives a conveyance of real property from a grantor.

Grantor – The person transferring title to or an interest in real property to a grantee.

Gross building area – All enclosed floor areas, as measured along a building’s outside perimeter.

Gross income multiplier – A figure used as a multiplier of the gross income of a property to produce an estimate of the property’s value. 177

Gross leasable area – Total space designed for occupancy and exclusive use of tenants, measured from outside wall surfaces to the center of shared interior walls.

Gross lease – A lease of property under the terms of which the lessee pays a fixed rent and the lessor pays all property charges regularly incurred through ownership (repairs, taxes, insurance and operating expenses).

Gross living area – Total finished, habitable, above-grade space, measured along the building’s outside perimeter.

Gross market income – (See potential gross income).

Gross operating income – The amount of cash generated by the operations of a property.

Ground lease – A lease of land only on which the lessee usually owns the building or is required.

Habendum – Clause following granting of the premises in a deed; defines grantee’s extent of ownership; begins with “to have and to hold” in deed.

Habitability, implied warranty of – In landlord-tenant law, protection for the tenant by requiring that the premises be fit for intended use per housing code. Capable of being resided within.

Health code – Regulations for the public health that affect real property, such as standards for septic systems, enforced by health department.

Heir – One who receives an estate or interest in land under the state statue of descent and distribution; person to whom property passes when deceased does not leave will.

Hereditaments – Things that can be inherited of real or personal property, including land.

Hold – Possess by lawful title; to be the grantee.

Hold over – Arrangement whereby tenant keeps possession after expiration of leasehold and landlord agrees by acceptance of rent.

Homeowners’ Association – Organization within a subdivision that is responsible for enforcing restrictions on use of the land.

HUD – Abbreviation for the federal government agency Housing and Urban Development, which administers fair housing and other federal real estate laws. 178

Imperfect market – A market in which product differentiation exists, there is a lack of important product information, and certain buyers or sellers may influence the market. Commercial real estate is bought and sold in an imperfect market.

Implied contract – An agreement showing intent to form a contract, conduct of parties, and their relationship.

Incompetent – Not legally able or fit.

Incorporeal rights – Intangible rights in realty such as those found in easements and licenses.

Indemnify – To pay for a loss or give security to cover a loss.

Ingress – Right of entrance.

Injunction – A court is using its equity powers to direct a party to a lawsuit to either do an act or refrain from doing some act.

Installment contract – Purchase of real property whereby purchase price is paid by periodic payments rather than in lump sum.

Interrogatories – Written questions sent from one party to a lawsuit to other party, who must answer them in writing under oath.

Interest-only loan – A method of loan amortization in which interest is paid periodically over the term of a loan and the entire original loan amount is paid at maturity.

Internal rate of return (IRR) – The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of present value of future cash flows equals the initial capital investment.

Interstate Land Sales Full Disclosure Act – Federal law that protects prospective purchasers from land developers who sell lots site unseen through interstate commerce.

Interval ownership – Ownership for only a limited period of time in a condominium.

Inter vivos trust – Trust that takes effect while the trustor is still alive.

Intestate – Person who dies without making a will.

Involuntary lien – A realty owner’s not consenting to a lien being placed against his/her realty. 179

Judgment – Court of law’s decision upon the parties’ claims within a litigated lawsuit; can be converted into a lien.

Judgment lien – Binds the real estate of the judgment debtor; holder can force a sale of realty to satisfy the judgment.

Judiciary – System of courts that interpret the law and declare and enforce liability.

Land – Soil, earth, permanent fixtures, and everything on, over, or under the surface of the earth.

Land installment purchase contract – A real estate purchase contract, drafted in conformance with state law, wherein the seller-vender accepts installment payments from the purchaser vendee. Title is conveyed to the vendee only when payments are completed.

Latent defect – Concealed or hidden defect in or on the real property.

Lease – An oral or written contract between landlord and tenant, which is also a conveyance, wherein the tenant has the exclusive right to possession of the landlord’s realty in exchange for the tenant’s paying rent to the landlord.

Leasehold – Estate in land in which the tenant has the right to occupy real property under a lease.

Lease/option – An arrangement in which the mortgagor/seller leases the realty to a tenant, who also is given the option to purchase the leased premises.

Legal description – Written matter that defines the boundaries of realty being transferred; legally recognized description used in deeds and other legal instruments.

