TERMS AND DISCLAIMERSomegawealthprotection.s3.amazonaws.com/OmegaManuals/... · 2011-10-25 · His real estate investing experience includes rehabbing, ... real estate business that

ii Introduction

TERMS AND DISCLAIMERS

NO ATTORNEY-CLIENT PRIVILEGE OR LEGAL ADVICE: While the authors are attorneys who have discussed various legal, business and other concepts herein, nothing herein shall be construed to constitute specific legal advice or recommendations. Furthermore, by using this training program, you understand that you should still seek legal and financial counsel when appropriate for your specific situation. Your participation in this course shall NOT create an attorney-client privileged relationship under any circumstance.

NO WARRANTIES: This training program is being provided AS IS for informational purposes, without any warranties, except for any applicable return policies. This training program is not guaranteed to produce any particular result. Use the information contained herein at your own risk.

TRADEMARKS: Innoventum, the Innoventum logo, and “where innovation meets momentum” are the registered trademarks of Innoventum, Inc. IDontLikeToWork is a trademark of IDontLikeToWork LLC. All other product names and companies mentioned herein may be trademarks of their respective owners. Innoventum and IDontLikeToWork LLC make no claim in the trademarks of these third parties.

NO ENDORSEMENT: None of the companies mentioned herein have endorsed this product.

ILLUSTRATION COPYRIGHTS: The majority of the photographs and illustrations used herein are the copyright of iStockPhoto.com and their respective authors, and AnimationFactory.com and their respective authors.

COPYRIGHT: This training program is owned and published jointly by Innoventum, Inc. and IDontLikeToWork LLC. To purchase additional copies of this training program, please contact IDontLikeToWork LLC at: 6659 Pearl Rd Suite 301 Parma Hts, OH 44130 Phone: 440-545-2095

© 2010 Innoventum, Inc. and IDontLikeToWork LLC. All Rights Reserved.

iiiIntroduction

ABOUT THE AUTHORS

Jeffery S. Watson

Jeff is a graduate of Ohio Bible College and the Cleveland Marshall College of Law. He was admitted to the Ohio Bar in May 1991 and since then has been a full-time attorney with an active trial/hearing practice. For the last five years he has been the owner of a successful solo practice.

Jeff has been a landlord and real estate investor since 1993. His real estate investing experience includes rehabbing, creative buying, long term holding of numerous rental properties and apartment buildings, and actively handling several short sales in more than one state at any given time.

He is a nationally recognized authority in the area of Short Sale transactions and disclosures. He is the co-creator of the Option Contract method that transparently discloses “back to back” transactions for short sale quick-turns. He represents established real estate investors in commercial and residential matters and frequently consults with title companies on closing protocol for short sales.

He is also legal counsel to Nova Star Real Estate Brokerage Ltd, Sharp Concepts Realty LLC Brokerage and Eagleville Bible Church Inc.

He is co-founder and part owner of Venture Land Title LLC, Strategic Real Estate Coach, Inc., and Realeflow LLC. He regularly prepares deeds and other documents for local title companies and real estate brokerages.

He is the Author of 4 digital books:

“How to Hire Your ‘Dream Team’”“Understanding the Foreclosure Process”“Death of the Land Trust … in Short Sales”“Short Sales Done Right – How to Profitably and Legally Navigate the Short Sale Jungle”

Jeff, his wife Lorri and their five children reside in a small town on the shores of beautiful Lake Erie in northeast Ohio.

Introductioniv

ABOUT THE AUTHORS (CONTINUED)

Denise GosnellDenise Gosnell is a world recognized author and attorney with a unique background in technology, law, business, and entrepreneurship. Denise is also a licensed real estate broker in the State of Indiana, and has extensive experience in real estate legal and business matters. Denise’s husband has been a real estate investor for over 30 years, and owns dozens of rental properties. Denise has represented her husband in over a hundred transactions over the past ten years, ranging from deed preparation, closings, land contracts, tenant evictions, etc.Denise is the President & CEO of Innoventum, Inc., a content publishing company. She also practices law through her law firm Gosnell & Associates, Inc.

Jynell BerkshireJynell Berkshire has a unique combination of legal, business, and public policy talents. Jynell has over fourteen years of experience in government relations and assisting start-up and existing companies with initial formation, growth, and funding challenges. Jynell is also a licensed real estate salesperson in the State of Indiana, and has extensive experience in real estate matters. Jynell is the owner and managing member of a real estate company that owns several rental properties. She represents herself in dozens of real estate matters, from tenant screening and evictions, to deed preparation, and property acquisition through tax sales, etc.Jynell is the Vice President of Innoventum, Inc., a content publishing company. She also practices law, and provides strategic consulting through her consulting company eGlobal Consulting, Inc.

Greg ClementGreg Clement is the creator of Realeflow, a world renowned marketing guru, and a visionary business leader in Cleveland, OH. His unique approach to business and life in particular has been responsible for the birth of multiple projects and companies that have greatly impacted the real estate industry. Greg graduated in 1997 from Baldwin Wallace College with a degree in Marketing. Greg has a financial planning background and has used those prior experiences and relationships to further bolster the impact his company has had on the investing community.Greg has been a partner in hundreds of real estate transactions over the last 3 years alone. Many credit Greg for being a catalyst for achieving hyper-growth in their businesses. Greg has created and developed a number of industry changing concepts and ideas such as “The Problem Property Solution” and “The Residential Redevelopment Model.”

Introduction v

TABLE OF CONTENTS

BATTLE TESTED REAL ESTATE STRATEGIES MODULE

The Battle Tested Real Estate Strategies Module provides a high level discussion of several battle tested legal and business strategies to use for building a successful real estate business that gives you the time and money freedom that you desire. These strategies combine the best battle tested and proven ideas of the four authors of this program.

Chapter 1. Building The Foundation Of Your Power Structure ...........6 Chapter 2. Money Tracking And Accounting: Creating Your Own Fort Knox...................................................................26 Chapter 3. Insurance Basics.................................................................44 Chapter 4. Common Real Estate Risks/Concerns................................52 Chapter 5. Importance of Legal Agreements.......................................60 Chapter 6. Diversifying Your Real Estate Business.............................70 Chapter 7. BONUS: Intellectual Property Overview...........................76 Appendix A...........................................................................................90 Appendix B...........................................................................................94 Appendix C...........................................................................................100 Appendix D...........................................................................................104 Appendix E...........................................................................................108 Appendix F............................................................................................112 Appendix G...........................................................................................116

7

BUILDING THE FOUNDATION OF YOUR POWER STRUCTURE

IT IS VERY IMPORTANT to lay the proper foundation for your real estate company just as it is important to lay the proper foundation when you are building a house. Have you ever tried to go back and add a basement to a house after you built it on a slab? Pretty tough, huh? It can also become difficult to fix problems that arise in your real estate company if you start off with a bad

legal structure.

The best way to lay a solid foundation for your company is to ensure you use one or more of the proper legal entities to protect you when problems arise (or, better yet, to keep many of the problems from arising altogether).

Contrary to popular belief, however, there is more to forming a real estate company than just picking a name and filing the paperwork. There are four parts to creating a powerful foundation and structure that will help ensure the sustainability of your business over the long term.

The first part of creating a powerful foundation is to pick the proper legal entity for the company that will best serve and protect the assets of the company and the assets of the owners. Choosing and maintaining a proper legal entity is a critical step in keeping your company sustainable and protecting your business and personal assets over the long term.

This Chapter will explore the various types of legal entities at a high level and will explain when to use one versus another. However, the entity structure that is best for those who flip real estate is different than the entity structure that is best for those who buy & hold real estate. Thus, for more details on the exact entity structure to use for your specific type of real estate business, you will want to consult the corresponding entity type section in the Module that is specific to your business.

The second part of creating a power structure is to pick an available name that has a lower probability of violating someone else’s existing trademark interests. A discussion on trademark law is beyond the scope of this Chapter, but is included in Chapter 7 as a bonus. However, the concept of choosing a company name is mentioned in this Chapter at a high level so you can see how it fits into the process.

The third part of building a power structure for your company is to file the paperwork properly with one or more appropriate government agencies. This Chapter will explain some options for forming your business with the chosen legal entity type, as well as determining what other licenses you may need to obtain in order to avoid problems later. Even if you already have a legal entity that you have formed in a certain business name, go ahead and work through this Chapter so you can confirm that everything was set up and is being maintained correctly.

The fourth part of creating your power structure is to maintain your company status over time. It is great to form it correctly to begin with, but if you do not maintain it correctly, then your initial work is wasted.

Overall, this is one of the most important chapters in the whole course, so please pay careful attention!

W WorksheetsVideo W

Building The Foundation Of Your Power Structure8

ABOUT THIS CHAPTERIn this Chapter, we will explore the steps involved in laying the foundation of a powerful structure for your real estate business. That foundation involves choosing the proper legal entity type(s) for your business that will help ensure its future sustainability, and complying with various government regulations to keep your business out of trouble. More specifically, this Chapter covers:

Part 1 Of Your Power Structure - Pick A Legal Structure That Has Sustainability. . .•

Part 2 Of Your Power Structure - Pick The Right Name For Your Business. . . . . . . .•

Part 3 Of Your Power Structure - Make It Official: File The Right Paperwork . . . . .•

Part 4 Of Your Power Structure - Maintain Your Company Status Over Time.. . . . .•

Stay Out Of Trouble With The Federal Trade Commission (FTC) . . . . . . . . . . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

page 9

page 14

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The training videos for Chapter 1 will teach you how to build a power structure for your new real estate company that will help ensure it lasts for a long time.

More specifically, the videos will explain how to choose the proper type of legal structure for your real estate company. It will also cover how to proceed with forming the company correctly, maintaining the limited liability status over time, and staying out of trouble with the Federal Trade Commission.

The following Worksheets for this Chapter are included in Appendix A:

Worksheet 1: Business Name • BrainstormingWorksheet 2: Company Filing • Deadlines

page 25

Building The Foundation Of Your Power Structure 9

Part 1 Of Your Power Structure - Pick A Legal Structure That Has Sustainability

The type of legal entity that you select will have a significant impact on the sustainability and tax consequences of your real estate business. For example, if you operate your business in a way that exposes your personal assets, and then if you ever face lawsuits or other judgments, you can lose everything you own as a result. However, if you form a company that has a limited liability shield, such as a limited liability company (LLC) or corporation, you can protect your personal assets and only expose the assets of that company.

It is not very fun to work so hard to amass a fortune, only to then lose it all with just one lawsuit. Some people make the mistake of just operating in their own name or a “doing business as” with a sole proprietorship and then wait until they have a lot of money before they worry about forming a legal entity that provides liability protection. This is a huge mistake, because you have still exposed yourself to unlimited personal liability in the process of building your wealth.

We will cover the different types of entities and how they work in more detail in just a moment. It is first important to mention that this course will cover several advanced strategies that will give you even greater protection than just forming one LLC or corporation.

Now, let’s walk through the different types of entities at a high level. Every state has different laws that govern which legal structures are available, as well as the particular characteristics of those legal structures. There is a common theme among them that can be generalized. The following legal entities are the most common:

Limited Liability Company (LLC)• - Both single member limited liability companies and multiple member limited liability companies are some of the easiest to setup and maintain, and are pass-through entities. This means that the profit and loss from the business passes through to the individual owners on their personal tax returns. Multiple member LLCs (with two or more owners that are a person, corporation, and/or trust) are generally recommended for owning assets such as real estate because of protections they offer with “charging orders”. With a charging order, all a creditor can gain access to is an owner’s “right to income distributions” from the LLC. But the charging order prohibits the creditor from controlling the ownership interest, and thus prohibits them from taking over your operating/decision-making power for the company. (Note that there is uncertainty in the case law in many states on whether single member LLC’s can receive the same protection with charging orders, so that is why multiple member LLC’s are generally recommended when charging order protection is desired).

S-Corporation• - An S-Corporation has most of the tax benefits of a C-Corporation, but has pass-through taxation. This means that the profit and loss from the business passes through to the individual owners on their personal tax returns via a K-1 Statement. You can elect S-Corporation status by filing a simple document (IRS Form 2553) with the IRS after forming a corporation in your state. It is important to note that only individuals who are U.S. citizens or permanent residents, estates, and certain trusts can own shares in an S-Corporation. In other words, C-Corporations, non-resident aliens, partnerships, and foreign trusts cannot own shares in an S-Corporation. However, a disregarded entity can own shares in an S-Corporation. A disregarded entity is a business entity that chooses to be disregarded as separate from the business owner for federal tax purposes. An example

© iStockPhoto.com / Kelly Keeley-Frost


What Type of Company Should You Form?

Legal Form What Is It? Advantages/Disadvantages

Sole Proprietorship

You operate in your own name, or you personally do business as (DBA) another name that has not been officially formed as one of the other entity types

Simple. Less paperwork. However, all of your personal assets are exposed with this type of legal structure.

Limited Liability Company A legal form which provides protection of incorporating with certain tax benefits.

Easy to set up and maintain and are pass-through entities whereby profit and loss from the business passes through to the individual owners on their personal tax returns. No double taxation. Protects personal asssets against many business losses.

S-Corporation Type of corporation that allows for pass-through taxation and not double taxation.

Many tax benefits of a C-Corporation but has pass-through taxation. You can elect S-Corporation status by filing a simple document (IRS Form 2553) with the IRS after forming the corporation.

C-Corporation A corporation, separate from its owners.

Entity structure of most companies publicly traded on the stock exchange. Provides the maximum deduction for fringe benefits, and a low corporate tax rate for small corporation. However, hardest to set up and maintain and has double taxation, meaning the earnings are taxed at the corporate level first, and then on the individual tax returns of the stockholders.

General Partnership A business with more than one owner and all partners actively participate in the business.

All partners equally share in the liability, ownership and profits.

Limited Partnership A legal form which provides much of the protection of incorporating.

Partnership between multiple owners that offers the ability for some partners to have limited liability, as well as limited input on management decisions.

Figure 1-1

Verbal PartnershipCreated by two or more people based upon their actions (owning a business together even though they never formed an official entity)

Partnership between multiple owners, but in a way that exposes your personal assets


of a disregarded entity would be a single member LLC that does “not” elect to have S-Corporate status. It is also important to note that there is a limit to how many shareholders there can be with an S-Corporation. This changes from time to time, but as of 2009 there can be no more than 100 shareholders in an S-Corporation.

C-Corporation• - A C-Corporation is the entity structure of companies publicly traded on the stock exchange. It provides the maximum amount of deductions for fringe benefits, and a low corporate tax rate for a small corporation. However, it is the hardest to set up and maintain, and also has double-taxation. Double taxation means that the earnings are taxed at the corporate level first, and then on the individual tax returns of the stockholders. Unlike with S-Corporations, there are no restrictions on what types of entities can own shares in a C-Corporation. For example, an S-Corporation can own shares in a C-Corporation, an LLC can own shares in a C-Corporation, and an individual can own shares in a C-Corporation. Also unlike S-Corporations, there are no limits to how many shareholders there can be with a C-Corporation.

General Partnership• - This is a partnership between multiple owners, but all partners equally share in the liability, ownership, and profits.

Limited Partnership• - This is a partnership between multiple owners that offers the ability for some partners to have limited liability, as well as limited input on management decisions.

Verbal Partnership• - This is a partnership that is created by the actions of the parties, even though no written partnership was ever officially formed. Many people do not realize that if two or more people come together and start operating a business together without forming an official company, they may have in fact created a verbal partnership. In terms of liability protection, this is one of the worst types of entities to have and provides little to no protection for your personal assets.

Sole Proprietor• - This is where you just operate in your own name, or you personally do business as (DBA) another name that has not been officially formed as one of the other entity types (and thus it is just you using an alias). The HUGE disadvantage with this type of structure is that your personal assets are all at risk.

Figure 1-1 provides a comparison chart that allows you to compare the above entity types side-by-side.

Many people think that registering a DBA certificate with their local county office gives them a legal entity structure that has limited liability protection, but it does not. It is just an assumed name for your sole proprietorship. (Note that corporations and other entities can file DBA’s with their Secretary of State when they also want to do business under a different name, but that is different than what is meant here).

As you can see, each of these entity types have their pros and cons. For most new real estate businesses just getting started, LLC’s are good places to start because they are the easiest to form and maintain, yet they provide limited liability protection. More details on the specific strategies we recommend for flipping or holding real estate are described separately in the respective Module.

© iStockPhoto.com / Karl Dolenc


But no matter what you do, PLEASE think long and hard before operating as a sole proprietor. Operating as a sole proprietor is only suitable if you have nothing to lose. The reason is because a sole proprietorship subjects you to complete personal liability. This means that if your business is sued, your house, your car, your personal savings, and pretty much everything else are at risk. Do yourself a favor and form an entity that has some limited liability protection.

You can find out what entity structures are available by visiting the Secretary of State (SOS) web site (or other governing agency for business formations) for the state in which you plan to form the company.

We have spent a lot of effort creating an index for you of all of the SOS web sites. That index (shown in Figure 1-2) is available at: http://www.innoventum.com/sos.html. (If you find a link that is broken or has changed, please let us know.)

Note that most of these Secretary of State web sites also have entrepreneur guides that explain the type of entities available, the pros and cons of each, and other valuable tips for doing business in that state.

In addition to the information provided by your Secretary of State about the legal structures available in your state, we have also included Figure 1-3 as a graphical representation to help you better understand which situations one entity versus another is best suited for.

You should seek legal counsel in your state if you need help in choosing the correct entity structure.

Figure 1-2


Question Sole Partnership Limited Sub-Chapter C Proprieter Liability Co. S Corp. Corp.

Do you have a lotof personal assets to protect (stocks, cash,house, etc.)

Is your businessthe type of businessthat is likely to besued?

Do you plan to haveone or more partners(such as for additionalcapital or skills)?

If you plan to have one or more partners, do you want to avoid personal liability fortheir actions?

Will you have outsideinvestors?

Is your business likely to lose moneyfor 2 or more years?

Will the ability todeduct life insurance,disability, and other fringebenefitsmakeahugefinancialimpact on you?

