The financial stakes are much higher when you’re dealing with commercial investments rather than residential investments. With such deals, the rewards are greater, but the risk is also. So, it will pay you to understand completely the terms and wording of commercial loan documents. In this article, I’ll provide you with the necessary knowledge of the basic loan forms and language. First, however, you should understand the types of lenders you’ll be dealing with in this market.

The first kind has the name “mortgage bankers.” They represent most commercial lenders. They work on behalf of a fixed number of lenders and often have long-standing relationships with them.

The second type of lender is mortgage brokers. Brokers are “shoppers” or middle men. That is, they shop your loan application around to lenders and operate on a deal-by-deal basis.

Go with mortgage bankers if at all possible. They’re more likely to be well-connected within the financial community so they’ll be able to steer you to the right person for your project. Also, they’re usually cheaper than brokers. When using the services of the broker, you have to pay two fees-one for the broker in addition to the lender’s fee.

Okay, let’s look at the standard commercial loan documents and their wording.

The Promissory Note A promissory note is a written promise to repay the loan. It’s spelled out in specific terms. Terms vary with the particular note, but they generally include the following items: * Date * Borrower and lender names * Address of lender * The principal sum * Interest rate * Term * Place of payment * Terms of repayment * Terms of late payment charges * Promise to pay * Acceleration and pre-payment stipulations * Deed of trust or mortgage attached * Attorney’s fees and other boilerplate items * Signatures and date

Loan Priority Priority simply stipulates who gets paid first. The lender has “first position.” This is a protection for the lender and means that the lender’s rights are subject only to the payment of real estate taxes. This means the lender has the ability to pay the taxes to protect his or her position.

There are also “junior” positions-second, third, and so forth. If a lender is in second position, then they have to bring the loan up to current status or pay it off to eliminate any default on that loan. Te date of recordation determines priority.

Securing of the Loan Notes must be secured, and this is done by recording of the mortgage or deed of trust. They’re liens against the property and are security instruments. Recording of a mortgage or deed of trust has two purposes. One, it establishes the priority I mentioned earlier. Two, it makes public the fact that the lien exists. This allows prospective lenders to establish the priority of the lien in regard to any proposed financing.

Whether a mortgage or deed of trust is involved is dependent on the area of the country in which you live. Eastern states tend to use the traditional mortgage format while Western states tend toward use of the deed of trust. Both are basically the same. The main differences lie in who draws up these documents. In mortgage states, an attorney is usually needed to prepare the document. In deed of trust states, it can be drawn up by a title company.

Both of these non-negotiable security instruments are universal to all real estate property borrowing and are often standardized. They include such information as: * The account number * Borrower’s name and mailing address * Beneficiary’s name and mailing address * Trustee’s name and address * The date * Property description (location, town, county, state, address, etc.) * Note amount * Purpose of the document (”recitals”) * Terms and conditions * Mutual agreements (rights of assignment, damages, trespass, personal guarantees, etc.) * Additional security (if required) * Default provisions and remedies * Recording authority * Successors in interest * Rights of assignment * Signatures and date

Special Provisions Special provisions may be added to the general terms of the mortgage or deed of trust. Here are two examples:

Cross collateralization A borrower has more than one property and offers them as collateral for the loan. So, the mortgage or deed of trust is recorded against all these properties. Thus, when any of these collateralized properties are sold, the proceeds go to the lender before any payment is made to the borrower.

Personal guarantee A personal guarantee occurs when the borrower doesn’t have sufficient collateral to secure the note in full. Thus, the borrower is required to guarantee to pay the difference of the short fall. My recommendation is to avoid personal guarantees at all costs since the lender can require you to pay the note in full! Avoid any situation where you may end up without money and are still stuck with the property!

As I said earlier, this article is intended only as a basic introduction to commercial loan documents. Before engaging in any deals in this market, I recommend you study the documents in detail so you have full understanding of the terms and conditions you’ll have to abide with once you put your name on the dotted line.

Key Point: Understand completely the terms and wording of commercial loan documents.

When you first decided to start in real estate investment that you were probably instructed to formulate a buyers list. This was a list of names of people that were looking for property. You were told that “with a good buyers list you may never have to put a property on the open market.”