Lessor – The landlord; owner of realty who gives right to exclusive possession of his/her realty to tenant, pursuant to a lease.

Leverage – The use of borrowed funds to finance a portion of the cost of an investment.

Levy – To collect a sum of money or seize property to satisfy an obligation.

Liable – To owe; in civil law, the party losing the case now owes legally enforceable obligations, usually money , to the winning party. 180

Lien – A claim or encumbrance placed upon realty for payment of a debt, which makes the realty security for the debt.

Life estate – Estate in land that is measured by the life tenant’s or another person’s life.

Life tenant – One who has an estate in land that exists as long as his/her life or another designated person’s life.

Limited common areas – Those areas owned in common by the condominium property owners but for the use of only some condominium property owners but for the use of only some owners; for example, laundry rooms in each building to be used only by the residents in each building.

Limited jurisdiction – Court empowered to determine cases concerning limited amounts of money and petty crimes and misdemeanors.

Limited real estate licensee – Broker or salesperson who deals in cemetery interment rights only.

Limited warranty deed – Another name used for the special warranty deed.

Liquidation value – The likely price that a property would bring in a forced sale (foreclosure or tax sale). Used when a sale must occur with limited exposure time to the market or with restrictive conditions of sale.

Liquidated damages – An amount of money agreed upon by the parties in a contract about the amount of damages a breaching party forfeits to a non-breaching party.

Liquidity – The ability to convert an investment into cash quickly without loss of principal.

Lis pendens – Latin for “suit pending.” Copy of lawsuit can be recorded along with real property records, which gives notice to the world that there is a lawsuit that may affect the interest in that real property.

Listing – An oral or written contract between real estate broker and landowner wherein the landowner agrees to pay the broker a stipulated commission if the broker produces a ready, willing, and able purchaser for his/her realty.

Littoral land – Land that borders a lake, an ocean or a sea.

Long-term leases – Leaseholds of 99 or more years.

Loan point – A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount. 181

Loan-to-ratio (LN) – The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.

Low hanging fruit – Any transaction that will produce a large profit with minimal work in one year or less.

Marketability – The ability to sell an investment quickly, regardless of its sale price.

Marketable title – Good, clear title that is free from defects and thus presents little or no risk of litigation; the necessary title called for in the real estate purchase contract.

Marketable Title Act – State law providing that if a record title shows a clear, not flawed, chain of title at least 40 years long, that title is good, or marketable enough, to be transferred.

Market value – The highest price a willing purchaser will pay to a willing seller.

Mechanic’s lien – A special, involuntary statutory lien that can be placed on real property by general or subcontractors, laborers, or material suppliers for work done, material supplied or construction managed for a specific piece of real property.

Mediation – A structured settlement process utilizing a skilled negotiator working with the parties to a lawsuit.

Meeting of minds – Complete agreement between parties to a contract on all its terms.

Memorandum of lease – Legal instrument for setting forth the names of the parties and legal description of realty, subject to a lease, which can be recorded instead of the lease itself.

Mental infirmity – A person’s condition that makes it possible to declare a contract, which he/she is a party to void or voidable.

Metes and bounds – One type of legal description for land that starts at a clearly marked point and goes around the boundaries by distance and direction back to the starting point.

Minimization of damages – Duty imposed upon a non-breaching party to a contract to prevent damage figure from going higher, by requiring him/her to exercise reasonable care.

Minority – The age at which a person lacks capacity to contract because he/she has not reached age of majority under his/her state’s law.

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Misrepresentation – False representation about a factual matter regarding real property being considered for purchase.

Mitigation of damages – Doctrine that requires a reduction in the dollar damage figure owed by the breaching party to the non-breaching part because of extenuating circumstances.

Money judgment – Court judgment ordering payment of a specific amount of money rather than ordering that an act be done or not done.

Monument – An artificial or natural object used in metes and bounds legal descriptions to establish boundaries for real property.

Mortgage – A pledge of real property as security for payment of an obligation; the mortgagee holds this against the mortgagor.

Mortgage deed – The legal instrument that creates the mortgage.

Mortgagee – The one who receives the mortgage and thus will receive the money payments.

Mortgage lien – Lien on the mortgagor’s realty securing by the value of the realty the lender’s loan proceeds given to the mortgagor.

Mortgagor – The one who gives the mortgage and thus will make the mortgage payments; the borrower; usually the person who is the purchaser under the real estate purchase contract and the grantee under the deed.