Do you want tototally avoid havingtofileaseparatecompany tax return?

Multiple memberLLC’smustfileseparate companyreturn, but singlemember has optionof putting onpersonal return.

Choose A Legal Entity Type

Boxes Crossed Out Are Not A Choice For “Yes” Answers

Figure 1-3

Answer these questions to see which entities are not good options for your business.


We will walk through the filing steps in a later portion of this module, because there is more we need to cover first.

Before you choose the type of entity to form, you need to determine who will be the owners of the company. Sometimes the individuals or businesses who you plan to include as owners can impact the type of entity that is available. Sometimes you may need to add more owners in order to get the desired protection.

Let’s look at a few examples to illustrate how ownership fits into legal entity selection. For example, if you plan to form a multiple member LLC in order to get the charging order protection discussed earlier, then you need to have at least two owners of the LLC. As another example, if you have a C-Corporation that plans to buy shares of another company, the company being purchased cannot be an S-Corporation because S-Corporations can only be owned by individuals or disregarded entities, as described earlier.

There are also privacy issues to take into consideration when choosing the owners and the type of entity. For example, the owner names that are made public will depend upon the entity type and the state in which that entity is formed. If someone doesn’t know who owns an asset, then it would be quite difficult for them to come and get that asset, wouldn’t it? Thus, there may be instances where you will want to form an entity in a state that gives owners a lot of privacy. The privacy issue is discussed in more detail in the later section of this Chapter that covers Filing The Right Paperwork.

At this point, you don’t need to worry about memorizing all of these complex variations. We just wanted to make sure that you understand that who you choose as owners can have an impact on what types of entities are available, and that sometimes you may need to add another owner or form an entity in a different state to get the best protection. It just depends on the type of business you are forming.

Part 2 Of Your Power Structure - Pick The Right Name For Your Business

Once you have determined what legal structure to use, and who will be the owners of your new business, it is time to pick the right name for the business. Many people rush into the process of picking a name and proceeding with forming the company. Let’s first explore why it is important that you choose a name more carefully.

For starters, if someone else already has a trademark interest in the same name in a similar industry, then you could be forced to stop using the name in the future under the Trademark Laws. In other words, you may invest a lot of time and money on your business cards, letterhead, web site, putting your name on

Ownership MattersNote that in choosing the proper type of entity, you will need to determine who the owners will be of the company. The number of owners can impact which entity is the best choice. Sometimes you may even need to add another person or entity as an owner in order to achieve the best protection (such as with the charging order protection of the multiple member LLC as described earlier). In addition to the number of owners impacting which type of entity is the best choice, the level and participation of the various owners is also an important consideration in selecting an entity type.


all of your products, and so on. Imagine if you later have to change all of that or face expensive litigation. It could be very costly to have to totally change your company name and all of the accompanying materials that use your name after the fact.

So it is better for you to take a few simple steps up front to minimize the amount of risk you will have in such a scenario. Now there are never any guarantees in life, and it is always possible there could be a problem even after you do some basic research. But if you can follow some easy steps and identify some glaring problems right up front, then wouldn’t you rather know about them now versus later?

A detailed discussion on trademark law is beyond the scope of this Chapter. However, in Chapter 7 (the Bonus Chapter on Intellectual Property), we have included a simple 4-Step Process you can use to help you choose a name for your business that is both available in your state, and that also seems to avoid stepping on someone else’s trademark rights.

Before you choose a name for your business, you first need to brainstorm on some names to consider. In brainstorming some names for your business, you will want to think about what message you want to convey with your company name.

To aid you in choosing a name for your business, we have included a Business Name Brainstorming worksheet in Appendix A. The instructions for this worksheet are contained in Worksheet 1 on the following page.

Choosing An Entity Name From The Research

Once you have your list of possible names, it is time to determine which name is the best choice. You can refer to the 4-Step Process in Chapter 7 on choosing a name if you would like to do some basic research and pick a name that is less likely to infringe someone else’s existing trademark rights.

At the end of the process, you simply look over your list and see if any of your names survived the scrutiny, and if so, pick the one survivor that you like the best. If none of them survived this process, then repeat the process as necessary until you find one or more names that seem to meet this criteria.It is impossible to find everything about every company in the United States, but even just an hour of research following the 4-Step process covered in Chapter 7 can help you identify those company names that should be avoided.

The bottom line with this step is that you have to determine what to name the company so you can include that name on the filing paperwork, along with the entity type and names of the owner(s). Once you have chosen the name for your company, it’s time to move on to the next step.

W

Trademark Law - One Reason Why Choosing A Name Is So ImportantFederal and state laws provide businesses with trademark interests in the brand identifiers they use for their goods and services. If someone else has already established a trademark interest in a given brand, they can have a superior right to use that name over you and can, in some cases, force you to stop using that name.

© iStockPhoto.com / Wolfgang Amri


Question Name #1 Name #2 Name#3 Name #4

Write down 4 business namesyou are considering

Is there anything in the namethat tells customers what you door what they get?

What type of feeling doesthis name convey?

What do you like about this name?

What do others like aboutthis name?

What do you dislike about this name?

What do others dislike aboutthis name?

What available domains would work well with this name?

Other commentsabout this name:

Business Name BrainstormingAnswer These Questions For 4 Names You Are Considering

WORKSHEET 1

Fill in the worksheet for different names you are considering for your business. The answers to these questions will help you pick names that convey the message you want to send.


Part 3 Of Your Power Structure - Make It Official: File The Right Paperwork

Now that you have chosen the type of legal entity, and have determined what name to use for your company, it is time to file the papers with the Secretary of State of the state in which you plan to organize the company. Note that the state in which you form the company does not have to be the same state in which you live. Some states have more corporate friendly laws than others. For example, Wyoming and Delaware have laws that tend to be very favorable to LLC’s and corporations, including real estate companies. These states (among others) also have Secretary of State web sites that are very user friendly.

Before you finalize your selection, it is important to find out which states require the least amount of information to setup the entity you have chosen. Privacy is an important (yet often overlooked) characteristic of asset protection, in addition to avoiding loss of assets through litigation and minimizing your tax liabilities.

Before forming the company with your preferred Secretary of State (such as your home state or one of these corporate friendly states), you need to have the following information ready for inclusion on the filing paperwork (as well as some other details depending on the type of entity):

____ Your Company Name ____ The Type of Entity Being Formed (LLC, etc.) ____ The Names and Addresses of the Owners, As Needed ____ The Company Mailing Address ____ The Person Who You Want Listed As The Registered Agent ____ The Date The Company Started Operating

Form the Company: You have several options for getting the company formed. You can hire an attorney, fill out the paperwork yourself from the SOS web site, or hire another third party service such as American Incorporators (www.ailcorp.com) to file the papers for you. There are many other companies, such as Socrates Media (www.socratesmedia.com) and Legal Zoom (www.legalzoom.com) who sell forms to help you do the formation yourself.

But before you proceed with forming a new company, you will want to consult the corresponding Module related to your type of real estate company for additional recommendations on the entity structure.

ObtainanEmployerIdentificationNumber: As soon as you get confirmation from your state SOS that the company has been officially formed, you should obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

An EIN a unique identifier (like a social security number) for your business that is needed for opening bank accounts, filing taxes, obtaining credit, etc. You can sign up for an EIN on the IRS web site (www.irs.gov), or by calling the EIN department at: (800) 829-4933.

You will also use the EIN in the future on your tax returns, and on any other paperwork for the corporation that needs its unique identifier. Note that if your company is electing to be taxed as an

© iStockPhoto.com / Bart Sadowski


S-Corporation (such as an LLC or Corporation electing this taxation status), you will also need to file IRS Form 2553 with the IRS after you obtain your EIN to elect S-Corporation taxation status. S-Corporation status is explained in more detail in other sections herein.

Obtain Other Required Licenses: You also need to make sure you have any required licenses by your state for the type of business you are operating. For example, some types of businesses must have a license before operating, such as real estate agents, attorneys, insurance agents, restaurants, daycares, etc. Furthermore, some counties also require that you obtain an operating license for each location of your business as well. Your county government office can also point you in the right direction.

Create the Initial Company Record Book: You also need to set up and maintain a company record book. A company record book contains copies of the Operating Agreement you have between owners of the company, the meeting minutes from your annual meetings or special meetings, a copy of your Articles of Organization/Incorporation that are received back from the Secretary of State, a copy of your EIN from the IRS, etc. You also need to make sure that you sign your Operating Agreement.

The Operating Agreement is an agreement that explains how the one or more owners will operate the company, and under what circumstances certain events in the company can or must happen, such as meetings, signing authority, sale or transfer of the company, purchase of real estate, and so on. In the separate Modules on flipping and buy & hold strategies, we have included some key provisions that you will want to consider including in your Operating Agreements between owners.

In addition to the Operating Agreement, you also need to create the proper stock/ownership certificates that show which member has what percentage of ownership in the company. Again, this is assuming that you formed an entity that has some type of limited liability protection, such as an LLC or Corporation. These are easy to create using a corporate kit that is described momentarily.

But the key point here is that in order to get the limited liability protection that you desire, you have to follow certain formalities to treat the company as a separate entity. And the company record book is one example of how you show that you are operating as an entity that is separate from you as an individual.

The easiest way to get your company record book created and organized is to buy one from a service such as Legal Zoom or Socrates Media. The “corporate kits” typically have a nice binder, sample forms, folders for storing the various types of documents that you should be keeping, stock certificates printed with your company name (if applicable), and so on.

Here is a short checklist of the types of items to include in your initial company record book: _____ Your Articles of Organization/Incorporation From The Secretary of State _____ Your Signed Operating Agreement Between Owners _____ Stock/Ownership Certificates That Show Who Owns What Shares/Interests _____ Your EIN from the IRS _____ IRS Form 2553 If You Elected S-Corporation Status And Filed It With The IRS _____ Your Initial Meeting Minutes _____ Your Banking/Checking Account Formation Paperwork

The exact items to include in your Company Record book vary depending on the type of company you form. But these are the most common items that are likely to apply to your situation.


Part 4 of Your Power Structure - Maintain Your Company Status Over Time

It is certainly a critical step to get the initial company record book created. However, in order to keep your company in good standing, you also need to have annual meetings with the officers of the company and put the minutes of those meetings in the company record book. Again, you can purchase a corporate kit that contains sample meeting minutes or you can hire an attorney or other entity to assist you.

Believe it or not, maintaining the company record book is one of the most often overlooked steps by existing businesses. They may have formed the company correctly initially, but they often neglect to maintain the company records properly by failing to keep minutes of their annual meetings and other key meetings in between where key company decisions are made.

In case you are wondering why this matters, it all goes back to the limited liability protection that you are trying to maintain for your company so you are not personally liable for the acts of the company. In other words, if you are ever sued, you want the plaintiff’s recourse to be limited to the assets of the company, and not also your personal assets. Note that this is different than the concept of a personal guarantee you may have to make to banks for any loans you personally sign for to get credit in the name of the company. You are stuck with those personal guarantees and have to pay them.

Here we are talking about liability from lawsuits, such as when an employee or customer sues you for some action. You definitely want their recourse to be limited to just the assets of the company, and not your personal cash, home, car, etc.

If you do not maintain your company’s legal status properly, then you can lose that status. So everything we have been talking about in this Chapter is part of the process of maintaining that separate identity and following the proper procedures to ensure that happens.

It is also important that you meet your company filing deadlines for income taxes, entity reports, employment taxes when you have employees, and any other taxes or reports that your business must file.

Most business owners are required to pay estimated taxes in quarterly installments to the IRS. You have to estimate how much money you will owe to the IRS in taxes during that year, and then pay equal installments of that amount over the course of the year. The same also applies to your state department of revenue, who also require estimated taxes in quarterly installments to be paid by business owners.

You can find an index of the IRS and state departments of revenue on our Innoventum web site at: http://www.innoventum.com/estimatedtaxes.html.

A list of the most common filing deadlines that many businesses have to meet are contained in Appendix A in Worksheet 2, Company Filing Deadlines. In order to help you avoid steep penalties from failing to meet your deadlines, you may want to use a third party reminder service where you can be reminded of your deadlines by email, text message, and/or telephone. An example of such a reminder service is www.GoPingMe.com. Note that even if you decide to use a third party reminder service to help you track your deadlines, you are still ultimately responsible for meeting them.

You should now refer to the Company Filing Deadlines worksheet in Appendix A. You can find the instructions for Worksheet 2 on the following page.W


Company Filing DEADLINESIn order to maintain your company in good standing, there are various deadlines you need to meet.

NOTE: You can sign up for a free third party reminder service to send you reminders of these various deadlines, once you determine what they are. One example of such a reminder service is www.GoPingMe.com. Note, however, that you should never totally rely on a third party reminder service to meet your deadlines. You should just use them as a backup.

Filing Type Due Dates Where to Send/File Amount, If Known Estimated Federal Taxes(Usually Quarterly)

Estimated State, County, and Local Taxes (UsuallyQuarterly)

Payroll Taxes For Employees(Social Security, WorkersComp., Unemployment, etc.)

Continuity Report (Annual orBi-Annual) With Secretary ofState/Business Register

Company Income Tax Return

Sales Tax (If You Sell Goods Subject To Sales Tax)

Property Taxes (On Real Estate)

Personal Property Taxes (OnFurniture, Equipment, etc.)

Inventory Taxes, If Applicable

Other:

WORKSHEET 2

Use this worksheet to help you keep track of your company filing deadlines and file the required reports by those deadlines.


Stay Out Of Trouble With The Federal Trade Commission (FTC)

In addition to following the proper business procedures to stay out of trouble with the IRS and possible creditors, it is also important that you be aware of, and comply with the federal business regulations that are monitored by the U.S. Federal Trade Commission (“the FTC”).

The FTC is the consumer watchdog for a variety of industries, and monitors various business activities to ensure that consumers are not being mislead with deceptive advertising or other business practices.

If the FTC finds businesses that are not complying with the regulations, it has the authority to file federal lawsuits against your business, and can seize your assets and force you to pay huge fines depending on the type of violation. So you definitely should take these regulations seriously.

This section will walk you through five of the most common advertising regulations that are monitored by the FTC that you need to be aware of in your real estate business. These regulations impact how you can communicate with prospective and actual customers in order to make sales for your business. There certainly may be other FTC regulations that apply to your scenario as well. You should also be aware that these regulations can change periodically. So the point is to make sure you stay on top of the latest FTC changes that affect advertising and other aspects that are related to your real estate business.

1. Robo-Call Rule (September 1, 2009)

Under the amendments to the Telemarketing Sales Rule (also called the “robo-call rule”) that took effect in September 1, 2009, you basically have to get written permission from consumers before you can send them pre-recorded marketing broadcasts by telephone.

If you do not comply with this rule, you can face steep penalties of as much as $16,000 per unauthorized call. Consumers who receive unsolicited pre-recorded marketing calls can file a complaint with the FTC.

It is important to note that there are a few exceptions to this rule. For example, informational recorded messages are not prohibited, such as notifications about school closings, flight cancellations, order shipments, debt collection, etc. The difference is that these types of messages do not attempt to interest a consumer in the company’s product or service.

Here is another exception to the rule: Politicians, banks, telephone carriers, most charitable organizations and certain health care messages are not covered by the Telemarketing Sales Rule. Therefore, they are not covered by the new prohibition.

But if your business is one who broadcasts pre-recorded telephone marketing messages out to consumers, then you are indeed affected by this rule and need to comply if you have not done so already.

In addition to getting written permission up front before broadcasting such pre-recorded telephone messages, you also have to include an opt-out mechanism while they are on the phone to allow consumers who previously agreed to the call to stop receiving them if they later change their mind. Most automated broadcasting services have such an opt-out mechanism included as part of their service, but you need to make sure any service you use complies with this requirement.


Here are some guidelines to help you comply with this rule if you want to broadcast pre-recorded marketing messages to consumers by telephone: ___ Did you get the consumer’s written consent (such as in a written agreement or through a legally binding digital agreement [such as with their initials, date, IP address, and terms] that has been preserved so you can later prove there was a valid agreement if disputed) ___ Did you gather the phone number that they specifically agreed to have the calls sent to (and later, make sure you only send the calls to that authorized number). ___ Did you clearly display the terms that the consumer was agreeing to (i.e. that they were agreeing to receive pre-recorded marketing calls to a specific number). ___ Did you make sure that their agreement to receive the pre-recorded calls was not a requirement for them to otherwise do business with you (in other words, did you make sure that you did not force them to agree to the terms so they could get some other non-related service from you). ___ Did you make sure and only have the calls placed during the hours allowed by Statute (see guidelines in the FTC article below). ___ Did you include an opt-out mechanism to allow subscribers to un-subscribe.

The above is a very simplified discussion of a complex rule. So please review the detailed information and requirements on the Robo-Call rules if it applies to your business. To do so, please consult the actual statute (16 CFR Part 310) and/or review the following article: http://www.ftc.gov/os/fedreg/2008/august/080829tsr.pdf.

2. Endorsements and Testimonials (December 1, 2009)

On December 1, 2009, changes took effect with the FTC guidelines that govern endorsements and testimonials. The FTC basically updated these guidelines to be consistent with the information age.

DisclosureofAffiliateRelationships

The first change to be aware of is that you are now required to disclose your affiliate relationships to consumers. What this means is that you must disclose any time a recommendation that you are making is biased because you will be compensated from a third party if the consumer purchases the product.

For example, if you have a post on your web site that recommends people go and buy a certain product from Company X, but if they buy it through that link, you will be compensated by Company X, then you have to disclose that fact. As another example, if you send an email to your customers promoting someone else’s product, you are required to state that you are being compensated if they end up buying the product.

The bottom line is that the consumer has a right to know when your recommendation that they go buy a certain product or service may be biased because you have a financial interest in the transaction.

The FTC gives a lot of leeway in how you can comply with the rule, so long as your affiliate relationship is clearly disclosed. You should definitely not bury those details in your terms and conditions or


some other page that no one would ever see. The safest way to comply with this rule would be to put the disclosure right next to the hyperlink that contains your affiliate link (in the case of an online promotion), but there are other disclosures that could also be acceptable.