A “Buyers First Program” is designed to take that to the next level. Instead of wholesaling to real estate investors with all the associated risks, I chose to work with Real Estate Agents and use the entire MLS as my inventory. I develop a “retail, end buyers list” to give to agents. The system is fully RESPA compliant and is readily accepted by the traditional Real Estate community. Consider the fact that Real Estate Agents only do things that are fully disclosed and traditional in nature. Dealing in the regular real estate arena, it has to be simple and fully compliant.

The buyers list should consist of people who are looking for a specific type of property. It may be someone who wants a 3 bedroom 2 bath house in the south part of town. There may be people on the list who are only looking for a certain kind of property at a set price.

Making a list of buyers is easy. One of the best ways to do it is with a three line classified ad promoting a special report titled “Yes, You Can Purchase a Home Even if You Have Bad Credit but have some Closing Costs” or “The Four Things Every First Time Home Buyer Should Ask their Real Estate Agent.” With that in the local newspaper and a toll free number, you can locate many people looking for a home. Some folks will call and are just curious. The easiest way to handle these people is to allow them to ask questions and answer them to the best of your ability. They usually call back later telling you they are now in the market for a house. Any way you do it, your list is made up by the contacts you make.

You can also gather names from family and friends. People know people. Google Ad Words is yet another proven, inexpensive way. By having a list, you can make groups and categorize the prospects.

You can then have a mortgage broker pre-qualify folks that are on the list. You may have names on the list of people who have run into a bit of bad luck and just need help getting started again. These are your perfect candidates.

Formulating a buyers list means you have a good start on a marketing plan of action. Every business has a client base. Think of your buyers list as your client base. The more clients you have the more business you can do. The more you do, the more money you can make. By formulating a buyers list, you are building a strong, stable and long term real estate investment business.

The focus of this article is advanced strategies for experienced real estate investors who want extra protection for your investments. The use of the strategies I’ll cover will depend upon your investment strategy. Also, they may not be solutions you’ll commonly use, but you’ll have the knowledge you need should you decide to employ them. It’s always good to have more weapons in your investment arsenal!

The Fundamental Protection of the Memorandum of Option A primary negative of lease options concerns financial difficulties of sellers. These problems can result in liens, delinquent property taxes and other similar hassles. For the investor, this can result in a considerable amount of time and money spent on resolving these issues before the property can be sold.

That’s why you need the Memorandum of Option. It’s an indispensable protection because it’s a public document that’s a record against the title of the property. Always record a memorandum because it lets everyone know that you have an interest in the property.

The memorandum has an important purpose–to prevent an unethical seller from selling the property out from under the investor’s nose to someone else. It also provides protection from bad faith sellers trying to squirm out of their obligations. My advice–always record a memorandum of option!

Advanced Strategy 1-the Deed in Escrow You may think that the term escrow refers only to the deposit of funds by one party for delivery to another party upon completion of a specific event or condition.

However, the definition also includes the deposit of deeds and other written financial/legal instruments. I recommend placing the deed in escrow at the time the memorandum of option is filed. In this case, the seller signs the deed along with the other contracts, but the deed is not recorded on the title at this point. Instead, it’s held in escrow by a title company or attorney, and they’re provided with instructions for its release.

Now, this action doesn’t protect against the filing of liens against the property. But, its effect is to reinforce to sellers that they’ve actually sold the property. This, in turn, creates reluctance on their part to try to back out on a lease option agreement.

It also has another advantage: It allows you to close on the property without the seller being present! With the deed in escrow, you should specify how and when the deed is to be released and recorded. The instructions can be simple, such as this example: “When Sam Smith pays $200,000 in certified funds to John Jones, the deed will be released to him. By (date), these funds must be paid.”

Advanced Strategy 2: The Performance Mortgage This is a method whereby the seller pledges the property as collateral for the lease option agreement, ensuring good faith performance by that seller. When the mortgage is assigned to you, it prevents the seller from selling the mortgage to other people. (It replaces the filing of the memorandum of option.)

The performance mortgage permits the seller’s insurance company to put the buyer’s name on the owner’s policy as another insured. It shows as well that the buyer is a lien holder and requires that he or she be notified if any type of foreclosure action is taken.