Motion for summary judgment – Motion brought by a party in trial court asking for judgment in his/her behalf because, even if everything is weighed favorably in the other party’s behalf, he/she still cannot show genuine issue as to any material fact.

Motion to dismiss – Motion brought in trail court by the defendant based on lack of jurisdiction, improper venue, insufficiency of process or service of process, or failure by plaintiff to state in its complaint a cause of action for which the law gives relief.

Multiple listing (MLS) – A real estate listing arrangement in which a listing broker makes an unilateral sub agency offer on a mass basis to all other MLS members; also, a method of sharing information among real estate companies about the listing each has available.

Mutual mistake – In contracts, a ground for having the contract set aside because both parties made the same mistake about a central aspect of the contract. For example, both parties bargained over the wrong piece of property.

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National Association of REALTORS – The real estate industry’s private trade association; its national branch. Negligence Failure to exercise a reasonable amount of care when owing a duty to another person. For example, a salesperson doesn’t research the selling price of comparable realties for the seller when seller has listing contract with that brokerage.

Negative leverage – Borrowed funds are invested at a rate of return lower than the cost of funds to the borrower.

Net lease – Lease requiring tenant to pay rent and all costs of maintaining realty, including utilities, taxes, insurance, and repairs.

Net listing – A listing contract in which the broker’s commission is any and all money above the seller’s net sales figure as stipulated.

Net operation income (NOI) – The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

Net present value (NPV) – The sum of the present values of all future cash flows netted against the initial investments, discounted at a given rate.

Nonconforming use – A use that once was within the zoning code and no longer is, but is permitted to continue despite the new zoning regulation, to end upon, stated events.

Non-freehold estate – A leasehold estate in land.

Novation – Substituting a new contract or obligation for the old one.

Nuisance – An offense to the senses that violates the laws of decency or obstructs the use of realty; interference with one’s interest in private use and enjoyment of realty.

Occupancy agreement – Contract giving the cooperative tenant the right to solely use and possess his/her unit within the cooperative and mutually share in the rest of the cooperative.

Opening statement – Each attorney’s speech, which opens a trial, about why his/her client should win the case; usually includes summary of the evidence to be presented subsequently.

Open listing – A listing contract in which the broker is paid a commission only if he/she, and not another broker or the seller, secures a ready, willing, and able purchaser. 184

Operating expenses – Cash outlays necessary to operate and maintain a property.

Opinion – A stated belief about an aspect of the real estate that cannot factually mislead another, such as a statement about the realty’s beauty as made by the real estate salesperson to the purchaser.

Opportunity cost – The “cost” of selecting one alternative is the benefit foregone from the next best alternative.

Option – A contract in which the purchaser pays the seller for the privilege of being the only one, for a certain designated time, who can purchase the seller’s realty.

Original basis – The total amount paid for a property, including equity capital and the amount of debt incurred.

Owner’s fee policy of title insurance – An insurance policy that gives all the protection of a title guarantee plus covers problems that cannot be detected by examining the public records.

Ownership – The right to use and possess real property to the exclusion of all others. P

Parole evidence rule – Rule of law and evidence requiring that when there is a final and complete writing, such agreement may not be contradicted or supplemented by evidence of prior agreements or expressions.

Partially amortized mortgage loan – The payments do not repay the loan over its term and thus a lump sum (balloon) is required to repay the loan.

Partition – To divide real estate into parts based on the relative interests of those who have title to it; can result in a forced, public sale when real estate cannot be subdivided. Each owner is then paid his/her ratable share afterwards.

Partnership – A business enterprise of two or more persons as the proprietors, which does not insulate them from personal liability; when it owns realty, owns it in severalty.

Part performance – Doctrine that lifts a contract or lease out of the statute of frauds, which requires a writing, by affirmative conduct that markedly changes the performing party’s position.

Party – One who is bound by a contract to perform.

Party wall – Wall on the boundary line of two adjoining parcels used by the owners of both.

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Passive income – Income from rental activity, limited business interest, or other activities in which the investor does not materially participate.

Passive losses – Losses from the ownership of passive investments.

Patent defect – A discoverable, not hidden or latent, flaw.

Per autre vie – A life estate measured by the life of another person rather than the life tenant’s life.

Per capita – Distribution of estate wherein heirs of different degrees take property on a representative basis.