Disclosure of Average Results When Using Above-Average Testimonials

Another change took effect on December 1, 2009 to the FTC’s guidelines on endorsements and testimonials that greatly impacts how you can use testimonials in your advertising. Under the new guidelines, you can no longer use consumer product endorsements (i.e. testimonials) in your advertising that state an outcome that is above average, unless you also include details on what the average consumer can expect.

Under the old guidelines, you could use extraordinary testimonials and then just put a disclaimer that says “Results not typical. Your individual results may vary.” That disclaimer is no longer sufficient.

You are still allowed to use testimonials, but if you use any testimonials that state extraordinary results, then you have to also clearly state what the average person should expect to achieve as well.

For example, if you have testimonials such as “I lost 100 pounds in 10 days” or “I made $1,000,000 in 2 months”, then you could still include those extraordinary testimonials (assuming they are true), but you would also need to state “The average person lost X pounds in X amount of time”, or “The average person makes $X in X period upon doing steps XYZ”. These are of course exaggerated examples, but you get the idea.

Many people will probably just give up on using testimonials. If you don’t have any data to back up what is average, then you should stay away from using any that are clearly above average. But let’s be clear - you do not have to stop using testimonials. You just need to start gathering the evidence to back up what the average person experiences with your products or services.

You are probably wondering how you can actually gather that evidence? Well, you use surveys to obtain this data from your customers. Some of the authors of this product have teamed up with a survey expert to provide information on exactly how you can use surveys to gather the proper data to support the testimonials you use in your advertising. You can learn more at http://www.ftcprofits.com.

There is an excellent FTC article which gives numerous examples of testimonial scenarios that would be acceptable and unacceptable. Please see section 255.2 on page 5 for those additional examples (http://www.ftc.gov/os/2009/10/091005revisedendorsementguides.pdf). For additional information in addition to the FTC article above, please see the actual statute (16 C.F.R., Part 255), or the article at http://www.ftc.gov/opa/2009/10/endortest.shtm.

3. CAN-SPAM Act

The CAN-SPAM Act is a law that specifies rules for commercial email, establishes requirements for commercial messages, gives recipients the right to have you stop emailing them, and spells out tough penalties for violations.

Any time you send commercial marketing emails to people (whether or not they requested it) and don’t comply with the requirements of what that message must include (including accurate identification of

Building The Foundation Of Your Power Structure24 Building The Foundation Of Your Power Structure Using Proper Legal Entities

who you are, a way for them to opt-out, etc.), you can face huge fines of up to $16,000 per email.

Even when you are sending messages to people who have explicitly requested the information, you should still provide an easy way for them to opt out of your lists or face fines and other penalties.

Here are some guidelines to help you comply with the CAN-SPAM Act: ___ Does your email contain an accurate email/domain? ___ Does the subject line accurately reflect what the message is about? ___ Is the message identified as an advertisement (there is a lot of leeway on how you can do this)? ___ Does the message include your physical address (such as in the footer at the bottom)? ___ Do you have an opt-out procedure contained in the message that gets processed promptly (or automatically) so people can stop receiving messages if they no longer want to receive them?

A detailed discussion of the CAN-SPAM Act and some other helpful tips for complying with it can be found at: http://www.ftc.gov/bcp/edu/pubs/business/ecommerce/bus61.shtm.

4. Include a Privacy Policy and Terms of Use On Your Web Site(s)

The FTC requires that you inform consumers of your data sharing practices so that they can decide whether or not they want to do business with you accordingly. The FTC also requires that you inform visitors to your web site of any special terms that they are agreeing to by using your web site. In order to avoid any compliance problems, it is important that all of your web sites have a Privacy Policy and a Terms of Use statement on them.

Here are some provisions to make sure you include in your Privacy Policy on your web sites: ___ A list of what items you collect (such as name, email, etc.) ___ What you will do and will not do with the information you collect (such as whether or not you will use it to market other products/services, whether you will share or sell the data with anyone else, etc.) ___ How the consumer can contact you if they have questions

Here are some provisions to make sure you include in your Terms of Use on your web sites: ___ Any disclaimers you want to ensure the consumer agrees to by using your site (such as a disclaimer that you do not guarantee any particular result will be achieved) ___ Any terms they are agreeing to by using the site (such as that they are of legal age, etc.) ___ How the consumer can contact you if they have questions 5. FTC Proximity Rule and Clear and Conspicuous Rule

In order to protect consumers, the FTC has long required that any key terms (like price, etc.) that consumers are agreeing to must be presented in a clear and conspicuous manner so that you can reasonably expect the consumer to see them and have knowingly agreed to them. To avoid problems with this rule, you should never hide pricing or other critical terms on a page no one will never read.

So there you have it. Those are five of the most common FTC regulations that nearly any business needs to be aware of, and comply with.

Building The Foundation Of Your Power Structure Using Proper Legal Entities 25

SUMMARY

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The first part of creating a power structure is to pick the proper legal structure for the company that will best protect the assets of the company and the assets of the owners. You need to determine what type of entity best suits your business.

You can access hyperlinks to the Secretary of State web sites for all 50 states on the Innoventum web site at: http://www.innoventum.com/sos.html

You will need to determine who the owners of the new company will be. The ownership concerns help determine what type of entity is best.

The second part of creating a power structure is to pick a name for your business that is available for use that has a lower probability of violating someone else’s existing trademark interests. You can use the 4-step process that is discussed in detail in Chapter 7 as a guide.

The third part of building a power structure for your business is to file the paperwork properly with one or more appropriate government agencies. You can file the paperwork with the Secretary of State or other Business Registrar yourself, or you can hire an attorney to assist you. There are also various companies who can form a company for you. American Incorporators (www.ailcorp.com) is one example. There are many other companies, such as Socrates Media (www.socratesmedia.com) and Legal Zoom (www.legalzoom.com) who sell forms to help you do the formation yourself.

Once you have formed the new business, you will need to obtain an Employer Identification number for your business through the IRS web site (www.irs.gov), or by calling the EIN department at: (800) 829-4933. The EIN serves as a unique identifier for your business. You also need to obtain any other required licenses that may be mandated by your local or state government (sales tax, law license, insurance license, etc.).

The fourth part of building a power structure is to maintain the company record book. This is a necessary evil that many businesses fail to do until it is too late. It is not difficult to have the annual meetings and other periodic meetings and capture those in the form of meeting minutes. There are kits available that show you how to do this. So do yourself a favor and just do it!

Part of maintaining the good standing of your company involves accurately documenting the future deadlines of the company, and then making sure the paperwork and/or tax payments are made by those deadlines. The most commonly missed deadlines are quarterly tax payments.

An index of the IRS and state Departments of Revenue can be found at:http://www.innoventum.com/estimatedtaxes.html

Another critically important part of maintaining your company in good standing is to keep your business out of trouble with the FTC by complying with the latest regulations that govern advertising and other business practices. You learned more details about five of the most common FTC regulations that impact most real estate businesses, and some tips on how to comply with those regulations.

27

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MONEY TRACKING AND ACCOUNTING: CREATING YOUR OWN FORT KNOX

AT THIS POINT, you have now learned the basics of how to form a real estate company and to maintain your limited liability status with the Secretary of State.

In this chapter, you will learn several important concepts that will help you maintain your real estate company in good standing over time. We like to refer to this as creating your own Fort Knox for your real estate company - one that is solid and sustainable.

For example, you will learn how to start establishing a credit history for your real estate company, and how to set up simple accounting procedures that will make your company run smoothly. Part of the accounting process involves using an electronic accounting system that will help you generate financial reports at any moment. These financial reports will not only make it easy for you to analyze the health of your business, but also will allow you to track the day to day cash flow of your business. These reports will also make it much easier for you to prepare your taxes and other financial documentation that bankers or other lending institutions may request.

You will also learn about some critical techniques for keeping the limited liability status of your company intact over time. Using the techniques discussed in Chapter 1, you were hopefully already able to set up a company with some type of limited liability (corporation, LLC, etc.). While it is certainly important to form a company correctly, it is equally important that you take the proper steps to maintain the limited liability status of your company over time.

To maintain your company in good standing and protect yourself from future personal liability, there are certain procedures you need to follow. The good news is that these steps are not as difficult as you might think. You just need to know what the steps are. In this Chapter, we are going to walk through exactly what you need to do to keep your company status in good shape.

You learned in Chapter 1 how part of maintaining the good standing of your company involves accurately documenting the future deadlines of the company, and then making sure the paperwork and/or tax payments are made by those deadlines.

In this Chapter, you will also learn about internal company procedures that need to be implemented to help you maintain your company in good standing, and also to help make it operate more efficiently.

The concepts covered in this Chapter are some of the most critical, yet also some of the most frequently overlooked steps by many businesses.

Unfortunately, if you do not take the time to learn these steps, you could face unlimited personal liability or problems with your banks, the IRS, or the FTC because you did not follow the proper procedures.

W WorksheetsVideo W

Money Tracking And Accounting: Creating Your Own Fort Knox28

ABOUT THIS CHAPTERIn this Chapter, we will cover some of the other critical aspects to maintaining the sustainability of your business, including the most important financial, bookkeeping, and procedural matters. The topics include:

Establish a Credit History For Your New Business . . . . . . . . . . . . . . . . . . . . . . . . . •

Make It Easy For Customers To Pay - Accept Credit Cards . . . . . . . . . . . . . . . . . . . •

Spotlight On Accounting Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Accounting Procedures For Keeping Your Business Healthy . . . . . . . . . . . . . . . . . . •

Use Accounting Software To Make Financial Statement Preparation A Breeze. . . . . •

Organize Your Income and Expense Receipts So Anyone Could Find Them . . . . . . •

Keep Your Business Records Separate From Personal Records Or Jeopardize• All Your Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

page 29

page 33

pages 34-35

page 36

page 37

page 40

page 40

page 43

The following worksheets for this Chapter are included in Appendix B:

Worksheet 1: Establish A Credit • History For Your BusinessWorksheet 2: Labels You Can Use • For Organizing Your Income And ExpensesWorksheet 3: Sample Expense Report•

The training videos will demonstrate the essential financial, bookkeeping, and procedural concepts that you need to know in order to keep your business running smoothly, and your limited liability shield intact.

You will learn how to establish credit in the name of your business and the best accounting procedures you should follow.

Money Tracking And Accounting: Creating Your Own Fort Knox 29

But with the knowledge contained in this Chapter, there is no reason for that to happen! So please take these steps to heart and apply them in your business. They truly are not difficult, but are very very important!

Establish A Credit History For Your New Business

A new real estate business is a newborn baby in the eyes of the credit world. In other words, your business does not have a credit history or a positive credit rating when it is first started. This is just like a newborn baby that does not yet have a credit history.

In the eyes of the United States government, your business is represented by the Employer Identifier Number, which is a Social Security Number for your business. You should have already obtained your EIN using the instructions in Chapter 1.

The first step in establishing credit for your new business is to open one or more bank accounts. To open one or more bank accounts, you will need to take your EIN and a copy of your articles of organization/incorporation with you to the bank, if applicable. If you formed a company with your Secretary of State/Business Registrar, then your articles of organization/incorporation will be contained on a certificate that you received back from that agency as proof that your company has been established in that state. In the case of a sole proprietorship (which we don’t recommend), you will not have any articles of organization and would just need to provide the bank with your EIN.

Once you have opened one or more bank accounts per business, you may choose to start establishing a positive credit history for the business. To do so, you will need to open one or more credit lines in the name of the business and then make prompt payments to those credit lines over time. Really, the process of establishing good credit for your business is very similar to the process that you use for establishing your own personal credit. The biggest difference is that you are using the EIN of your business and not your own personal social security number, and your business is the one that makes the loan payments, not you personally.

It is important to note that when you open business loans, there are some possible risks you need to be aware of. In addition to the normal perils of borrowing money, banks have been known to withdraw money you have on deposit with them when a loan was in default. Thus, you may want to consider using a different bank for your business checking account than those who you borrow money from.

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Since your new business has a credit history and score that resembles one of a newborn baby, you will have to personally guarantee any loans that a bank makes to your business in the beginning. Once your business has been around and has a solid history of its own, you will get to the point that you no longer have to personally guarantee the loans. Let’s take a step back and explore exactly what this means, because the concept of a personal guarantee may be foreign to you.

A personal guarantee means that you as an individual are promising to pay back the loan or obligation if your business does not do so. So your business is on the hook for the loan, and so are you personally. That means that if you get a business loan, and the business does not make those loan payments, you still have to pay back the loan from your other job or funds out of your own personal pocket.

Think of it from the bank’s perspective. If someone came to you and had no credit history (which is the case for a new business), why would you want to loan them money for an un-proven business without some assurance by someone who does have a history or income you can rely on to back up that loan? Most people would do the same thing if you were serving as a lender of funds.

The key point here is that in order to get a bank line of credit in the name of your business, your own personal credit history will be an important factor. If you have lousy credit and a low credit score, then it is going to be difficult to also get credit for your business, because you cannot even get credit personally. However, there is still hope for you if you fall into this category. Keep reading to find out.

To find out whether or not you have good personal credit, you can obtain a credit report from one of three credit bureaus: Equifax: www.equifax.comExperian: www.experian.comTransUnion: www.transunion.com

You can also purchase your FICO score from MyFICO (www.myfico.com) and some credit bureaus. Your FICO score is a number that ranks your credit-worthiness.

Many lending decisions are made by a computer automatically based upon your FICO score. For example, many lenders consider a score over 750 to mean that you have excellent credit, and a score of 700-750 to mean that you have good credit. The exact FICO score requirement varies by lender, so these are just examples to give you an idea of how this works.

The best way to establish a credit history for your business is through a bank loan, such as a line of credit and/or a credit card established in the name of your business. In other words, in order to show your business as having a credit history that can be counted on, you should ideally take out business loans from entities such as banks who report your credit history to the credit bureaus. You will also want to have a business credit card for accounting reasons we will explain later in this module. If you have good personal credit and a strong income history, then you should be able to establish a business line of credit and a credit card account through a bank.

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You may want to consider a loan that is backed by the U.S. Small Business Administration (SBA), which offers various types of lending programs through preferred banks. You can obtain more details about these loans by visiting www.sba.gov.

So how do you actually get a bank loan and/or credit card for your business if you have poor personal credit? Well, it is actually quite easy to get a bank loan even if you have poor personal credit using what is called a “secured loan”. Here is how that works. You can ask a bank to give you a loan that is secured in full up front by the same amount as the line of credit. Thus, you could ask the bank to give you a $5,000 line of credit, and you would then give them the $5,000 up front to secure the loan.

This probably sounds crazy, because if you have to pay them the money up front, what is the point of borrowing it back? Well, stay with us for a minute. The only way you are ever going to establish a credit history for your business is if you can build a record of paying your payments on time. So even though you have paid the entire line of credit to the bank up front and they are just loaning you your own money back, it still gives you the opportunity to start establishing credit. The bank will report this to the credit bureaus as a credit line that you have paid. This approach will not likely give you enough funds to operate the business, but at least it will let you start building a credit history for your business until it can stand on its own.

The point is that if you can qualify for a business loan and/or credit card based upon your own personal credit history, do so, even if it has just a small line of credit. If you cannot qualify for a business line of credit and/or credit card based upon your own personal credit history, then start with whatever amount you can afford, and obtain a credit card that is secured up front by the amount of the loan. At least it will get you headed in the right direction.

If you simply cannot get a bank line of credit or a credit card for your business using either of these approaches, then you can still resort to other lines of credit, such as borrowing from personal credit cards, friends and family, home equity loans, etc. If you need to use these funds for business expenses (as opposed to just helping you meet your personal bills), then please make sure that you submit an expense report to the business for reimbursement, or make a loan to the business and pay it back so that you are not co-mingling your personal and business funds. We will explain the concept of co-mingling later in this module. But for now, just make a note that if you give personal money to the business, you should do so in the proper way.

Please take a moment now and refer to the Establish A Credit History For Your Business worksheet in Appendix B. The instructions for this worksheet are contained in Worksheet 1 on the following page.

Secured Credit Cards - The Easiest Way To Get Business CreditThe most common type of secured credit is a secured credit card. Most banks offer secured credit card programs where your own personal credit history does not matter at all because you are securing the credit line with the funds up front.

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Establish A Credit History For Your Business

A brand new business has a credit history like a newborn baby. Use this worksheet to help you start establishing a credit history for your business.

(1) Open one or more bank accounts in the name of the business. When visiting the bank, make sure to take copies of:

The EIN you obtained from the IRS

A copy of your articles of incorporation/organization if you filed the company with your state registrar (such as the Secretary of State)

(2) Open a business line of credit, even if it has a small credit limit. You will have to personally guarantee this credit line since the existing business has no history. If you have poor personal credit, ask the bank about letting you open a credit line that is secured in cash from you in the amount of the credit line.

(3) Open a business credit card, even if it has a small credit limit. You will also have to personally guarantee this credit line. Just as with #2 above, you can still get a credit card in the name of the business even if you have poor personal credit. But to do so, you may have to pay the amount of the credit line up front as security.

WORKSHEET 1

Use this worksheet as a checklist to assist you in opening credit lines that will start giving your business a credit history.


Make It Easy For Customers To Pay - Accept Credit Cards

In today’s society, regardless of the type of business you have, it is highly likely that some of your customers will want to pay by credit card. For example, if you have a real estate company that rents out property to tenants, you may want to consider accepting credit cards. You might be surprised at how many tenants want to pay their rent by credit card.

The point is that you need to make it easy for your tenants or other customers to pay your business in the means that they prefer.

You have various options for accepting credit card payments. PayPal (www.paypal.com) offers the easiest way to accept customer credit cards.

Despite popular belief that PayPal is just used with eBay, PayPal has actually grown into a full-service credit card merchant provider. PayPal makes it super-easy for you to accept credit card payments from your customers online using MasterCard, Visa, Discover, and American Express, bank draft, as well as the traditional PayPal account.