Of course, some sellers don’t like the idea of a performance mortgage and won’t agree to this deal! If a performance mortgage is agreed to, have your attorney review the terminology of the mortgage to make sure the appropriate, specific clauses are included.

Advanced Strategy 3: The Land Trust Land trusts are formed by organizations established to hold land and to administer use of that land. You’ll find that this technique is very useful with subject-to’s because a land trust minimizes your exposure to litigation.

It accomplishes this by hiding true ownership. The actual owner or beneficiary is not recorded in the public records, just the name of the trust. This means potential litigants find it difficult to identify someone to sue.

Keep in mind that land trust contracts tend to be complicated and long so you’ll definitely need an expert lawyer to draw them up.

Advanced Strategy 4: Get a Partner In some cases, you may want to consider subject-to high-end properties (in terms of rapidly appreciating value). With these properties, there’s more risk. Since there is more risk, you can spread that risk by taking on the seller as a partner. In this case, the buyer and the seller share the profits.

Here’s an example: Assume a property is worth $800,000 and the monthly rental is $3,500. Under normal circumstances, you’d likely back away from this deal. However, let’s assume that you discover this home might be sold for $200,000+ in profits. This deal makes good financial sense for both you and the seller. So, you agree on a 50-50 partnership (or another percentage arrangement), and you both end up happy.

Ironclad rule: If you use this method, insist that the seller cover all the risks.

Advanced Strategy 5: Refinancing Refinancing is a great tax-deferment strategy. Here’s an example: Assume you have a house worth $300,000, and $230,000 is owed on it. Through a new mortgage, you can take out some or all of the $70,000 in equity, and it’s not a taxable event. The result-you can use that money to reinvest in other properties while still holding on to your original property.

It’s a good idea to check with lenders and brokers in your area to find out what refinancing programs are available and which ones best suit your needs.

Tax Concerns With any of the strategies I’ve just described, IRS regulations have to be met. So, you and your tax person should stay up to date on those regulations. They do occasionally change, and those changes can affect the legality and profitability of deals. One area to really be on top of is capital gains.

Capital gains are the profit on the sale of a property. Currently, a person can sell his or her primary residence (the one actually lived in, not investment properties) every two years.

If a person is single, he or she can keep the profits up to $250,000; if a person is married, he or she can keep up to $500,000. In both instances, the profits are tax free. If the seller of a property lives in his or her home for two out of five years, then that property qualifies for a tax-free gain. The seller can rent the home out for three years - and not a single day more.

My Advice Never stop learning! Keep advanced strategies in mind as you grow your investment portfolio. It’s not likely you’ll need them for the majority of investments (especially early in a career), but, as is often said, knowledge is power. With that knowledge, you’ll be able to apply it quickly and easily when the right investment situation arises.

Key Point: Always get the lenders written permission. Study advanced strategies in depth, so you can make use of them at the appropriate time for maximum protection of your investments.

This article explains advanced strategies for well-experienced real estate investors who want extra protection for their investments. Keep in mind that the strategy chosen will depend on the type of investment strategy followed. In other words, not every strategy applies to a particular situation. Also, they some solutions may not be ones an investor commonly used. However, knowledge of those solutions may come in handy in the future.

The Fundamental Protection of the Memorandum of Option A primary negative of lease options concerns financial difficulties of sellers. These problems can result in liens, delinquent property taxes and other similar hassles. For the investor, this can result in a considerable amount of time and money spent on resolving these issues before the property can be sold.

The Memorandum of Option is a basic protection for the investor. The memorandum is a document is a record against the title of the property and should always be recorded. It informs the public that you have an interest in the property.

Why do you need the memorandum? Simple-it prevents an unethical seller from selling the property out from under your nose to someone else. It also gives you protection from bad-faith sellers trying to squirm out of their obligations.

Advanced Strategy 1-the Deed in Escrow Most often, escrow refers simply to the deposit of funds by one party for the delivery to another party upon completion of a particular condition or event.