Percentage interest – The proportionate share of the condominium’s common areas as are owned by each unit owner of condominium property.

Percentage lease – Commercial lease based on the landlord’s receiving a portion of the tenant’s gross sales on the premises.

Periodic tenancy – Lease based on a periodic payment, renewal, and termination by year, month, or week.

Perfect market – A market in which the products are homogenous, there is complete information, and no buyers or sellers may influence the market.

Permissive counterclaim – Defendant’s option to sue plaintiff for any claim he/she has against him/her not arising out of the same transaction or occurrence.

Perpetual renewal – Leaseholds capable of unending renewal.

Perpetuity – A form of annuity in which an amount is received at the end of the period (a year, a month) forever.

Personal property – That property that is not real property; moveable, not fixed; called chattels.

Physical depreciation – The physical decay or deterioration of a property.

Planned unit development (PUD) – A development in which many uses of land are for the good of all, usually involving single and multifamily housing, recreation, and limited commerce; an exception to the zoning code wherein the community allows the structures to cluster on less land but the same amount of land, per the zoning code, is used toward the whole of the development.

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Plat – Recorded land subdivision with identifiable number.

Pleadings – Legal documents in which the parties to a lawsuit transmit to each other and to the court the legal wrongs complained of and defenses thereto. Their purpose is to give the other party notice of the claims being made against him/her.

Point-of-sale inspection – Ordinance requiring that a structure pass a building inspection before a real estate purchase transaction can close.

Police power – The government’s basis for regulating the use of land on behalf of the public’s health, safety, and welfare.

Portfolio income – Income from interest, dividends, royalties, or the disposition of property held for investments.

Positive leverage – Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower.

Potential rental income – The total amount of rental income for a property if it were 100% occupied and rented at competitive market rates.

Power of attorney – A legal instrument that gives one person the authority to act for another; an attorney-in-fact, not an attorney-at-law.

Precedent – Principle of law declared by a court to serve as a rule for future guidance in same or analogous cases.

Preponderance of the evidence – Standard of proof used in civil cases of “more probable than not.”

Pretrial – Conference scheduled by court before trial, attended by attorneys and parties to lawsuit and presided over by judge.

Present value – The sum of all future benefits accruing to the owner of an asset when such benefits are discounted to the present by an appropriate discount rate.

Price-fixing – Two or more brokers agreeing between or among themselves not to take less than a certain agreed commission rate.

Principal – (1) Original sum of loan that does not include interest; (2) the person who is represented by another; for example, seller is usually the broker’s principal.

Priority – Sequential order in filing liens; liens that are filed first take priority over later liens.

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Probate court – State court that has exclusive jurisdiction over the disposition of estates; hears and determines cases regarding the validity of wills.

Procuring cause – Originating a series of events without a break in continuity, which accomplishes the broker’s purpose of employment: producing a purchaser ready, willing, and able to purchase realty at seller’s terms. Meeting this test entitles the broker to the commission.

Profit a prendre – Permits one person to use another’s realty for a particular purpose and to also remove things from the realty.

Promissory estoppel – Doctrine in contract law that prevents a wrongdoing party from escaping performance according to his/her promise because the contract lacked consideration.

Promissory note – Legal instrument that creates a debt; used in tandem with both mortgage deeds and real estate purchase contracts.

Property – A thing capable of being owned.

Proprietary lease – Cooperative tenant’s lease for his/her unit of cooperative real estate, which is coupled with his/her proprietary stock interest in the cooperative.

Proration – Clause within real estate purchase contract requiring the seller to pay all taxes, utilities, and charges on the real property up to the title transfer date and the purchaser to pay them from that date forward.

Property type – The classification of commercial investment real estate. The four primary property types are: retail, industrial, office and residential.

Purchase money mortgage – Mortgage given by purchaser to seller as part or all of the purchase price of real property.

Purchasing power risk – The variability in the future purchasing power of income received from an investment.

Pyramid zoning – Zoning that permits more than one type of realty use; once a new type of use is permitted, the old uses are retained, too. For example, when single-family is enlarged to multifamily and then commercial, all three uses can be built and retained in that zone.

Qualified fee – A freehold estate having the same characteristics as a fee simple absolute except it is capable of ending upon the happening of a stated event. 188

Quiet enjoyment – Tenant’s right to undisturbed, peaceful enjoyment and possession of the real estate.