Despite the fact that PayPal is easy to use, it is worth noting that Paypal sometimes holds back a higher percentage of the transaction in case a customer disputes the transaction in the future. So you may want to just get your own merchant account as described momentarily.

In the event that you ever have a real estate business that also sells products or services online, PayPal makes it easy to integrate with your web site. For example, you simply insert onto your Checkout page a certain URL that contains your payment page on PayPal’s server. When the customer clicks the option to make their payment on your web site, they are then re-directed to your PayPal product page to complete the transaction. Once they have completed their payment on PayPal’s server, PayPal displays a hyperlink back to whatever page on your web site that you want the customer to be returned to. If you are selling a digital product, then this page can be the download page for the digital product.

If you need to accept credit cards in person or by telephone instead of or in addition to online, then you need to open a merchant account for your business.

One of the most popular companies to use for a merchant account is Authorize.NET. You can purchase credit card readers and other equipment through Authorize.NET, and also establish your merchant account and start accepting payments in person, online, and/or by telephone.

In addition to Authorize.NET, there are various other companies and banks which also offer merchant accounts, so you can do some research and find one that best suits your needs. Most merchant processors charge both a per transaction fee (such as 30 cents per transaction) as well as a percentage of the overall purchase (such as 2% of the order).

Note that in order to open a merchant account, you usually have to fill out a lengthy application and provide credit reference information. In most instances, your ability to get a merchant account will depend on your business and/or personal credit history. If you have trouble getting a merchant account due to problems with your credit history, then PayPal may be the best choice for you to start with.

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SPOTLIGHT

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STEP 1: BATCH PROCESSING Collect your bills into a pile and process payments and invoices in groups (such as once per month).

Follow this simple 3-step process to keep your bankers happy and to save yourself days of time on tax return preparation.

A SIMPLE 3-STEP PROCESS:

STEP 2: ELECTRONIC ENTRY Enter all of your bills and invoices into an electronic accounting system, such as QuickBooks, when posting payments. Then, print checks from the accounting system or pay bills online.

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ACCOUNTING PROCESSES

STEP 3: FILING File each income and expense item into a clearly marked folder after they have been entered into your electronic accounting system.

© iStockPhoto.com / Colin Lambers

EXAMPLES OF FILE FOLDER CATEGORIES:

Income• Utility• Insurance• Bank Statements• Bank Loans• Credit Card Statements• Expense Reports• Office Supplies•

You can further sub-divide these into addtional categories if a particular folder would get too full. For example, you could have separate folders for each utility bill.


Accounting Procedures For Keeping Your Business Healthy

One of the most often overlooked details in a real estate business is the maintenance of its accounting records. Proper accounting procedures are important for several reasons. The first reason is because a proper accounting process will make it very easy for you to analyze the health of the company at any given point in time, and will make it much easier to prepare your business tax returns when they are due. The second reason that a proper accounting process is important is because it will help you preserve the limited liability protection that you hopefully established from the knowledge you learned in the earlier Chapter.

As we will explore later in this section, it is important that you follow proper procedures that ensure that you keep your business records and funds separate from your personal funds. If you do not, then you can lose certain limited liability protections that would otherwise be available to your business. What this means is that you could subject yourself to unlimited personal liability for your actions, or the actions of your business, even decades later, if you do not operate your business with the correct accounting procedures. It is not difficult, though, so do not stress over it. We will show you just how easy it is to implement the proper accounting procedures for your business. We just wanted you to know why it is important so you will pay careful attention.

Believe it or not, it is actually very common for even established real estate companies to just throw all their receipts together into un-organized filing boxes and to have no way of analyzing the health of their company at a given point in time. The sad part is that they do not realize it is a problem until later in the game when it then becomes a problem that is quite problematic to fix.

Let’s use some examples to describe this point. Suppose that you are applying for a business loan from a bank or the SBA. You have good revenue, and have been in business for two years. You were fortunate enough to operate this long based upon your personal savings. Now, your banker who is processing the loan asks for the following statements: a cash flow statement, a balance sheet, and an income statement. He cannot process the loan without it.

Scenario A: You have an accounting system that you enter all income and expenses into as you go along. To respond to the banker’s request, you simply open your accounting program, select the Reports option, and choose Cash Flow Statement and print it. You then choose a Balance Sheet and print it. You then choose an Income Statement and print it. You head over to the fax machine and send the documents to your banker and you are done.

Scenario B: You do not have an accounting system for tracking your income and expenses. Instead, you simply put all receipts into filing boxes, or your lateral files. When the banker makes this request, you tremble because of two reasons. (1) You do not even know how to create the financial statements he is talking about; and (2) It will take you several weeks to go through the 4 months of receipts you have in

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the file to run the totals (even once you know how to generate the statements). You decide to not pursue the loan because these statements are just too much work.

Which scenario would you rather be in? The point is that by entering your data into an accounting system and filing them properly as you go along, you can also generate various financial statements as you go along. These are not only beneficial for your banks, but more importantly, for you as the business owner to analyze the health of the business.

In the next section, we will explore how to use an accounting program and proper paper filing procedures in your business.

Use Accounting Software To Make Financial Statement Preparation A Breeze

A good accounting system is one of the most important tools you will need for operating and maintaining your real estate business. It will be the central hub of all of your business financial records and activities. For example, you can generate your invoices from an accounting system, post payments, pay expenses, etc.

There are several accounting programs available today that will serve your purposes just fine, such as QuickBooks by Intuit (www.quickbooks.com), and Office Small Business Accounting by Microsoft (www.microsoft.com).

In this section, we will use QuickBooks as an example since it is the most popular accounting system used by businesses today. However, you should pick whatever accounting program that you are most comfortable with and that you will be most likely to use.

The first step in using an accounting software program is to install the program, and then set up a new company profile. To set up a profile for a new company using QuickBooks, you select the button that says “Create a New Company”, as is shown in Figure 2-1.

A wizard will then begin that walks you through each of the steps to setting up a new company profile.For example, you will be guided through entering the company name, address, phone number, and tax year.

You will be prompted to specify whether or not you use the cash method of accounting, or the accrual method of accounting.

Figure 2-1


Using the cash method of accounting, you report the income that you receive from customers as income only once your customers actually pay you. With the accrual method of accounting, you report income when you submit an invoice to the customer, regardless of how long it takes them to pay you. What this means is that with the accrual method of accounting, you could be responsible for paying income tax on work that you have not yet been paid for. Each method of accounting has its pros and cons, but most businesses use the cash method of accounting because it is easier to understand if you do not have a background in accounting.

Once you are finished with the Wizard, you will be prompted to specify whether you want to take the QuickBooks tutorial, or whether you want to start working in the program. This is shown in Figure 2-2.

Once you start using QuickBooks, you will usually start with the main navigation menu which is displayed in a flow diagram format, as shown in Figure 2-3. This diagram makes it easy for you to access different parts of the software depending on what part of the accounting process you are working in. For example, this interface shows you that after you enter bills, you then pay the bills. Upon selecting the respective item in the navigation menu, it will open that part of the software so you can perform that particular task.

This interface in

Figure 2-2

Figure 2-3


Figure 2-4

Figure 2-5

QuickBooks is really easy to use, and if you need help on a given topic, there is excellent help built-in to the software, and also on the QuickBooks web site.

If you prefer, most accounting programs such as QuickBooks will also integrate with your online bank account. What this means is that it can download your bank statement electronically and automatically post those entries to your company profile. This makes it easier to reconcile your checkbook with your accounting system.

One of the biggest advantages to using accounting software like QuickBooks is the ability to generate financial reports upon demand. Examples of the QuickBooks Report Center are shown in Figures 2-4 and 2-5.

If your banker calls you and says he needs a cash flow statement, income statement, and balance statement, you can generate these reports within a few mouse clicks.

Furthermore, when tax time comes around and you are ready to prepare your company tax return (or have an accountant do so), you can easily generate the reports that will be needed to enable you to complete your tax returns quickly.

The Spotlight on Accounting Processes that is contained earlier in this module gives you an explanation of a simple 3-step accounting process that you should use in your business, which includes using an accounting software program such as Quickbooks.

Let’s now talk about how you should file your invoices and receipts once they are entered into your accounting system.


Organize Your Income and Expense Receipts So That Anyone Could Find Them

Although you will be using an accounting system, you still need to keep your paper files organized. The IRS requires you to maintain your receipts to prove your income and expenses.

Thus, once you have entered a given expense or income item into the accounting system, you should file those paper records into an organized filing system. There are numerous ways that you can arrange your files based upon your type of business. Some general categories are shown in Worksheet 2 that you should consider creating for storing your files once you (or your bookkeeper) have entered them into an accounting software program. You can also further sub-divide these depending on how many different accounts you have, so any one file does not get too large.

You should now take a moment and review the worksheet called Labels You Can Use For Organizing Your Income and Expenses that is contained in Appendix B. The instructions for Worksheet 2 are contained on the following page.

As noted earlier, for a complete summary of an entire accounting process you should use in your business, please review the Spotlight on Accounting Processes that is contained earlier in this module. Keep Your Business Records Separate From Personal Records Or Jeopardize All Your Assets

It might be tempting to pay some of your personal bills from your business checking account, but this is an absolute “No-No”. So don’t even think about paying your house payment from your corporate checking account. It is critically important that you maintain your personal records separately from your business records.

One reason it is so important for you to maintain your peraonal records separately from your business records is because you can lose the protection that you are given by any separate legal entity you formed

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Labels You Can Use For Organizing Your Income and Expenses

Make a copy of this page and use these for your file folder index tab labels (or re-create similar labels using a label-maker program that comes with stick-on label kits).

Income Bank Loans

Utility Bills

Insurance Expense Reports

Bank Statements OfficeSupplies

Here are some extra ones too:

Credit CardStatements

WORKSHEET 2

You can place this worksheet that is contained in Appendix B on a copy machine and then cut out these tabs to use for organizing your income and receipts. You can also create your own labels as desired.

Money Tracking And Accounting: Creating Your Own Fort Knox42 Money Tracking And Accounting: Creating Your Own Fort Knox

if you co-mingle your personal assets and your business assets together. In other words, someone could try to “pierce the corporate veil” and get at your personal assets by arguing that you and the corporation were really just one and the same anyway, because you acted like it.

Another reason it is important that you maintain your personal records separately from your business records is because it makes it much easier to identify the health of the business. If your house payment is mixed in with your business expenses, it makes it really difficult to see how well the business is actually performing.

So here are some tips for how you can make sure you maintain your personal and business expenses separately. In the situations where you pay for something out of your personal funds that is really a business expense that your business should

pay for, submit an expense report to the business and then have the business reimburse you. You should attach the original receipt to the expense report so that it becomes part of the official company records.

An example of an Expense Report worksheet you can use to submit expenses you paid for out of your personal funds to your business for reimbursement is included in Appendix B as Worksheet 3.

There may be some situations where you do not have the funds in your business account to reimburse yourself personally. In such situations, you can either make a loan from you to the company to document how those personal funds got into the business account, and then make payments to yourself on the terms you specify.

Or, you can purchase additional shares of stock in your company with the funds that you need to get into the company banking account. This latter scenario only applies if you formed the type of company that issues stocks or units of membership (like corporations and LLC’s do) and if the terms specified in the Operating Agreement allow the additional stocks or units of membership to be purchased.

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SUMMARYThis Chapter covered several important concepts necessary for maintaining your company in good standing over time. You are now armed with knowledge of how to create your own personal Fort Knox for your business - one that is solid and sustainable.

It is important that you start establishing a credit history for your new business. Since a new business has no credit history, you have to personally guarantee any loans that are made to your business. This means that your personal credit history is very important.

In the event that you have poor personal credit, you can still start establishing a credit history for your business using the concept of secured loans. With a secured loan, you have to give the bank the amount of the credit line up front to secure the account. You are really just borrowing your own money back, but at least you will start establishing a history for your business so it can stand on its own in the future.

It is also critical to use the proper accounting process in your business. Part of this accounting process involves using an electronic accounting system. Here are some examples of accounting systems:

Intuit QuickBooks (www.quickbooks.com)Microsoft Office Small Business Accounting (www.microsoft.com)

By using an accounting system, you can easily generate financial reports upon demand at tax time, or when your bankers request them. Once the income and expense records have been entered into your accounting system, it is then important that those paper documents get filed into the proper categories in your filing system. You need to make it super-easy to locate any document in the future.

You may want to setup credit card processing for your real estate business, such as if you need to accept rent payments from tenants by credit card.

You can open your own merchant account through providers such as Authorize.NET. But the easiest way to accept credit cards is through PayPal (www.paypal.com).

It is worth noting that Paypal sometimes holds back a higher percentage of the transaction in case a customer disputes the transaction in the future. So you may want to just get your own merchant account with a bank or through an Authorize.NET provider.

You need to make sure and keep your business records separate from your personal records if you want to maintain a limited liability status for your company (assuming you formed one with limited liability status to begin with).

For example, you never want to pay your house payment out of your business checking account. Any time you pay for a business expense with your personal funds, you should submit an expense report to the company for reimbursement, or make a loan to the company until it can pay you back.

In all things you do for your business, remember to always treat your business like a separate entity, and not just part of your own personal accounts. That rule will help you stay on track.

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45

INSURANCE BASICS

IN THIS CHAPTER, we will explore the reasons why insurance is so important to your real estate business and to ensuring its sustainability.

As you probably already know, insurance is a contract (called an insurance policy) where one party (insurer) agrees to pay another party (insured) for losses affecting the insured’s interests (the insurable interest). The insured pays a premium to the insurer in return for the coverage. Let’s be honest here. None of us likes to pay for insurance. When things are going well, it can be very easy to think you don’t need insurance.

However, if you have just ONE incident go wrong, such as a tenant who falls through a floor in one of your rental properties, or someone who gets hurt on your construction site, you’ll sure be glad that you had insurance to cover that incident.

You may be wondering how the insurance companies can even stay in business even though they pay out so much if you have a claim? Well, the insurance company counts on the fact that most people will not have a major event in any given period.

So insurance companies make a lot of money as a whole and can afford to pay out a large amount for a claim in the instances where it happens. And if and when you are one who has a major event happen, wouldn’t you rather be protected through insurance than face a claim that could possibly bankrupt your real estate company?

You can best think of insurance as:A Moat Around Your Castle

You learned in Chapter 1 how important it is to file the proper entity to give your real estate company limited liability protection. You can think of insurance as adding another layer of defense around your company, as well as providing a capital infusion to cover a loss that you otherwise couldn’t afford to pay for out of your own revenue.

In this Chapter, we will also explore several types of insurance that are available so you can better understand the options that are available to your real estate company. There are tons of insurance policies out there that you don’t need. In fact, there is an insurance policy available for nearly anything you can imagine.

As a practical matter, however, you don’t need to buy every insurance policy that exists. You just need to purchase insurance for the biggest risks that your company faces through its operation. And there are certain policies that any real estate company should have in its arsenal of defense.

Let’s take a look at some of these types of insurance in more detail and explore which ones are the most important to consider for your real estate company.

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Insurance Basics46

ABOUT THIS CHAPTERIn this Chapter, we will explore the most common types of insurance that you should consider for your real estate business. Insurance adds another level of protection for your business beyond the limited liability shield that you hopefully formed based upon the concepts in Chapter 1. More specifically, this Chapter covers:

Types of Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Ensuring Contractors/Companies You Work With Have Adequate Insurance. . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

page 47

page 50

page 51

The training videos for Chapter 3 will teach you how to add another layer of protection around your business through proper use of insurance.

More specifically, the videos will explain the different types of insurance, and how to determine which ones you need to carry and which ones you don’t need to carry.

The following Worksheet for this Chapter is included in Appendix C:

Worksheet 1: Insurance Brainstorming • Worksheet

Insurance Basics 47

Types Of Insurance

There are various types of insurance available to add additional layers of protection for your real estate company. However, you do not necessarily need to buy every type of insurance that is available. A lot of insurance companies may try and pressure you into buying more coverage than you really need.

Let’s walk through some of the most common types of insurance at a high level, and cover those which offer the best protection for you and your real estate company.

Property & Casualty Insurance• - Property insurance protects a person or business with an interest in physical property against its loss or the loss of its income-producing abilities. This can include repairing or replacing real estate due to damage caused by fire, storm, etc. This can also include theft of personal property. Casualty insurance mainly protects a person or business against legal liability for losses caused by injury to other people or damage to the property of others. For rental properties, property and casualty are usually bundled together into a single policy. For the home you live in, this is generally included in a Homeowner’s Policy. On your Homeowner’s Policy, you should also consider adding a Home-Based Business Rider and Addendum, when applicable. And you definitely should take out a property & casualty policy insurance for each and every piece of real estate that you own. You should generally consider obtaining an Extended Form Policy, or H03 type of policy, when possible, since they give you additional protection. These policies are so important because they protect you against major damage to the property itself, as well as from liability you face on a potential “Slip and Fall” claim.

Personal Umbrella• - A personal umbrella acts as protection for you on a personal level once your other policies have been exhausted. If you cause an accident or other wrongdoing (such as an automobile accident), you could lose some or all of your personal assets (your house, your car, etc.) to pay the claim if you don’t have an adequate personal umbrella to step in and pay the claim. If your real estate corporate umbrella is broken and your corporate assets exhausted, a personal umbrella can help protect your personal property so that your personal assets are not seized. Most personal umbrella insurance policies can insure liability at huge numbers, often starting in the millions. Furthermore, a personal umbrella extends to the operation of automobiles, and additional liability that comes from ownership of your home and rental properties. This type of policy is definitely one you should consider purchasing as an additional level of defense.

Worker’s Compensation• - Worker’s compensation insurance is designed to provide compensation and/or medical care for employees who are injured in the course of employment, in exchange for the employee not to sue his employer. If an employee is injured in the course of and arising out of his/her employment and needs medical care, this protects you from losing the assets of the company to pay for the medical and other related claims due to the injury. If you have any employees, you are required by law in some states to carry this type of insurance. In other states it is optional, but highly recommended. Most payroll companies have an affiliated worker’s compensation company or policy, so they make it easy to carry worker’s compensation insurance for your employees. The amount of the premiums for worker’s compensation insurance is generally based upon the type of jobs your employees perform (i.e. how risky) and/or the size of your payroll (i.e. how much you pay your employees). It is usually generally very inexpensive to carry worker’s compensation coverage in comparison to the overall cost of your payroll. Note that it is also important that you verify that

Insurance Basics48

Insurance adds another layer of protection to your business in addition to the limited liability shield that you should also have if you formed the proper entity.