But, the definition also refers to the deposit of deeds and other written financial/legal instruments. Here’s my suggestion–place the deed in escrow at the same time the memorandum of option is filed. When this happens, the seller signs the deed along with the other contracts. The deed isn’t recorded on the title at this point however; it’s held in escrow by an attorney or title company, and they’re provided with instructions for its release.

You should know that this action doesn’t protect against the filing of liens against the property. However, its effect is to impress upon sellers the fact that they’ve actually sold the property. The result-it creates reluctance on the sellers’ part to attempt to back out on lease option agreements.

This action another benefit for you; it allows you to close on the property without the seller being present! With the deed in escrow, you can then specify how and when the deed is to be released and recorded. The instructions can be simple, such as this example: “When Joanie Jay pays $200,000 in certified funds to Stan Wild, the deed will be released to him. By (date), these funds must be paid.”

Advanced Strategy 2: The Performance Mortgage With this technique, the seller pledges the property as collateral for the lease option agreement, and, thus, ensures good faith performance by that seller. Once the mortgage is assigned to the buyer, it prevents the seller from selling the mortgage to other people. (It replaces the memorandum of option filing.)

The performance mortgage permits the seller’s insurance company to put the buyer’s name on the owner’s policy as another insured. It shows as well that the buyer is a lien holder and requires that he or she be notified if any type of foreclosure action is taken.

I’m sure it’s no secret to you that many sellers dislike the idea of a performance mortgage and won’t agree to such an arrangement! However, if you do find a customer who agrees, your attorney should review the terminology of the mortgage to make sure the appropriate clauses are included.

Advanced Strategy 3: The Land Trust A land trust is defined as an organization established to hold land and to administer use of that land. This technique is very useful with subject-to’s. The purpose of a land trust is to minimize possible exposure to litigation.

It accomplishes this by hiding true ownership. The actual owner or beneficiary is not recorded in the public records, just the name of the trust. This means potential litigants find it difficult to identify someone to sue.

Keep in mind that land trust contracts tend to be complicated and long so you’ll definitely need an expert lawyer to draw them up.

Advanced Strategy 4: Get a Partner In some cases, you may want to consider subject-to high-end properties (in terms of rapidly appreciating value). With these properties, there’s more risk. Since there is more risk, you can spread that risk by taking on the seller as a partner. In this case, the buyer and the seller share the profits.

Here’s an example: Assume a property is worth $800,000 and the monthly rental is $3,500. Under normal circumstances, you’d more than likely back away from this deal. However, let’s assume you discover that this home might be sold for $200,000+ in profits. This deal makes good financial sense for you and the seller. So, you agree on a 50-50 partnership (or another percentage arrangement), and you’re both happy.

Ironclad rule: If you use this method, insist that the seller cover all the risks.

Advanced Strategy 5: Refinancing Refinancing is a tax-deferment strategy. Here’s an example: Assume an investor has a house worth $300,000, and $230,000 is owed on it. Through a new mortgage, that investor can take out some or all of the $70,000 in equity, and it’s not a taxable event. That means this investor can use that money to reinvest in other properties while still holding on to the original property.

It’s a good idea to check with lenders and brokers in your area to find out what refinancing programs are available and which ones best suit your needs.

Tax Concerns With any of the strategies I’ve just described, IRS regulations have to be met. So, you and your tax person should stay up to date on those regulations. They do occasionally change, and those changes can affect the legality and profitability of deals. One area to really be on top of is capital gains.

Capital gains are the profit on the sale of a property. Currently, a person can sell his or her primary residence (the one actually lived in, not investment properties) every two years.

If you’re single, you can keep the profits up to $250,000; if you’re married, you can keep up to $500,000. In both instances, the profits are tax free. If the seller of a property lives in his or her home for two out of five years, then that property qualifies for a tax-free gain. The seller can rent the home out for three years - and not a single day more.

My Advice Never stop seeking out advanced strategies! Keep them in mind as you build your investment portfolio. It isn’t likely you’ll need all the strategies for the majority of investments (especially early in a career), but knowledge is definitely investment power. With the information I’ve provided, you’ll be able to apply it quickly and easily when the right investment situation arises.

Key Point: Always get the lenders written permission. Study advanced strategies in depth, so you can make use of them at the appropriate time for maximum protection of your investments.