Quiet title – Court action to remove defects in the title to real property so that good, marketable title can be obtained; court approval of an adverse claimant’s becoming the true owner of the realty.

Quitclaim deed – A deed in which grantor conveys whatever interest he/she has in real estate without making any warranties to grantee.

Race – A nonwhite person as defined in the discrimination laws. For Section 1982 litigation in fair housing, race has been expanded to mean those persons not considered white in the year 1866.

Rate of return – The percentage return on each dollar invested. Also known as yield.

Ratification – Approval of another’s act that, when done, was not authorized.

Real Estate Recovery Fund – Money set aside in a special account and used to pay real estate consumers for damages sustained to them by a real estate licensee.

Real Estate Settlement Procedure Act (RESPA) – Federal law that gives both sellers and purchasers advance disclosure of closing costs; reduces the cost of closing by prohibiting illegal referrals and kickbacks; gives purchasers specific information about closing, and prescribes a standard form to be used as the closing statement.

Real property – Land with its fixtures and improvements and bundle of rights.

REALTOR – A trade name for a member of the National Association of REALTORS and its state local affiliates. Realty – Land with its fixtures and improvements.

Reasonable person – A concept used by the law to measure right and wrong conduct. Reasonable persons are those who behave as a judge or jury would perceive prudent persons as behaving.

Reasonable wear and tear – The deterioration a tenant is allowed to commit to the leased premises; the opposite of waste.

Recapture – Taxable income derived from the sale of a capital asset. It is equal to the amount of straight line cost recovery taken during the holding period.

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Recording – Filing or entering a legal instrument in the county recorder’s office that causes it to become a public record giving constructive notice of its existence to the world.

Recourse – Right to proceed legally against prior property owner.

Rectangular survey – Federal government system of accurate land survey and description using baselines and principal meridians.

Redlining – Lending institutions’ denying mortgage loan money, or lending it but under stricter terms, because the neighborhood of realties is experiencing racial transition.

Reformation – Correction of a legal instrument when, by fraud or mutual mistake, it fails to reflect the intent of the parties.

Regulation Z – Interpretation of the Truth-in-Lending Law by the Federal Reserve Board.

Rejection – In contracts, the offeree’s turning down the offer.

Relation back, doctrine of – Legal fiction whereby deed placed in escrow by grantor, who subsequently dies before closing, is deemed to have been delivered to grantee.

Release clause – As used in the real estate purchase contract, a clause that frees up the seller to proceed with a second purchaser if the first has not removed a condition.

Release of lien – Freeing property from liens against it.

Relief – What equity allows a wronged party to recover, usually an act compelled or stopped. For example, when the seller refuses to convey title, the court can force him/her to convey by specific performance.

Remainder – The estate left at the termination of a prior estate in land, such as fee simple left after the end of a life estate.

Remedies – What the law allows a person subjected to a certain legal wrong to recover, typically in damages. For example, breach of contract allows the wronged party to recover money in the form of compensatory damages.

Rent – Consideration in a lease or rental agreement, which is usually a money payment made by the tenant to the landlord in exchange for the tenant’s exclusive use and possession of the premises.

Reply – A plaintiff’s responsive pleading to a defendant’s counterclaim; does the same thing for the plaintiff that the answer does for the defendant.

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Request for admission – Discovery device that forces a party to a lawsuit to take a position of truth or falsity regarding an evidentiary matter for the upcoming trial.

Rescission – Canceling the contract or deed and restoring the parties to their former positions because of fraud, mutual mistake, or other serious wrongdoing.

Reservation – Limitation reserved to the grantor of some right in the conveyed realty, such as an easement.

Restraining order – Equitable relief, as ordered by court, prohibiting an activity.

Restrictions of record – Limitations on how real property can be used by private control set forth on a deed, a plat, or a declaration of restrictions, as recorded in the county recorder’s office.

Retaliatory eviction – Prohibited practice of landlord seeking to evict tenant after tenant has tried to get landlord to comply with the health or building codes by reporting landlord to authorities.

Reversion – The estate in land that returns to the grantor or his/her heirs at the termination of the grantee’s estate in land. Revocation in contracts, the offerors canceling his/her offer the offeree has accepted.

Rezoning – Changing land from one category of use to another.

Right of first refusal – The right to purchase property, or not, before another can proceed to purchase it.

Right-of-way – Easement where one has the right to cross or go over the land of another.

Riparian land – Land that borders a stream or watercourse.