You can also think of insurance as adding a cash infusion for high priced liability incidents that your real estate company could otherwise not afford to cover.

Insurance Basics 49

any companies you hire to work for you have both workers compensation and basic liability insurance.

Commercial Liability• - A commercial liability policy is usually the first line of defense against many common claims against your real estate company. This type of insurance is frequently offered in a package with Property Insurance to protect against incidents that occur on your property to allow your business to continue operations while you face real or fraudulent claims of certain types of negligence or wrongdoing. This type of policy provides added protection in addition to your Property & Casualty Insurance. For example, it can also cover damages or injuries caused by your employees at a client’s site (as opposed to on your own property). This can add further protection for your business assets, such as for claims that can arise away from your property.

Commercial Umbrella• - A commercial umbrella is very similar to a personal umbrella described earlier, only it is for your company and not you personally. A commercial umbrella provides additional coverage when the limits of insurance on an underlying business policy are exceeded. It then steps in to pick up the additional amount of coverage. For example, if you have $1,000,000 coverage under a commercial liability policy and you have a claim settlement for $1,500,000, the commercial umbrella policy covers the additional $500,000 of the liability.

Title Insurance• - Title insurance can safeguard your business against financial loss from defects in the title to the real property or the invalidity or unenforceability of mortgage liens. In other words, title insurance protects an owner’s or a lender’s financial interest in real property against loss due to title defects, liens, or other matters.

KeyOfficer/EmployeeInsurance• - Key officer/employee insurance is a life insurance policy that you take out on a key officer or employee of the company to help carry the business through that person’s death. If you have a business that would face bankruptcy or significant financial challenges if it lost a key officer or employee due to death, you may want to consider this type of policy. But otherwise, it is generally unnecessary.

Self Insurance• - Self insurance is a concept that can apply to many of the other types of insurance discussed herein. Self insurance is when your company sets money aside into an account to pay claims that may later arise. There are self insured medical policies, self insured liability policies, etc. There are many agencies that can help manage a self insurance policy. Some self insurance policies allow you to join forces with other companies to pool your money as a group to help offset the loss that any one of the participating companies may face. Self insurance is generally a bad idea for small companies because they typically do not have sufficient revenue to set aside for a large claim.

EmployeeBenefits/Insurance• - There are various types of insurance that you can offer through your business in a group policy to your employees. This can include health insurance, dental

Who Would You Rather Be?

Un-Insured

or

Insured

Insurance Basics50 Insurance Basics

insurance, life insurance, disability insurance, etc. It typically takes two or more participants to form a group policy, but this can vary depending on the type of insurance and the specific requirements that the insurance carrier may have.

There are numerous other types of insurance policies that are available that we did not discuss here. The key point with insurance is to first identify what the biggest operating liabilities and risks are for your company. Then, you should carry the types of insurance that will provide you the maximum amount of coverage for the areas you face the biggest risk of liability.

To further help you determine the types of insurance you may want to carry, we have included an Insurance Brainstorming Worksheet in Appendix C.

Ensuring Contractors/Companies You Work With Have Adequate Insurance

You learned in the earlier section of this Chapter why it is critical that your real estate company have adequate levels of insurance to cover you biggest risks. However, many business owners overlook the fact that it is also important that you ensure the contractors and/or other companies you work with also have adequate insurance when they are working on your property or with your employees or clients.

For example, if you hire a contractor to work on your real estate and that contractor injures someone on your property, both you and the contractor could face liability for his harm.

Thus, you should request that the contractors you use provide you with a copy of their commercial liability insurance policy, or that they have their insurance company fax you what is called a “Binder of Coverage” that proves they have liability coverage in an adequate amount.

As another example, if you lease out one of your properties to another company or individual, you should make sure that either you or your tenant continue to carry the property and casualty insurance on it. If you allow the tenant to carry the

property and casualty insurance, you will want to ensure that they have their insurance company list you as an additional named insured on the policy, and that they have their insurance company send you proof each year that the policy has been renewed in adequate amounts. You must ensure you are protected in the event that a catastrophic event happens on your property, even if there is a tenant occupying that property.

Key InsuranceHere are some of the most common types of insurance that any real estate business should consider carrying:__ Property & Casualty Insurance On Any Real Estate__ Personal Umbrella On The Owner(s)__ Commercial Liability Insurance__ Commercial Umbrella Insurance

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Insurance Basics 51

SUMMARYWhen things are going well, it can be very easy to think you don’t need insurance. However, if you have just ONE incident go wrong, you’ll sure be glad that you had insurance to cover that incident.

Insurance companies count on the fact that most people will not have a major event in any given period. They make a lot of money as a whole and can afford to pay out a large amount for a claim in the instances where it happens.

If you are the one who has that major event happen, you will sure be glad you are protected by insurance.

You learned in Chapter 1 how important it is to file the proper entity to give your real estate company limited liability protection. You can think of insurance as adding another layer of defense around your company, as well as providing a capital infusion to cover a loss that you otherwise couldn’t afford to pay for out of your own revenue.

You learned about several types of insurance that are available, such as:Property & Casualty Insurance• - Property and casualty insurance protects you against damage to physical property, as well as injury to other people or damage to the property of others.Personal Umbrella• - A personal umbrella acts as protection for you on a personal level once your other policies have been exhausted. Worker’s Compensation• - Worker’s compensation insurance is designed to provide compensation and/or medical care for employees who are injured in the course of employment, in exchange for the employee not to sue his employer. Commercial Liability• - A commercial liability policy is usually the first line of defense against many common claims against your real estate company. Commercial Umbrella• - A commercial umbrella is very similar to a personal umbrella described above, only it is for your company and not you personally. Title Insurance• - Title insurance can safeguard your business against financial loss from defects in the title to the real property or the invalidity or unenforceability of mortgage liens. KeyOfficer/EmployeeInsurance• - Key officer/employee insurance is a life insurance policy that you take out on a key officer or employee of the company to help carry the business through that person’s death. Self Insurance• - Self insurance is when your company sets money aside into an account to pay claims that may later arise. EmployeeBenefits/Insurance• - There are various types of insurance that you can offer through your business in a group policy to your employees, such as health insurance, dental insurance, life insurance, disability insurance, etc.

There are insurance policies available for nearly any type of risk you can imagine.

As a practical matter, however, you don’t need to buy every insurance policy that exists. You just need to purchase insurance for the biggest risks that your company faces through its operation. And there are certain policies (such as many of the ones above) that any real estate company should have in its arsenal of defense.

53

COMMON REAL ESTATERISKS/CONCERNS

THERE ARE ALWAYS RISKS in business, but the key is to minimize your risks as much as possible.

This Chapter will explore some of the most common risks and concerns that arise in a typical real estate business, and some steps you can take to minimize those risks.

Once you become aware of what these risks are, there are some simple solutions that can help you minimize most of them.

For example, many real estate investors do not realize that there are “owner of record” (seasoning) requirements that must be met before certain types of financing can be obtained for a piece of real estate. A great deal can be spoiled in an instant if your financing falls through because you haven’t met the owner of record requirements.

Another common issue that arises when purchasing real estate is to make sure you get the proper type of deed, and that you get exactly what you think you are getting. We will explore the most common types of deeds and discuss what you should look for in your deeds.

One of the biggest risks that can kill the profits of your project is unrealistic budgeting and estimating. This Chapter covers how to get a handle on your cost and time estimates and to keep them on track so you don’t end up flushing all your profits down the toilet by going over-budget.

Yet another problem that can arise involves obtaining the proper building permits. If you start remodeling or new construction without the proper permits, you are asking for trouble. You can face steep penalties by not having the proper permits, or even worse, have a “stop work order” issued where you are required to stop the project until the issues are addressed adequately.

Furthermore, most people don’t realize how important it is to pay your property taxes on time. Every state in the United States has laws that authorize county government offices to hold a tax sale to collect past due property taxes.

At these tax sales, members of the public can step up and pay property taxes on behalf of a delinquent property owner. In return, they are either rewarded with a really steep interest rate, or may even obtain title to the property. This Chapter will explain how to avoid these property tax problems, and what to do if you ever face them.

And finally, this Chapter will discuss the importance of having the proper operating procedures in place for your business to ensure that your projects progress smoothly on a regular basis. Sure, problems will creep up on you at times, but by having solid operating procedures in place, you can minimize the number of problems that arise.

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Common Real Estate Risks/Concerns54

ABOUT THIS CHAPTERThis Chapter covers some of the most common risks and concerns that any real estate company should address. More specifically, this Chapter covers:

“Owner of Record” Requirements (Seasoning) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Get The Proper Deed Upon Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Realistic Budgeting/Estimating of Remodeling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Obtain Proper Building Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Importance Of Paying Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Have The Proper Operating Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The training videos for Chapter 4 will explore some of the most common risks that a typical real estate company will face.

More specifically, the videos will explain how and when these problems can occur, and what measures to take to avoid the problem or minimize its negative impact.

The following Worksheet for this Chapter is included in Appendix D:

Worksheet 1: Operating Risk • Mitigation Checklist

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Common Real Estate Risks/Concerns 55

“Owner of Record” Requirements (Seasoning)

One of the challenges faced by nearly any real estate company is how to obtain financing for your next deal. Sometimes banks or other lending institutions can be a viable source of funding, and other times, private investors are the only option available.

It is important that you be aware of any “owner of record” requirements that any lender you are working with may have. Owner of record requirements are also often referred to as “seasoning requirements”.

What this means is that some banks may require that you have owned the property in the same individual or company name and for a certain period of time before they will allow that individual or company to obtain a mortgage on that property. This time period can vary, but is often between 91 days and one year.

Owner of record requirements commonly present problems when you are trying to re-finance a property that you acquired recently and have not held long enough to meet a lender’s requirements, or when you are trying to quickly re-sell the property.

A detailed discussion of this subject is beyond the scope of this Chapter, but for now, just be aware that banks or other lending institutions may have requirements on how long you have to own a property before they will loan money against it if you choose to re-finance, or before they will loan money to someone else to buy it. Be aware of that concern before you buy the property, because it will help you better address the issue during and at the end of the transaction.

Get The Proper Deed Upon Purchase

Whenever you purchase real estate, it is critical that you obtain the type of title that you are expecting. In other words, you need to ensure that you are getting the exact property that you think you are getting (in terms of boundaries), and that you are getting the level of ownership that you are expecting.

There are various types of deeds, but the most common are the Warranty Deed and the QuitClaim Deed. There are two types of Warranty Deeds: a General Warranty Deed and a Special Warranty Deed. Let’s look at each of these in more detail.

General Warranty Deed: This deed provides the highest level of protection for a buyer. Here, the seller is conveying the property with certain legally binding covenants or warranties.

These warranties can be written into the General Warranty Deed, or implied by certain words:Covenant of Seisin• - Seisin means possession, and the seller warrants that they own the property and have the legal right to convey it. Covenant Against Encumbrances• - The Seller warrants that the property is free of any liens or encumbrances unless they’re specifically stated in the deed. Covenant of Quiet Enjoyment• - The Buyer is guaranteed that the title will be good against third parties attempting to establish title to the property. Covenant of Further Assurance• - The Seller promises, in order to make the title good, they will deliver any document or instrument necessary.

Common Real Estate Risks/Concerns56

What is unique about the General Warranty Deed is that the covenants or warranties do not cover just the period of ownership of the Grantor. They extend back to the origin of the property. Each Grantor of a general warranty deed in the title chain would be liable for title problems before and through their ownership.

The second type of Warranty Deed is the Special Warranty Deed. The Special Warranty Deed is not nearly as protective of the buyer as is the General Warranty Deed.

The grantor of a Special Warranty Deed conveys the property with two warranties:The Grantor warrants that they have received title. • The Grantor warrants, unless noted specifically in the deed, that the property was not encumbered • during their period of ownership. This means that the Grantor only warrants the title against his own actions or omissions. The Grantor warrants nothing prior to their taking title. If specifically stated in the deed, other warranties can be conveyed. Special warranty deeds are frequently used by executors and trustees.

A Quitclaim Deed is the least protective deed for the buyer. Basically, it only conveys whatever rights or interests the Grantor has in the property. It provides no warranties or covenants to the Buyer. If the Grantor has good title, the Quitclaim Deed is as effective as a General Warranty Deed, but with none of the guarantees. If the Grantor has no title at all, then the Grantor gives the Buyer “nothing at all”. Quitclaim Deeds are frequently used to cure defects in the title and to transfer property between family members.

The point is that you will want to ensure that you get the type of deed that you are expecting from the transaction. If you are expecting to receive the highest form of title available, then you would want to obtain a General Warranty Deed. Title insurance is very important to help insure that you are getting exactly what you think you are getting.

You will also want to review the legal description that is contained in the deed to make sure that you are getting exactly what you think you are purchasing. For example, if you are purchasing a duplex that sits on two lots, you will want to ensure that the legal description covers the duplex and both lots. The original owner may, for example, have acquired a property under multiple deeds, and the legal description may only get carried forward from one of them.

Since most people are not experts when it comes to reading a deed and tracing the chain of title at the courthouse to ensure that you are getting good title, it is a good idea to purchase title insurance. The title insurance company bears the burden of discovering exactly what you are buying, and providing you insurance that guarantees you are getting exactly what you think you are getting or they are held liable for correcting the title problem.

In other words, title insurance is indemnity insurance that safeguards against financial loss from defects in the title to the real property or the invalidity or unenforceability of mortgage liens. Title insurance is meant to protect an owner’s or a lender’s financial interest in real property against loss due to title defects, liens, or other matters.


For example, title insurance will provide you with a defense against a lawsuit attacking the title as it is insured, or allow you to be reimbursed for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Although a vast majority of title insurance policies are written on land, title insurance can be purchased to insure any interest in real property, including an easement or a lease.

Realistic Budgeting/Estimating of Remodeling

One of the biggest pitfalls that real estate companies often face is having the project go over budget. For example, a particular property may end up costing a lot more to repair than you expected, or it may take a lot longer to finish than expected.

Thus, it is critically important that you take the proper measures to ensure that your time and monetary budget for performing the construction or repairs to a given piece of property are as accurate as possible.

There are several ways to help ensure you obtain realistic budgets. One way to ensure that you estimate the cost of repairs accurately is to have an experienced contractor or someone else who is very experienced at assessing the damages that exist to a property give you guidance on what it will cost to make any critical repairs, and also on what it will cost to make any cosmetic changes that you may desire.

You should typically obtain estimates from more than one contractor so you can have something to compare. One contractor may notice something that the other did not.

Another way to help ensure that your estimates are as accurate as possible is to use automated estimating tools to give you computer-generated project estimates for what a project should cost.

One example of such an estimating tool is HammerPoint Project Manager, which is included in the Pro edition of Realeflow (www.realeflow.com). Realeflow Pro can produce professional quality work estimates in just a few minutes. HammerPoint Project Manager uses national indexes to estimate the average cost of repairs for almost anything you can think of.

You could even do both of these in combination: get a quote from one or more experienced contractors, and then compare it to the estimates you receive from an automated estimating tool such as the one included in Realeflow Pro.

Obtain Proper Building Permits

Whenever you build a new structure or remodel an existing structure, you should ensure that you obtain the proper building or other permits that are necessary. For example, many people do not realize that

Common Real Estate Risks/Concerns58 Common Real Estate Risks/Concerns

exterior items such as a storage building or an in-ground pool may require a building permit.

In some cases, you may even need to obtain a zoning change or a variance to allow you to build something on a piece of property that it is not otherwise already zoned for. An example of when a variance or zoning change could be necessary is when you want to build a commercial building on a lot that is zoned for residential use, or vice versa.

Some real estate companies get into trouble when they solely rely on contractors to obtain the necessary building permits. It is certainly fine to allow your contractors to obtain the permits. But if they don’t, you need to be aware that as the property owner, you are the one who is still responsible in the event of a problem and would be liable for paying any fines to correct the issue.

Importance Of Paying Property Taxes

Another issue that you need to be aware of is just how important it is that your real estate taxes be paid in a timely fashion. Many people do not realize that the county government offices across the country have the power to hold a tax sale with the public to help collect past due property taxes. Members of the public (individuals or businesses) can then attend the tax sale and pay the past due property taxes.

The property owner is then faced with paying either a steep interest rate to the person who paid the taxes, or to face losing title to the property. Think about that for a minute. What we’re saying is that you can lose title to your property if you don’t pay hefty penalties and interest to redeem it from tax sale.

If you are the person investing in tax liens, this is a great deal for you. You can either get a huge rate of return on your money (usually ranging from 15-40%), or you can obtain title to the property if the property owner doesn’t pay the penalties and interest to redeem the property from the tax sale.

If you are the property owner, the way to avoid this problem is to simply pay your property taxes on time. And if you are late on paying your property taxes, make sure you pay them prior to any tax sale to avoid these additional penalties and risks!!

Have The Proper Operating Procedures

It is also important that you have proper processes in place for handling common operations of the company. For example, if you are a company that leases out real estate, you will want to have detailed procedures for advertising available properties, tenant selection, evictions, repairing properties, etc.

These procedures can save you a ton of time and money because you use a consistent process each and every time. If you and your team are not efficient and consistent in how you handle common operations, you may be flushing a lot of potential profit down the toilet.

An Operating Risk Mitigation Checklist is included in Appendix D. This checklist covers several of the concepts discussed in this Chapter in a checklist format.W


SUMMARYYou learned about the most common risks and concerns that arise in a typical real estate business and some steps you can take to minimize those risks.

You learned about “owner of record” (seasoning) requirements that must be met before certain financing can be obtained for a piece of real estate. Properties typically must be held for 6-12 months before a bank or other lending institution will allow the property to be re-financed (such as if you want to pull out your equity as profit).