Riparian rights – Landowner’s right to the ordinary or natural flow of water that borders his/her real property.

Risk – The probability that actual cash flows from an investment will vary from the forecasted cash flows.

Run with the land – Rights in land passing from owner to subsequent owner of real property.

Safe rate – The rate a low risk, liquid investment achieves. 191

Sales comparison approach – A way to determine market value by comparing a subject property to properties with the same or similar characteristics.

Sale cost – The brokerage commissions and fees, and any additional transaction costs that are incurred during the sale of a property.

Security deposit – Deposit of money by tenant to secure his/her compliance under rental agreement and/or act as security for landlord in the event the tenant damages the realty.

Security interest – A property interest, such as real estate, which a creditor can look to for satisfaction when the borrower does not repay.

Seisin – Possession by titled owner of real property.

Self-dealing – A real estate agent/broker’s working for his/her own best interests rather than his/her principal’s best interest, in violation of the fiduciary obligation he/she owes the principal.

Seller’s affidavit of title – A signed, sworn statement made by the seller, representing the condition of the title.

Separate property – Real and/or personal property owned by the husband or wife prior to marriage or acquired during marriage by will, inheritance, or gift. The other spouse cannot claim separate property as community property.

Service of process – Delivering or somehow putting a defendant on notice that he/she is being sued, so as to give him/her the constitutionally protected due process of law rights.

Setback – A zoning restriction stating how far from the lot line a structure must be.

Settlement – An agreement by the parties to a lawsuit to each take something less than each desires so as to avoid pursuing the case to trial or beyond.

Severalty ownership – One person, real or artificial, owning real property alone and not in co-ownership.

Sheriff’s deed – The type of deed given when the realty is sold by the sheriff pursuant to a court order to satisfy a judgment, such as from mortgage lien.

Sign ban – Local law prohibiting real estate agents and sellers from posting “For Sale” and other signs on their listed realties.

Single agency – Relationship in which the real estate agent/broker represents only one party to a transaction, either the purchaser or the seller. 192

Sinking fund – A fund designed to accumulate a designated amount of money over a specified period of time. The periodic amount of money deposited plus compound interest will accumulate to the designated amount of money over the specified period of time.

Site – An improved or improvable piece of land usually suitable for building.

Special assessment – Tax levied against specific parcels of real estate for benefits those realities will directly receive, such as sewers, paved streets, street lights.

Special lien – A lien that can be satisfied by only a specific parcel of realty of obliged owner.

Special warranty deed – A deed in which the grantor warrants only against defects that occurred during his/her ownership and not those that occurred before. Specific performance – An equity court action ordering completion of the real estate purchase contract in which the seller has to convey title to the purchaser and the purchaser has to pay for the realty.

Spot zoning – A community; singling out a piece of real property for a use that bears no rational relationship to what surrounding realties are used for.

Standard of proof – The degree of evidence needed in a particular type of case. In civil cases, plaintiff needs to prevail by a preponderance of evidence; in criminal cases, defendant need to be proven guilty beyond a reasonable doubt.

Standing – The ability of a person to sue based on whether the law deems he/she has been injured in an ascertainable way by the violation of the law.

Stare decisis – Legal doctrine that applies when a court declares that principle of law, as decided in an earlier case(s), serves as precedent and is to be followed by other courts in similar or analogous cases.

Statement of record – A substantial disclosure form that a developer must file with HUD pursuant to the Interstate Land Sales Full Disclosure Act.

Statistical records of business – Evidence used in fair housing case wherein broker’s records show pattern of sales and listings that violate the laws.

Statute – Written law, enacted by state or Federal legislation, that declares, commands, or prohibits some act.

Statute of conveyances – Requires recording of certain real property instruments.

Statute of frauds – Requires certain contracts to be in writing, such as the real estate purchase contract, or else they are enforceable. 193

Statute of limitations – The length of time one has to sue another after which a lawsuit can never be brought.

Statutory lien – A lien on real property place by state or federal statute, such as a local tax lien or an IRS lien.

Statutory survivorship tendency – A way under state statute for two or more persons to hold title to real estate with one another; upon the death of any of one of the tenants, the decedent’s interest passes to the survivor(s).

Steering – Illegal practice in which a real estate licensee makes housing unavailable or tries to influence choice of housing by racial, religious, ethnic, sexual, handicap, or family status factors.