You learned about the importance of making sure you obtain the proper type of deed when you purchase real estate, and that you get exactly what you think you are getting.

You learned about Warranty Deeds and the fact that they come with the assurances that you are getting clear title, and about QuitClaim Deeds and the fact they have no warranties or assurances. Title insurance is really important to obtain to provide you with insurance coverage to guarantee that the deed is conveying what the title company says you are getting (and that you are expecting).

You also learned about the numerous problems you can face if you don’t budget and estimate your construction or remodeling projects accurately. You can obtain multiple estimates and use computer generated estimates to help ensure that the projects are completed on time and on budget. Realeflow Pro (www.realeflow.com) includes an estimating tool that you may want to consider using for your remodeling projects.

The importance of obtaining proper building permits was also discussed. If you start remodeling or new construction without the proper permits, you are asking for trouble. You can face steep penalties by not having the proper permits, or have your project totally stopped until you address the permit issues adequately.

One of the best kept secrets (or risks) in the real estate industry is the power that county government offices have to sell your real estate at tax sale for just the price of past due taxes that are owed. The person or company who pays the back taxes to the county is either rewarded with a high interest rate return, or they can obtain title to the property.

So if you are the property owner, you want to make sure you pay your property taxes before a tax sale ever occurs, or it will cost you dearly! You will either have to pay huge penalties and interest if you let your property go to tax sale, or you can face losing title to the property.

And finally, you learned about the importance of having the proper operating procedures in place for your business to ensure that your projects progress smoothly on a regular basis. For example, you learned about having standard procedures for handling tenant screening, evictions, remodeling projects, etc.

There are always going to be issues that can arise from time to time. But by having solid operating procedures in place, you can reduce both the frequency and cost to address any problems when they do arise.

61

IMPORTANCE OFLEGAL AGREEMENTS

DID YOU KNOW THAT a large majority of the problems that are commonly encountered with third party vendors can be avoided altogether if there is just a proper written agreement between parties?

Let’s face the facts. Way too many deals are done on a hand shake these days. While both parties may have good intentions, it is important to note that memories can fade over time, and/or complex situations can arise that neither party even thought of.

The mere act of putting down an understanding between two parties into a written agreement helps both parties think through various possible outcomes, and allows for both parties to then plan for a mutually agreeable way to handle such situations, should they arise.

It is important to note that no matter how good your written agreements are, there are some problems that you just cannot avoid. For example, no matter how good your agreements are, it doesn’t help you much in the event that your vendor declares bankruptcy and has no means to pay you.

But such situations are not nearly as common as misunderstandings between the parties over “what the terms of the deal really were”. Thus, the large majority of problems can be avoided or minimized by the proper agreements.

This Chapter will explore various types of agreements and the situations in which you should use them in your real estate business. It would be impossible to cover every type of agreement and every possible scenario, but if you follow these two general rules, they will serve you well:

Every time you hire another individual or company to do something for you,formalize it with a written agreement

andEvery time another individual or company hires you to do something for them,

formalize it with a written agreement

You may be wondering whether emails back and forth can be sufficient. In most cases, they are not sufficient, although they are one step above an oral agreement. The problem with agreements that are formed with emails going back and forth is that it is not clear which version included what terms, and whether both parties agreed to all of the terms. A single document that has the signature of both parties is always the best type of agreement.

This may sound a little overwhelming, but we have great news for you. This course comes with tons of sample agreements that you can use as a starting point for most scenarios you will encounter in your real estate business. You can then consult an attorney if you need to customize these agreements for your specific situation.

W WorksheetsVideo W

Importance of Legal Agreements62

ABOUT THIS CHAPTERIn this Chapter, you will learn about how critically important it is that you use the proper written agreements for various aspects of your real estate business. You will also learn about the most common types of agreements you should use for specific situations you will encounter. More specifically, this Chapter covers:

Importance of Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Contractor Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Employee Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Investor Agreements With Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Purchase Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Finance Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The training videos for Chapter 5 will teach you how to further protect your real estate business through the proper use of written agreements.

More specifically, the videos will explain the different types of agreements you should use, and in what circumstances.

The following Worksheets for this Chapter is included in Appendix E:

Worksheet 1: Agreement Checklist•

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Importance of Legal Agreements 63

Let’s jump right in and look at the types of agreements you should have in your real estate company’s arsenal.

Contractor Agreements

Any time you are ready to hire a contractor to repair or construct real estate, it is critically important that you have a written agreement with the contractor which spells out the scope of the project. Such an agreement is called a Scope of Work Agreement.

Here are some of the key provisions to include in a Scope of Work Agreement:_____ The names and addresses of the parties_____ The address(es) of the property to be repaired/constructed_____ A detailed description of the scope of the project_____ The timeline the project should be completed within_____ The payment terms for how and when the contractor will be paid_____ A statement confirming that the independent contractor shall pay his/her own income taxes_____ The materials/equipment that the contractor is supplying_____ The materials/equipment that you are supplying_____ Terms for handling changes that may become necessary (such as through Change Orders)_____ The signatures of both parties

If you are going to be sharing any confidential details about your real estate business with the contractor, you should also have the contractor sign a Confidentiality Agreement.

A ConfidentialityAgreement includes terms that specify what types of details the contractor shall keep private and for how long.

You may also hire independent contractors from time to time to perform work that is not related to construction or repairs. In such situations, you should have the contractor sign a Professional Services Agreement.

A Professional Services Agreement spells out the terms of what you are hiring the contractor to perform, for how much, and so on. It contains similar provisions as the Scope of Work Agreement described above, but is not focused on construction terminology.

An example of a Professional Services Agreement is included in the Agreements Workbook.

IMPORTANT NOTESpecific examples for all of the agreements that are mentioned in this Chapter are included in the Agreements Workbook. More details on some of these agreements are also discussed in the respective modules on flipping and buying and holding.


Employee Agreements

Any time you hire an employee, there are several types of agreements you should consider having the employee sign. These include an employment agreement, confidentiality agreement, and non-compete agreement. Let’s look at each of these in further detail.

An Employment Agreement is the most important agreement that you should have an employee sign. An Employment Agreement describes various terms between your company and the employee that are to be followed.

Here are some examples of the types of provisions to include in an Employment Agreement:_____ The names and addresses of the parties_____ A job description that the employee is expected to perform_____ The location where the employee is expected to work_____ The hours/schedule that the employee is expected to work _____ The salary or hourly compensation and benefits that are being paid to the employee_____ A statement clarifying that the Employer shall own the intellectual property that the employee creates during his performance of the job (This is explained in more detail in Chapter 7 on Intellectual Property)_____ The signatures of both parties

In addition to an Employment Agreement, you should also have the employee sign a ConfidentialityAgreement. You can either include confidentiality clauses directly within the Employment Agreement, or have a separate Confidentiality Agreement signed.

As described previously, a Confidentiality Agreement specifies what type of information being shared with the employee is to be kept in confidence by the employee, and for what duration.

Another agreement that you should consider having an employee sign is a Non-Compete Agreement. Non-compete agreements are appropriate for the types of positions where it would be really harmful to your company if the employee left and obtained a similar position with a competitor.

In order to be enforceable, Non-Compete Agreements must be reasonable in geographic region, time frame, and scope of tasks being restricted. For example, if you write a Non-Compete agreement in a way that would make it nearly impossible for the employee to ever get another job again in the current state, then the courts would not enforce such an unreasonable agreement.

However, what is ultimately reasonable in a Non-Compete Agreement totally depends on the circumstances of your company and the type of business you are in, and how restrictive the Agreement is on the employee’s ability to earn a living in the future. Many courts consider two years to be a reasonable time frame.

In terms of geography, what is reasonable to include as a restriction totally depends on the type of business you are in. In some cases, a national restriction might be reasonable, but in other situations,


it would be totally unreasonable. For example, if you are local real estate company serving only one county, it would be unreasonable for you to restrict the employee from going to another real estate company in a totally different county that you do not even serve.

Here are some key provisions to include in a Non-Compete Agreement:_____ The names and addresses of the parties_____ A description of the industry of the Employer_____ A description that explains the limits being placed on when, where, and what type of company the Employee can work for in the future_____ A statement indicating that the Employee agrees that this Non-Compete is reasonable_____ The signatures of both parties

Investor Agreements With Sellers

If you are assisting a particular seller with a short sale transaction, then it is critical that you have the seller sign an AffidavitofUnderstanding. A short sale transaction is one where the seller and the bank agree to sell the property for a lower amount than the mortgage that is owed on the property.

There are many types of agreements that are sometimes called an Affidavit of Understanding, but the Affidavit of Understanding that we are referring to here is one that makes it clear that the Seller understands the implications of proceeding with a short sale.

An Affidavit of Understanding for a short sale transaction should include some of the following key provisions:_____ The names and addresses of the parties_____ An acknowledgement that the homeowner is past due on the mortgage_____ An acknowledgement that the bank may or may not accept less than the mortgage owed _____ An acknowledgement that the homeowner may be subject to income taxes on any amount of the mortgage that the lendor “forgives” to allow the short sale to happen_____ An acknowledgement that the homeowner may face additional negative credit reporting issues due to the short sale if it moves forward_____ The signatures of both parties

Note that in the Finance Agreements section of this Chapter, some additional seller agreements are also discussed, such as a Deed, Note, and Mortgage, which can apply when the seller is carrying the financing for the deal.

Purchase Agreements

Whenever you purchase real estate, a Purchase Agreement should be used to itemize the various terms of the transaction. In fact, all sales of real estate MUST be in writing for it to be legally binding. So this is one of those instances where you are actually required by law to have a written agreement in order for you to have a contract that can be enforced.


Here are some of the key provisions that you should include in any Real Estate Purchase Agreement:_____ The names and addresses of the parties_____ The legal description of the property _____ The “commonly known as” address of the property_____ The amount of earnest money being paid_____ Any fixtures that are being excluded (if any)_____ The financing terms that the Buyer must be able to obtain before the agreement is enforceable_____ The period in which any inspections must be completed, if applicable_____ Under what terms either party can back out of the transaction (such as unsatisfactory inspection)_____ Who is responsible for paying the upcoming property taxes_____ Who is responsible for paying any surveys or appraisals_____ Who is responsible for paying the title insurance and other closing costs_____ When the closing must be completed by_____ The signatures of both parties

These are just a few examples of the types of provisions that are found in most Purchase Agreements for real estate. Realtors in each state have access to state-specific purchase agreements that will likely include provisions similar to the above.

If you are purchasing a property yourself without representation of a Realtor, or if you have legal questions related to the Purchase Agreement,

then you should consult an attorney in your state for specific advice on your situation.

There may be times when the purchase of real estate does not go through, such as due to a Buyer’s inability to get satisfactory financing, or to due problems discovered during inspection. In such cases, the Purchase Agreement was previously signed, but the parties are not going to proceed with the transaction.

In such situations, you should sign a Mutual Release Agreement to specify that you are releasing each other from the terms specified in the Purchase Agreement.

There also may be times when a problem arises related to the purchase of a property that the Buyer is willing to accept, but that the Seller will want to ensure causes him/her no further liability. In such an instance, the Seller should have the Buyer sign a Hold Harmless Agreement.

A Hold Harmless Agreement specifies the situation that exists that the specified Party is willing to assume all liability for moving forward, and to indemnify the other if further problems arise related to it in the future.

Note that there may also be other scenarios where the Buyer or the Seller may want the other to hold them harmless, and when such situations arise, a Hold Harmless Agreement should be used to specify the exact terms.

Finance Agreements

Whenever you obtain financing to purchase real estate, or whenever you are the one financing a


transaction, it is critically important that you have the proper written agreements in place to specify all the details.

There are various types of finance agreements, such as a Land Contract, Mortgage, Lease Option to Buy, or Option to Buy. Let’s look at each one of these in further detail.

If you are purchasing real estate from the current owner on contract, then you need to sign a Land Contract with that owner to specify all the terms of that purchase.

A Land Contract specifies the various terms under which the Buyer is able to earn equity in the real estate over time, and to ultimately obtain legal title (through a Deed) to the property when the financed amount has been paid to the Seller in full at a later point in time.

Here are some of the key provisions that should be included in a Land Contract:_____ The names and addresses of the parties_____ The legal description of the property _____ The “commonly known as” address of the property_____ The amount of money being paid as a down payment (if any)_____ The payment terms that the Buyer agrees to pay the Seller for the property _____ Details on whether or not the Buyer can make improvements to the property without getting consent of the Seller_____ Whether Buyer has the right to assign his interests in the Land Contract (such as to re-sell the property to someone else)_____ Who is responsible for paying the upcoming property taxes_____ Who is responsible for paying property and casualty insurance_____ The default terms for what happens if the Buyer defaults on any payments, and what can be done to cure the default_____ A provision stating that the Seller shall not further mortgage the property_____ When the closing must be completed by_____ The signatures of both parties

Once a Land Contract is signed, it should be recorded in the County Recorder’s Office just as you would a deed. This puts the world on notice that the Buyer has an interest in the real estate, such as if the Seller tries to further mortgage the real estate in the future.

Note that in some States, you may be required to also record a “Memorandum of Land Contract” with the Land Contract itself. A Memorandum of Land Contract is typically a 1 or 2 page document that specifies the existence of the Land Contract for the property having a certain legal description. It also specifies the names and addresses of the parties and a few other details.

You can contact your county recorder to find out if a Memorandum of Land Contract is required before they will allow you to record a Land Contract. If so, they can give you a sample from one that has been previously filed on the public record.

A Land Contract is one way that the Seller helps finance the purchase of the real estate for the Buyer.

Importance of Legal Agreements68 Importance of Legal Agreements

Another scenario where the Seller can help finance the transaction for the Buyer is called “sellerfinancing”.

Unlike a Land Contract, in the seller financing situation, the Seller is actually giving the Buyer title to the property immediately (at closing) in the form of a Deed. In such scenarios where the seller has agreed to finance the transaction through seller financing, then a Deed, Promissory Note, and Mortgage/Deed of Trust Agreement should be used for the transaction.

The Deed is what transfers legal title of the property from the Seller to the Buyer. You learned about the different types of Deeds in Chapter 4, so you may want to cross-reference that section.

A Promissory Note (also sometimes called a Mortgage Note) is an Agreement where the Borrower (in this case, the Buyer) promises to repay the amount of the loan plus interest to the Lender (in this case, the Seller). The Promissory Note also describes the amount of time the Borrower has to repay the loan, and what action the Lender may take if the Borrower fails to make the required payments. The note should state the interest rate, and may also contain provisions such as a balloon payment.

The Borrower’s typical monthly payment to the Lender is not necessarily just for principal and interest owed on the note. The Buyer may also have to pay escrow payments for property taxes and insurance as part of the monthly mortgage payment.

In order to give the Lender (the Seller) a security interest in the property, a Mortgage or Deed of Trust Agreement should be used. Both a Mortgage Agreement and a Deed of Trust Agreement serve the same purposes of pledging the Borrower’s (the Buyer’s) title to the property as security for the loan and giving the Lender a claim against the property in the event of default.

A Mortgage Agreement is used in most states, including Indiana, Florida, and New York. A mortgage involves only two parties: the borrower and the lender. With a mortgage, the borrower has full title to the property but may not transfer ownership until the debt is paid off and the lien is released. If the debt is not paid, the lender has the right to sell the property, usually through judicial foreclosure.

Some states, including California and Texas, use a Deed of Trust instead of a Mortgage. A Deed of Trust involves three parties: the borrower, the lender and a third-party trustee, such as an attorney or title insurance company, who holds temporary title until the debt is paid and the Deed of Trust is cancelled. If the debt is not paid, the trustee may sell the property, usually bypassing the Court system.

A Lease Option to Buy Agreement is a Lease Agreement that allows a Lessee to lease the property, while also giving the Lessee the right to purchase the property in the future according to certain pricing or other terms, such as with a certain portion of the lease payments being credited to the purchase price.

An Option to Buy Agreement is an agreement where the Option Holder pays a fee for the right to buy a property at a certain price for a certain amount of time. The Option Holder then has to exercise the option before the term expires, or all rights to purchase the property for the specified terms are forfeited.

An Agreement Checklist is included in Appendix E to help you identify the different types of agreements you may want to use for different scenarios.W


SUMMARYIn this Chapter, you learned how important it is to get all of your agreements with third parties in writing.

You learned about the various types of agreements that are commonly used in real estate, and the situations in which you should use them. The mere act of putting terms in writing will help both parties anticipate future problems, and agree on how to address them in advance.

It is impossible to cover every type of agreement that exists, but you learned about some of the most important ones, such as:

Scope of Work Agreement• - This is an agreement you enter into with any contractors who are performing repairs or construction to specify the scope of work, payment terms, and other details.ConfidentialityAgreement• - This is an agreement between two parties that specifies the details that one party will hold in confidence for the other, and for what duration. Confidentiality Agreements can be used with Contractors or Employees. Professional Services Agreement• - Whenever you hire a contractor for something other than real estate repairs or construction, you can use a more general agreement that specifies the details of the services that the contractor will perform for you. Employment Agreement• - An Employment Agreement is used whenever you hire an employee to specify the terms of that employment arrangement. Non-Compete Agreement• - A Non-Compete Agreement can be used with an employee to specify certain circumstances in which the employee cannot take another job in the future that is competing with their current employer. AffidavitofUnderstanding• - An Affidavit of Understanding can be used when you are purchasing a property from a Seller in a short sale scenario. It ensures that the seller understands the implications of what they are agreeing to do.Purchase Agreement• - A Purchase Agreement is used to purchase real estate. It specifies the buying clauses and the selling clauses that apply to the transaction, such as how much the property is being sold for, who will pay for the closing, etc. Mutual Release Agreement • - A Mutual Release Agreement can be used for various purposes, such as when the parties have both decided not to proceed with the Purchase Agreement. Hold Harmless Agreement• - A Hold Harmless Agreement is used whenever one party agrees to take responsibility for a certain problem from another party.Land Contract• - A Land Contract allows a Buyer to purchase a property from a Seller over time, and receive title to the property at a later point in the future once the full payment price has been paid. Deed, Promissory Note, and Mortgage • - These are used when the Seller is financing the transaction and is allowing the Buyer to take immediate title to the property (at closing). Lease Option to Buy• - A Lease Option to Buy is a Lease Agreement that also includes terms that allow the Lessee to buy the property at a future point in time, with some portion of the lease payments being credited to the purchase price. Option to Buy• - An Option to Buy is an agreement where the Option Holder pays a fee for the right to buy a property at a certain price for a certain amount of time.