Straw person – One who acts in a transaction as if he/she were a principal party but is instead merely standing in for the real party, who is someone else

Strict liability – Being liable to another for a particular condition despite no intent to deceive or even any negligent conduct.

Subagent – One who is the agent of another who is an agent in a principal agent relationship. This person has all the same agency duties.

Subcontractor – One who does work on or furnishes material for real property per the order of the general contractor; material men or laborer.

Subdivision – Tract of land divided into streets, home sites, and improvements by the owner as shown by the recorded plat.

Subject to mortgage – A purchaser is obligating himself/herself to take the realty subject to the mortgage but not assuming primary liability to the lender/mortgagee for that mortgage. All payments are made by the purchaser to seller/mortgagor only.

Sublease – The tenant leases a portion of his/her term to another

Subordination – Agreement to make one’s rights secondary to another’s; a reduction in priority of rights.

Subpoena – A written, legal command to appear in court to testify.

Subrogation – Legal substitution of one creditor for another with the substitute receiving all the legal rights of the original.

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Substantially equivalent – In fair housing law, this means that state law and/or a state agency are about the same as the Fair Housing Act and HUD.

Subsurface rights – Land ownership rights beneath the surface that extend to infinity.

Summons – Document served by a court upon a defendant summoning, or calling, him/her into court.

Sunk costs – Investment costs that are committed and cannot be recovered.

Supply – The amount of property that will be made available for sale or rent at a given price or rental rate.

Suspended losses – Passive losses that cannot be used in the current year are “suspended” for use in future years or at the time of sale.

Surrender – Cancellation of lease by lessor’s and lessee’s mutual consent.

Survey – System of measuring land to formulate a legal description showing how much land there is and where it is located.

Survivorship – Type of ownership where one co-owner receives another co-owner’s interest upon the other’s death.

Sweetheart contracts – Long-term contracts the condominium developer entered into his/her friends and relatives that were binding on the condominium unit owners’ association even after the developer lost control.

T-bar – A chart used to summarize the timing of real estate cash flows.

Tax impact – The impact of taxes on investment income and rate of return.

Tax liability – Real estate taxable income multiplied by the tax rate.

Tax shelter – The ability of real estate holdings to reduce an investor’s tax liability through the use of cost recovery.

Taxable income – Adjusted gross income less personal deductions and exemptions.

Temporary restraining order – Order of court which, for a limited period of time, prohibits certain activity. 195

Tenancy at sufferance – Lessee who occupies leasehold without any legal right to do so after his/her tenancy has expired.

Tenancy at will – Lessee who possesses leasehold until the lessor terminates the tenancy.

Tenancy in common – Co-ownership of real property by two or more persons with undivided shares; ownership passes by devise or descent instead of by survivorship.

Tenant – The person in possession of real property by right or title with the owner’s permission.

Tenants’ fixtures – Items that are considered fixtures but are nonetheless removable by tenant at the end of his/her term.

Tenement – Permanent holding of property.

Testamentary intent – In wills, a showing that a disposition of property is take effect only at death.

Testamentary trust – Trust that takes effect upon trustor’s death.

Testate – One who dies possessed of a will.

Testator – One who makes a will.

Testing – In fair housing, this is a way to monitor compliance by using (usually) a black person and a white person to pose as prospective purchasers with real estate agents to ascertain whether minority people are treated differently from non-minority people when trying to lease or sell real property. Also called auditing or checking, this is used as evidence in trials of fair housing cases.

Third-party practice – Occurs when the defendant sues another person who has caused his/ her liability under the original complaint.

Time is of the essence – A phrase that makes the element of time the most critical, vital part of a contract.

Title – Outward evidence of the right to possession or ownership of realty.

Time value of money (TVM) – An economic principle recognizing that a dollar today has greater value than a dollar in the future because of it’s earning power.

Title companies – Privately owned firms that sell insurance regarding defects that may exist in the title to real property. 196

Title defect – A flaw in the title that allows claims by another upon the owner’s right to title, possession, and ownership or realty.

Title guarantee – An insurance policy issued by a title company guaranteeing accuracy of the title examination subject to certain limitations, one of which is flaws that cannot be revealed by examination of public records.

Title insurance – Insurance obtained by owner from title company, which protects owner against loss arising from defect in realty’s title, including flaws that are not revealed by examination of public records.

Title search – Examination of public records to elicit any information that has bearing on which person has the right to title, possession, and ownership of real property.

Topography – Shape of the land.

Tort – A civil wrong, such as fraud, misrepresentation, negligence.

Tract – A piece of land; lot.

Trade fixtures – Objects that are fixtures under the fixtures’ tests, which are put in by a business tenant; the tenant has the right to remove them at the end of the tenancy.

Trial court – Lower court wherein issues of fact are decided by judge or jury and judgment is rendered.

Trust – Real and/or personal property held by one person for the benefit of another.

Trust account – A special, non-interest bearing account in which a broker holds money, usually the earnest money deposits.

Trustee – A person who holds and manages real and personal property for another’s benefit.

Trustor – A person who creates a trust for the use of his/her real and/or personal property.

Trust-in-Lending Law – Federal legislation requiring meaningful disclosure of the terms of credit by a creditor to a prospective debtor. Triggered for real estate agents by their advertisements offering credit or arranging of credit by the real estate brokerage.

Unauthorized practice of law – Unlawful activity that occurs when broker/agents practice law instead of real estate upon their clients and customers.

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Unconscionable clause – Clause in contract or lease that is so overly harsh to one party that a court can refuse to enforce it.

Undisclosed principal – In contracts, a party to a contract that is not known to the other party.

Undue influence – A ground for setting aside a contract or will when one party has been pressured into the contract or will by the other party, especially if the party being pressured suffers from a disability.

Unenforceable contract – One in which neither party can force the other legally to perform.

Uniform Settlement Statement Standard form – Closing statement, used pursuant to RESPA.

Unilateral contract – A contract in which one party makes a promise in exchange for an act done by the other party.

Unit – In condominiums, the apartment or house within the condominium property that only the unit owner owns, not all condominium property owners.

United States District Court – Federal trial court found in different geographical locations throughout the country.

Unit owner – In condominiums, one who has common ownership interest in the condominium property with all other condominium owners and an individual interest in his/her own unit.

Valid contract – One that is binding and enforceable; one party can legally force the other party to perform.

Variance – A use of land that is permitted, even though it is not in-strict compliance with the zoning code, because of undue hardship or practical difficulties.

Vendee – The purchaser of real property.

Vendor – The seller of real property.

Vest – Give an immediate right to enjoyment of the property.

Void contract – One lacking essential elements necessary for formation; of no legal force and effect. 198

Voluntary lien – Lien placed against realty to which the owner has consented, as in a mortgage lien.

VA – Department of Veteran Affairs, Formerly Veterans Administration; since 1944, the VA has guaranteed the top portion of an eligible veteran’s loan.

Variable costs – Operating expenses that fluctuate with occupancy, such as utilities and maintenance costs.

Variable-rate mortgage (VRM) – Interest rates can be adjusted periodically, subject to certain limitations and caps.

Vendee – Purchaser-borrower under a contract for deed.

Vendor – Seller-lender under a contract for deed.

Voluntary conveyance – (See deed in lieu of foreclosure)

Waiver – Renouncement of a legal right.

Warehousing – Guaranteeing for a specified time, and for a fee, that funds will be available under certain terms and conditions.

Ward – Person who is subject to a guardianship in probate court.

Warranty – Grantor’s assurance of protection of grantee’s right and title to real property.

Warranty deed – A deed with the greatest protection as the grantor warrants good, marketable title that he/she will stand behind.

Waste – Life tenant’s wrongful, permanent diminishment of the value of the realty. For non-life tenants, there are two categories of waste: (1) intentional waste, such as breaking all the windows, and (2) permissive waste, such as not repairing broken windows.

Will – A written, witnessed legal instrument that sets forth testator’s property distribution.

Will contest – Probate court proceeding to determine whether the writing produced is the last will or codicil of the testator.

Withdrawal in contracts – An offeror’s taking back his/her offer if it is not accepted.

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Words of conveyance – Language that follows the consideration in the deed instrument, stating the grantor’s intent to convey or transfer the real property.

Writ of execution – Legal instrument authorizing officer of the court to carry out order of the court.

Yield – A measure of investment performance, gauging the percentage return on each dollar invested, Also known as rate of return.

Zero lot line – The concept whereby owner possesses and owns exclusively his/her housing unit and other real property connected with it and also shares ownership and possession of common, connected real property with other zero lot line owners.

Zoning – Ordinances or resolutions passed by the local government, pursuant to its police powers, which regulate how land is to be used in specific areas.

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