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DIVERSIFYING YOURREAL ESTATE BUSINESS

IN THE PAST, you have no doubt heard the expression “Don’t Put All Of Your Eggs in One Basket”.

What this expression is talking about is “diversification”. The key point with diversification is to make sure that you never have any single person, process, or vendor that could cause your company to face extreme hardship or failure if that relationship goes south.

There are different ways you can diversify your real estate company to ensure that there is no single point of failure.

For example, you can diversify the sources where the the income for your business comes from. You can diversify where your financing for deals comes from. And you can also diversify how your work gets done. Let’s look at each of these in a bit more detail.

It is worth noting that this Chapter may be short, but it covers critical diversification concepts that all business owners should be fully aware of.

Have Multiple Streams of Income

One way to diversify your business is to ensure that you have multiple streams of income. In other words, you want to ensure that you have revenue coming in from more than one source.

Let’s look at a few examples. Suppose you are a realtor who lists properties exclusively for a builder. The builder keeps you busy full time, so you don’t take on any other clients.

What if the builder ever faces financial challenges, or decides he doesn’t want to work with you any more? Well, in that example, you would be hurting for business and would basically lose your entire source of revenue in one day.

To avoid this problem, you could still work with the builder, but also make sure you take some other clients at the same time so if you lose the work from the builder, you are not totally out of income.

So that’s the basic idea of diversifying your income. Let’s look at a few more examples of how you can diversify your income if you are in the real estate business.

Tax lien investing can be a great way to bring in additional revenue for your real estate business, while also helping with diversification. You learned in Chapter 4 why it is so important that you pay your property taxes on time.

As a quick recap, county offices across the United States have the authority to hold tax sales to allow them to collect past due property taxes. At these tax sales, investors can pay the past due property taxes,

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ABOUT THIS CHAPTERIn this Chapter, we will explore why it is important to diversify your business so that you don’t have “all your eggs in one basket”. In other words, you will learn about various ways you can diversify your business to ensure there is no single point of failure. More specifically, this Chapter covers:

Have Multiple Streams of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Use Different Financing Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Diversify How The Work Gets Done . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The training videos for Chapter 6 will cover the various ways you can diversify your business.

More specifically, the videos will explain why diversification is important, and what specific steps you can take in your business to ensure you don’t have any single point of failure.

The following Worksheet for this Chapter is included in Appendix F:

Worksheet 1: Diversification • Worksheet

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Diversifying Your Real Estate Business 73

and then either receive a high interest rate of return on their investment, or they can obtain title to the property itself if the property owner doesn’t pay the steep penalties and interest to redeem the property from tax sale.

In this Chapter, we are focusing on ways to diversify your income, so the point is that you may want to consider being a tax lien investor so that you can earn high interest rates of return on your investment.

In the event that the property owner chooses not to redeem the property from tax sale, you can then quiet the title on the property and take title to it. You will then have another property that you can either flip, or rent.

There are different strategies you can use depending on whether you are trying to invest in tax liens for a high rate of return, or whether you are investing with the end goal of actually obtaining title to the property.

Another way you can diversify your income streams as a business owner is to have disability insurance. If you ever face a disabling injury, it would certainly be a good idea to have a disability insurance plan in place to pay you a decent salary until you recover from the disability, if ever.

Don’t count on Social Security Disability to carry you through, even if you qualify for it. The amount of money that you can earn through Social Security Disability is far less than what it takes to support most American business owners with a reasonable lifestyle. And this does not even count any ongoing medical issues you may have to pay for as a result of the disability.

Use Different Financing Sources

In addition to diversifying your income streams, you should also diversify your financing sources whenever possible. For example, you don’t always want to use the same bank or investor for all of your real estate projects. If you ever have one project that encounters problems, you could jeopardize your entire relationship with that bank or investor.

Most mortgages have a clause in them that gives the bank the right to call in the loan if they ever believe that you are in financial trouble (and even if you have never missed a payment). This is the reason why it is a good idea to use different banks for different projects. If you ever have a problem with one bank, it doesn’t jeopardize all of the loans that you have outstanding.

Diversify How The Work Gets Done

You also want to diversify how the work gets done in your business. In other words, you want to avoid being in a situation where there is only one employee who knows how to perform certain tasks that are critical to the business. If that employee is ever in a terrible accident or leaves the company, you don’t want to jeopardize the stability of your business because that person was the only one who knew how to do some critical tasks.

Diversifying Your Real Estate Business74 Diversifying Your Real Estate Business

Here are a few suggestions for how you can diversify how the work gets done so that you can keep this problem from happening.

One way to diversify how the work gets done is to always have at least two people in your company who know how to perform a given task. This is called “cross-training”. One person can be the primary person responsible for a given task, and the other one can be the backup.

The other way you can diversify how the work gets done is to ensure that you have procedure manuals for every job

that is performed by every employee.

You or another employee should audit these manuals periodically to ensure that the procedures can be followed if the person who normally performs them leaves or is out unexpectedly.

One of the most devastating problems that a real estate company can face is when a key employee leaves the company and goes to a competitor, or opens up a competing business. In such a scenario, your business takes a “double hit”.

The first hit you take is by having a key person leave the company who was the only one who knew how to perform that task. The second hit you take is by having a new competitor to deal with. So you actually end up losing revenue on two fronts.

There are two steps you can take to try and avoid this scenario from happening. The first step is to ensure that you use cross-training as described earlier to ensure that no one employee is so key to your operation that you are dramatically harmed if they leave.

The second step you can take is to have such employees sign a Non-Compete and Non-Disclosure Agreement when they start working for you. Non-Compete Agreements put a limit on what other jobs a former employee can take in a certain geographic region and for a certain period of time. Non-Compete and Non-Disclosure (Confidentiality) Agreements were discussed in more detail in Chapter 5.

We have included a Diversification Worksheet in Appendix F to help you identify the areas you can diversify in your real estate business.

RecaponDiversificationHere are some of the areas you should diversify in your business:__ Have income come from different sources__ Have your financing come from different sources__ Cross-train your employees and/or have procedures manuals so you are not devastated if one employee leaves

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SUMMARYIn this Chapter, you learned why it is important that you “Don’t Put All Of Your Eggs in One Basket”. This is of course referring to “diversification”.

The key point with diversification is to make sure that you never have any single point of failure.

There are different ways you can diversify your real estate company to ensure that there is no single point of failure.

For example, you can diversify the sources where the income for your business comes from. You can diversify where your financing for deals comes from. And you can also diversify how your work gets done.

Diversifying Your Income

You learned how you can diversify your income by having more than one source for your income. You learned about how you can diversify your income through tax lien investing, and by carrying disability insurance to help in the event you become disabled.

Diversifying Your Financing

You learned how important it is to obtain financing for your real estate deals from multiple lendors or investors. That way, if you ever have trouble with any one of the lendors, you do not put your entire portfolio at risk.

Diversifying How The Work Gets Done

You learned about diversifying how the work gets done in your company by ensuring that no one employee holds a key position that you cannot recover from if they leave. You learned about using cross-training, procedure manuals, and Non-Compete Agreements to help you with this process.

You may also find other ways to diversify your business. But the key point is to always be on the lookout for single points of failure, and to take measures to eliminate any point of failure that you identify.

77

INTELLECTUAL PROPERTY BASICS

INTELLECTUAL PROPERTY is often one of the most valuable assets that a company owns, yet many companies do not even know how to recognize and protect the intellectual property assets that they have. Furthermore, many companies often violate the rights of others without realizing they are even doing so.

As a business owner, it is important that you be aware that your intellectual property can be just as valuable, and in some cases, even more valuable, than the real property that you own. From copyrights and trademarks to patents and trade secrets, intellectual property rights encourage innovation and promote stability in our society.

The intellectual property laws in the United States seek to achieve an ideal balance between preserving a domain of knowledge that others can draw upon to enhance society, while also fairly rewarding the original creator of those ideas or materials. In order to achieve this desired balance, an intellectual property right is generally limited in time (patents, for example, expire after 20 years). This is different from property rights in land, which generally last forever, unless and until the owner decides to transfer the property to someone else.

This Chapter will explore the differences between patents, copyrights, trademarks, and trade secrets and will describe how you can obtain the protection of each. It will also cover the importance of having the proper employment agreements, confidentiality agreements, and other agreements to perfect your intellectual property rights so you can profit from your ideas and work product.

You will first learn about patents, and how they can offer protection for innovative ideas and designs. Utility patents protect a physical product or functionality, while design patents can protect a unique appearance of a product.

Trademarks allow you to protect identifying words, names, logos, and slogans that you use to brand your company. But before you start using a particular name as the name of your company or your products or services, it is important that you take reasonable steps to ensure you are not violating someone else’s existing trademark interests. This Chapter will walk you through a 4-step research process you can use.

Trade secrets allow you to protect the valuable confidential information that your business develops, such as your customer and supplier lists, internal business processes, etc.

Copyrights allow you to protect the “original works of authorship that are fixed in a tangible medium of expression”. In other words, copyright protection can be obtained on the work product that you and your employees create, such as the documents, emails, art work, software, and web sites.

There are often multiple forms of intellectual property protection that can apply to a single product or idea. For example, in the case of computer software, you may have a trademark interest in the name of the software, a copyright interest in the software as a whole, and a patentable idea on some novel innovation that is contained in the software.

It is critically important that you use the proper agreements with your employees and contractors so that you actually get good title to the intellectual property that you are paying them to create.

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ABOUT THIS CHAPTERIn this Chapter, you will learn about another type of property that can be just as valuable, if not more valuable, to your business than real property. The type of property we are referring to here is intellectual property. More specifically, this Chapter covers:

Protect Your Great Ideas Through Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Build Brand Recognition Using Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

4-Step Research Process For Choosing A New Name . . . . . . . . . . . . . . . . . . . . . . . .•

Search Secretary of State/Business Registrar of Your State . . . . . . . . . . . . . . . . . . . .•

Search United States Patent & Trademark Office . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Search State Trademark Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Search The Search Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Keep Your Trade Secrets “A Secret” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Make Sure You Own The Copyrights You Think You Do . . . . . . . . . . . . . . . . . . . . .•

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The training videos for Chapter 7 will teach you how to add another type of property to your portfolio: intellectual property.

More specifically, the videos will explain how to obtain and leverage patents, trademarks, trade secrets, and copyrights in your business. It will also explain some steps you can take to help ensure that you do not violate the intellectual property rights of someone else.

The following Worksheet for this Chapter is included in Appendix G:

Worksheet 1: Agreement Checklist For • Intellectual Property

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Protect Your Great Ideas Through Patents

Patents are the ultimate form of intellectual property protection because they basically give you a monopoly on your idea. The right granted to the patent holder is “the right to keep others from making, using, or selling” the idea that is protected by the patent. The rights granted by a patent, however, do not automatically include the rights for the patent owner to produce his/her own invention, such as when the patented idea requires someone else’s patented idea in order to implement it.

But patents are one of the best forms of intellectual property protection available in the U.S. After all, if you have a patent on a hot new idea that takes the market by storm, you could generate millions of dollars in revenue from licensing your patented invention to others in the industry. If you hold the patent on it and others want to use that idea during the term of your patent, they have to pay you!

However, the U.S. government puts a time limit on how long a patent lasts (such as 20 years for a utility patent). After the patent expires, the ideas contained in the patent are dedicated to the public, and others are free to use them. In other words, patents are a key way that the U.S. government gives incentives to constantly keep innovations happening. In exchange for a monopoly for a limited number of years, those patented ideas are then dedicated to the public for all to use and improve upon.

There are three types of patents: utility, design, and plant patents. A utility patent can be obtained on “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof…”, and lasts 20 years from the date of filing. A design patent can be obtained on “any new, original, and ornamental design for an article of manufacture…”, and lasts 14 years from the date of filing.

As mentioned earlier, the rights granted by a patent are the rights to keep others from making, using, or selling the patented invention. To obtain a patent, you apply for a patent with the U.S. Patent & Trademark Office (www.uspto.gov).

The invention must be “New, Useful, and Nonobvious” in order to be patentable. New means that it doesn’t already exist, useful means that it serves some useful purpose, and non-obvious means that it is not an obvious variation of one or more things that are already in existence.

There are several activities that can harm your patent rights. The U.S. gives you one year to file a patent from the first public disclosure or first offer to sell the invention. In other words, if you have already disclosed or offered to sell your invention over a year ago, then you are forever barred from obtaining a patent on that idea. If you have someone sign a confidentiality agreement before sharing your ideas, however, then it does not count as a public disclosure.

Many other countries are not as generous as the U.S. For example, in some countries, ANY public disclosure you make of an invention without a confidentiality agreement may cause you to lose the right to patent that idea in those particular countries.


Types of Intellectual Property

Legal Form What Is It? Advantages/Disadvantages

Patent Provides the right to keep others from making, using, or selling the idea protected by the invention (i.e. gives a monopoly on that idea).

The biggest advantage is the monopoly you get on the idea. The disadvantage is that patent rights expire after a certain period of time. Utility patents expire 20 years after filing, and design patents expire 14 years after filing.

Trademark Protect a word, symbol, sound, smell, or combination of these to distinguish source and quality of goods or services.

The advantage to protecting your trademark interests is that you can maintain the rights to use the trademarked name as an identifier for your company.

Trade Secret Protect confidential business information that have significant commercial value to your business, such as customer lists, vendor lists, etc.

The biggest advantage to trade secrets is that they do not expire, and only require that you maintain certain internal company procedures to keep them a secret. The biggest disadvantage to trade secrets is that you are not protected from someone else developing them or from someone reverse engineering them.

Copyright Protects “original works of authorship that are fixed in a tangible medium of expression”.

The biggest advantage to copyrights is that they provide the right to exclude others from copying, distributing, making derivative works, or publicly performing an author’s work. The disadvantage to copyrights is that they do not protect an idea itself, just that particular expression of an idea.


So the key point to remember is that whenever you have one of those great ideas that you feel has enormous market potential and should be patented, make sure you use confidentiality agreements to help preserve your patent interests until you get a patent on file. We have included some sample confidentiality agreements in your Agreements Workbook.

Build Brand Recognition Using Trademarks

Trademarks are another form of intellectual property assets that you can obtain for your business Trademark (goods) or Service Mark (services): protect a word, symbol, sound, smell, or combination of these to distinguish source and quality of goods or services. Similarly, trade dress protects the packaging or form of the product that operates to distinguish source/quality of the goods.

In the U.S., federal and state trademark laws co-exist. Basic trademark rights arise automatically through use, but you can perfect your rights by filing a federal trademark registration with the United States Patent & Trademark Office (www.uspto.gov).

A trademark owner has the right to prevent likelihood of confusion. In other words, if you have trademark rights in a name and someone else uses the same or similar name such that consumers would think you are the same company, then you could pursue a trademark infringement action against the other company to get them to stop.

In addition to the right to prevent likelihood of confusion, a trademark owner also has the right to prevent dilution. Dilution arises when another’s mark weakens a famous mark. If you have a famous trademark and someone uses the mark or a similar variation thereof, even in another industry where consumers would never be confused, then the owner of the famous mark can stop the usage through a dilution claim. In other words, they have the right to keep you from harming the good reputation of their famous mark.

In general, a trademark can last as long as the trademark continues to be used. Your trademark rights can be lost if you expressly abandon the mark or stop using the mark. Your trademark rights can also be lost if you lose your distinctiveness by not enforcing infringers, or if the mark becomes generic (like what happened to “aspirin”).

As noted a moment ago, you can optionally pursue federal trademark registration with the USPTO. The advantages to obtaining a federally registered trademark are that it provides constructive notice to all states of your interest in the mark, and makes federal court action readily available for you for infringement. A registered trademark has a 10 year term that is renewable with continued use. A federal trademark registration application can be found at www.uspto.gov.

To properly designate your trademark interests in a word or phrase, there are certain designations you need to use. You should use ™ to identify a trademark that you do not have a federal registration on (either because you haven’t filed one, or because you have filed one but it is still pending registration). The purpose of marking your interests in a trademark is to show others your intent to claim trademark interests in that mark. But once federal registration is obtained, you can use ® to designate that it is a federally registered mark.

Here are some examples of trademarks: Microsoft, General Motors, Victoria’s Secret, company logo that

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allows one to recognize your company, slogans that identify a company or product, or product packaging that identifies source (trade dress).

Before you start using a new name for your company, products, or services, it is thus important that you do some reasonable research to make sure that someone else does not already have a trademark interest in the name you want to use, such that a likelihood of confusion or dilution would be caused.

4-Step Research Process For Choosing A New Name

Now we’re going to walk through a simple 4-Step Process you can use to help you choose a name for your business that is both available in your state, and that also seems to avoid stepping on someone else’s trademark rights. You can perform this process as part of the overall process covered in Chapter 1 whenever you form a new company, or you can use this process any time you are choosing a new product or service name to use in your business.

You should perform the following research process for any names you are considering. Here is a quick summary of that process, which we will then cover in detail:

(1) Search Secretary of State/Business Registrar of Your State(2) Search United States Patent & Trademark Office(3) Search State Trademark Register(4) Search The Search Engines

(1) Search Secretary of State/Business Registrar of Your StateFirst, please note that this step only applies if you are forming a new company, and not when you are researching product or service names, or slogans.

But if someone else has already formed a company with a particular name in a given state, then no one else can form a company with that name in that state. Here is how that works. The Secretary of State (or other business registrar in a few states) is responsible for managing business entities that are filed with the state. For example, Figure 7-1 shows a snapshot of the web site of the Indiana Secretary of State (which, at the time of this writing, is the Honorable Todd Rokita). This office is responsible for business entity filings in Indiana.

If someone else has already filed a business with the name Jones Consulting LLC, then you will not be allowed to file a business with that name either. You are typically restricted from filing the name Jones Consulting LLC, Jones Consulting Inc, or any other name that just varies by the entity type (LLC, Inc, LLP, etc.).

Thus, in this step, you should search the online business database of your Secretary of State/Business Registrar to see if the names you are considering are all available in the state in which you plan to form your company. If any of your possible names are already taken, then you should just cross that one off the list and just continue your research with the remaining ones.

You can access an index of Secretary of State web sites at: http://www.innoventum.com/sos.html. You can use that index to access the respective web site which will allow you to search the business database in your desired state to see whether the names you are considering are


already taken.

Let’s walk through an example of how to perform this search using the Indiana Secretary of State web site.

We will use a company called Innoventum, which is owned by some of the authors of this program, as an example. Suppose you were considering a company name called Innoventum LLC. You visit the Indiana Secretary of State web site and enter the term Innoventum, along with a partial word search as the criteria. This is shown in Figure 7-1.

When available, it is recommended that you start with a partial word search because it will give you more matches, and thus a better idea of whether there is a conflicting name.

You then select the search button to retrieve the businesses that use that name in the respective state.

In this example, there are two businesses returned that have the name Innoventum, as you can see in Figure 7-2. The Indiana Secretary of State’s office would not let anyone else form a company with the name Innoventum, or Innoventum Holdings because those names are already taken.

In many instances, you can get around this by adding another word to the name, like Innoventum Consulting Services, Inc. or some other variation like that.

Each Secretary of State has its own rules for what is allowable and what is not when someone else has used a certain variation, so just consult the rules on the respective state web site for more details.

If it turns out that one of your desired names is already taken in that state, simply cross it off the list.

(2)SearchUnitedStatesPatent&TrademarkOfficeThe second step in choosing the proper name is to search to see if anyone else has a trademark registered with the United States Patent and Trademark Office (USPTO) that is identical or similar to your name.

As was mentioned earlier in this Chapter, the United States Trademark Laws give businesses certain legal rights to the names that they use to identify their company names, products, etc. Businesses start

Figure 7-1

Figure 7-2


earning trademark rights by using that name in commerce. However, businesses can perfect trademark interests by filing a federal trademark registration with the United States Patent and Trademark Office.

What this means to you at this point in your research is that you want to make sure that no one else has a federal trademark registration on the name you are wanting to use in your industry such that consumers would be confused. To answer this question, you will need to perform a search using the USPTO web

site at http://www.uspto.gov.

If you find any similar trademarks registered with the USPTO, then perform the following analysis: Is that mark you found for a really famous brand, or are they in a similar industry such that your customers may also be their customers for similar products? If you answer yes to either question, then you should cross that name off your list to err on the side of caution.

Let’s walk through how this works using Innoventum as the example again. Open your web browser and go to http://www.uspto.gov.

From the navigation panel, select Trademarks | Search Marks, as shown in Figure 7-3.

Next, select New User Form Search (Basic). A screen similar to Figure 7-4 will be displayed. Enter the company name into the “Search Term” field. The “Plural and Singular” and “Live and Dead” options should both be selected by default.

For the field called “Field”, you should select “Combined Word Mark”, which should also be selected by default.

Select the Submit Query button, and a list of all of the federally registered trademarks that meet the specified criteria will be displayed. A screen similar to Figure 7-5 will be returned in the case of the Innoventum example.

Review the search results for your search to see if you find any marks that are the same or similar variation to the company name you are considering.

As discussed earlier, if you find any trademarks on the USPTO web site that are similar to the name you are

Figure 7-3

Figure 7-4

Figure 7-5


considering, then perform the following analysis: Is that trademark you found for a really famous brand, or are they in a similar industry such that your customers may also be their customers for similar products? If you answer yes to either question, then you should cross that name off your list just to avoid any possible problems with those companies.

Repeat the searching with other criteria to try and find names that sound similar but that have a different spelling. If you recall the examples we gave earlier, what matters is whether customers would be confused, so different spellings that still sound similar can also cause problems later if they cause customer confusion.

(3) Search State Trademark RegisterThe third step in this 4-step name selection process is to search the State Trademark database in the state(s) in which you plan to form and operate the company. Each state also maintains a trademark database for trademarks that have been registered in that state. You should repeat the analysis described in step 2, but for your State Trademark Register. For any that don’t pass the test, mark them off.

(4) Search The Search EnginesThe final step is to search one or more search engines such as Google or Yahoo to see if anyone else in your industry is already using the name. Use what you have learned in this module to assess whether a conflict exists such that customers would likely be confused. If so, cross that name off the list too.

Choosing An Entity Name From The ResearchAt the end of this process, you simply look over your list and see if any of your names survived the scrutiny. You then should pick which name you like best out of the ones that passed these tests.

You now have a better understanding of trademarks, how to obtain your own trademarks, and how to minimize your trademark infringement risks by doing the proper research before choosing a new name. Let’s now move on to discussing trade secrets and copyrigthts.

Keep Your Trade Secrets “A Secret”

Trade secrets are governed by the laws of each state. But in most states, trade secrets have a definition similar to the following: “information including a formula, pattern, compilation, program, device, method, technique, or process that:(1) derives independent economic value, actual or potential, from not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

A trade secret owner has the right to recover or stop misappropriation of trade secret. This means that you could have the right to recover any unauthorized copies that were made of your trade secrets such as your customer lists, vendor lists, etc. from the person who took them from you without permission.

There is no right to a trade secret for any information that is in the pubic domain, information that someone else independently develops, or for information that is reverse engineered. You also have to take reasonable steps to maintain the secrecy of your trade secrets, or you can lose the right to maintain its protection. For example, you wouldn’t want to post highly confidential data in public areas that visitors to your company could see.


Let’s compare trade secrets to patents for a moment, since there are times when you may want to use a trade secret to protect a technique or procedure, as opposed to a patent. As a quick recap, patents must be novel (new), are expensive to obtain, and expire after a certain time. Trade secrets, on the other hand, only need to have relative secrecy (novelty is not required), only require internal company procedures to maintain secrecy, and last until they become public (if ever).

Let’s look at a hypothetical to further illustrate the difference between patents and trade secrets. Suppose you have developed a new formula for treating some minor ailment that can be made from household ingredients. You could choose to pursue patent protection (if your invention meets the novelty and non-obvious requirements for patentability), but then the patent would expire after 20 years. Or, you could maintain the ingredients in secrecy, and never have to share your exact formula.

The benefit to obtaining a patent in this hypothetical is that you could obtain a 20 year monopoly on the idea so that if others in the market started using your formula, then you could make them stop or pay you royalties. The downside to the patent in this scenario is that after 20 years, everyone could then start competing with you, and the patent gives them the exact recipe for how to do so.

The benefit to maintaining the formula through trade secrets in this example is that you could keep this formula secret for longer than 20 years, and possibly never have any competition. However, the big risk with this approach is that if someone else independently develops or reverse engineers your formula, you would have no recourse to make them pay you royalties like you would with a patent.

Of course, in the case of certain formulas for medicines, they may be governed by the FDA or other regulatory agencies, so there could be other requirements for disclosure. But this was just intended to provide a simple example to illustrate the pros and cons of trade secrets versus patents.

Let’s now turn to copyrights and explore the importance they play in your business.

Make Sure You Own The Copyrights That You Think You Do

Copyrights protect “original works of authorship fixed in any tangible medium of expression, now or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly, or with the aid of a machine or device”. Only the “expression” is protected, not the underlying idea itself. You learned earlier that patents are what allow you to protect “ideas”.

Here are some examples of copyrights:

• Science Fiction Novel • Family portrait • Computer Software • Drawing • Content of a Web Site • Article


• Poem • Sheet Music • Any other original work of authorship “expressed” in a tangible medium of expression

A copyright owner has the right to exclude others from copying, distributing, making derivative works, or publicly performing an author’s work. These rights were legislated by Congress. The purpose of copyrights is to prevent substantial copying by others who have not themselves made the effort to create their own expression of an idea.

It is recommended that you mark your works with a copyright notice, but this marking is optional. Here are a few example formats you can use to designate your copyright interests:

© 2009 Company Name. All Rights Reserved.Copyright 2003 Company Name. All Rights Reserved.

For works originally created on or after January 1, 1978, a copyright lasts until 70 years after the last surviving author’s death. If the work is a “work for hire” or if the work is anonymous, then the copyright lasts until 95 years from publication or 120 years from creation, whichever is shorter.

Despite popular misconception, copyright interests are actually created immediately upon creation of work, regardless of registration. The author of the work owns the copyright unless the work was created by an employee within the scope of their job, or if there is a written agreement (such as with a contractor) that transfers the copyright interests over.

This is such an important point that it is necessary to state it again. If the author is a contractor, such as a company you hire to create some product for you, then the CONTRACTOR owns the copyright interests in the very work you paid them to produce, unless you get a written agreement that transfers the copyrights interests over to your company.

This makes it critically important that you always have a written agreement with contractors that specifies exactly who owns the copyright interests in the work that is being produced. We have included a sample agreement that you can use with contractors in the Agreements Workbook. The sample agreement has an intellectual property ownership clause that gives the company hiring the contractor the ownership of the intellectual property.

Even though you automatically obtain copyright interests in the work product that your employees produce, you should also have all employees sign an employment agreement that spells out the terms of their employment, including details on intellectual property ownership.

For example, you do not automatically own the patentable ideas of your employees unless you have an employment agreement that gives you such rights (although you may have certain “shop rights”, but not patent ownership). We have included a sample employment agreement in the Agreements Workbook.

We have also included an Agreement Checklist as Worksheet 1 of Appendix G. The Agreement Checklist For Intellectual Property gives you some sample clauses to consider including in contracts with employees and contractors, and especially those that specify ownership of intellectual property.

W

Intellectual Property Basics88 Intellectual Property Basics

Federal copyright registration is optional, but has several advantages. First, it provides proof of your creation date. Second, it is required before you can bring a copyright infringement action in Court.

And third, federal registration provides you with additional rights and damages. For example, if federal registration occurs within 5 years of publication, registration will establish prima facie evidence in court of validity.

Furthermore, if copyright registration is made within 3 months after publication or prior to infringement, statutory damages and attorney fees are available to copyright owner. Otherwise, only award of actual damages and profits is available to the copyright owner.

To obtain a copyright registration, you fill out a simple form and send it to the U.S. Copyright Office along with the required fee (less than $100) and a non-returnable deposit of two (usually) copies of the work. When you register computer programs, you are also required to submit certain pages of source code.

Forms and instructions for filing a copyright either electronically or by mail can be found at http://www.loc.gov/copyright.

To help guide you on how to avoid violating someone else’s copyright interests, let’s look at a few examples of what would be copyright infringement and what would not be copyright infringement:

Example #1: Installing software from a friend’s CD that he bought but you did not – This would be a violation of copyright.

Example #2: Taking work someone else did and only slightly modifying it or using it unchanged – This typically would be a violation of copyright unless you have copyright owner’s permission.

Example #3: Making a backup copy of a CD in case other goes bad – This is not generally a copyright violation.

The fair use of a copyrighted work for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is NOT an infringement of copyright.

In determining whether a fair use defense is available, several factors will be looked at, such as whether the use is for commercial or educational purposes, the amount of work copied, and the effect on the value of the copyrighted work.

Here is the key point you should take away from this Chapter. You should use every reasonable means to protect your intellectual property assets, because they are very valuable assets for your company, just like your real property. However, you should also take reasonable steps to ensure that you do not violate the intellectual property interests of others. We have discussed several ways that you can grow your own intellectual property portfolio while also respecting the intellectual property rights of others. So get out there and add one more form of property to your portfolio (intellectual property)!


SUMMARYIn this Chapter, you learned about intellectual property and how it can be just as valuable as the real property that you own.

This Chapter introduced several types of intellectual property, including patents, copyrights, trademarks, and trade secrets, and explained how you can to obtain the protection of each.

It also covered the importance of having the proper employment agreements, confidentiality agreements, and other agreements to perfect your intellectual property rights so you can profit from your ideas and work product.

You learned about patents, and how they can be used to protect innovative ideas and designs. Utility patents protect a physical product or functionality, while design patents can protect a unique appearance of a product.

Trademarks allow you to protect identifying words, names, logos, and slogans that you use to brand your company. Federal registration is optional, but allows you to obtain additional trademark protection.

You also learned a 4-step process to assist you in picking company and product names for your business that are available for use that have a lower probability of violating someone else’s existing trademark interests.

The 4-step process involves:(1) Search Secretary of State/Business Registrar of Your State(2) Search United States Patent & Trademark Office (www.uspto.gov)(3) Search State Trademark Register(4) Search The Search Engines

You learned about trade secrets and how they allow you to protect the valuable confidential information that your business develops, such as your customer and supplier lists, internal business processes, etc.

You also learned about copyrights and how they allow you to protect the “original works of authorship that are fixed in a tangible medium of expression”. Examples of such work product can include documents, emails, art work, software, and web sites.

You also learned how critically important it is for you to use the proper agreements with your employees and contractors so that you actually get good title to the intellectual property that you are paying them to create.

For example, contractors own the copyrights in the work they create for you, unless you get a written agreement that transfers the copyright interests to you. You automatically own the copyrights in the work that is produced by your employees for you. But you do not automatically own the patentable ideas of your employees. That is why the proper agreements are so important - to clarify ownership!

And finally, you learned how there are often multiple forms of intellectual property protection that can apply to a single product or idea.

Appendix A 91

TABLE OF CONTENTS

Worksheet 1: Business Name Brainstorming . . . . . . . . . . . . . . . . . . . . .92 Worksheet 2: Company Filing Deadlines . . . . . . . . . . . . . . . . . . . . . . . .93

Appendix A92

Question Name #1 Name #2 Name#3 Name #4

Write down 4 business namesyou are considering

Is there anything in the namethat tells customers what you door what they get?

What type of feeling doesthis name convey?

What do you like about this name?

What do others like aboutthis name?

What do you dislike about this name?

What do others dislike aboutthis name?

What available domains would work well with this name?

Other commentsabout this name:

Business Name BrainstormingAnswer These Questions For 4 Names You Are Considering

Appendix A 93

Company Filing DEADLINESIn order to maintain your company in good standing, there are various deadlines you need to meet.

Filing Type Due Dates Where to Send/File Amount, If Known Estimated Federal Taxes(Usually Quarterly)

Estimated State, County, and Local Taxes (UsuallyQuarterly)

Payroll Taxes For Employees(Social Security, WorkersComp., Unemployment, etc.)

Continuity Report (Annual orBi-Annual) With Secretary ofState/Business Register

Company Income Tax Return

Sales Tax (If You Sell Goods Subject To Sales Tax)

Property Taxes (On Real Estate)

Personal Property Taxes (OnFurniture, Equipment, etc.)

Inventory Taxes, If Applicable

Other:

Appendix B 95

TABLE OF CONTENTS

Worksheet 1: Establish A Credit History For Your Business. . . . . . . . . . . . . . . . . 96 Worksheet 2: Labels You Can Use For Organizing Your Income And Expenses. .97 Worksheet 3: Sample Expense Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Appendix B96

Establish A Credit History For Your Business

A brand new business has a credit history like a newborn baby. Use this worksheet to help you start establishing a credit history for your business.

(1) Open one or more bank accounts in the name of the business. When visiting the bank, make sure to take copies of:

The EIN you obtained from the IRS

A copy of your articles of incorporation/organization if you filed the company with your state registrar (such as the Secretary of State)

(2) Open a business line of credit, even if it has a small credit limit. You will have to personally guarantee this credit line since the existing business has no history. If you have poor personal credit, ask the bank about letting you open a credit line that is secured in cash from you in the amount of the credit line.

(3) Open a business credit card, even if it has a small credit limit. You will also have to personally guarantee this credit line. Just as with #2 above, you can still get a credit card in the name of the business even if you have poor personal credit. But to do so, you may have to pay the amount of the credit line up front as security.

Appendix B 97

Labels You Can Use For Organizing Your Income and Expenses

Make a copy of this page and use these for your file folder index tab labels (or re-create similar labels using a label-maker program that comes with stick-on label kits).

Income Bank Loans

Utility Bills

Insurance Expense Reports

Bank Statements OfficeSupplies

Here are some extra ones too:

Credit CardStatements

Appendix B98

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Page 1 of 1

Appendix B 99

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Appendix C 101

TABLE OF CONTENTS

Worksheet 1: Insurance Brainstorming Checklist . . . . . . . . . . . . . . . . . . . . . . . .102

Appendix C102

Insurance Brainstorming

Property & Casualty Insurance

Commercial Liability

Commercial Umbrella

Title Insurance

Personal Umbrella

Use This Checklist To Help You Determine What Types Of Insurance You May Need For Your Real Estate Business.

Do You Own Real Estate or Are You Purchasing Real Estate?

Do You Have Employees?

Worker’s Compensation Insurance

Employee Benefits / Insurance


Commercial Insurance

Personal Umbrella

Do You Work With Contractors?


Commercial Umbrella

Personal Umbrella

Does Your Contractors Have A Commercial Liability Policy?

Does Your Contractor Have Workers Compensation Policy (For Any Employees)?

Would Your Business Shut Down If One Employee or Owner Died?

Key Officer / Employee Insurance

Appendix C 103


Appendix D 105

TABLE OF CONTENTS

Worksheet 1: Operating Risk Mitigation Checklist . . . . . . . . . . . . . . . . . . . . . . .106

Appendix D106

Operating Risk Mitigation

What Are The Seasoning Requirements Of The Lender, If Any?

Did I Obtain The Proper Type Of Deed? Did I Get What I Expected?

Do I Have Enough Title Insurance To Safeguard Me From Any Financial Loss?

Are Property Taxes Owed? If So, How Much?

Use This Checklist To Help You Determine What The Common Risks Are For Your Real Estate Business.

Real Estate Purchase:

Remodeling/Construction:

What Is The Cost Of My Remodeling/Construction?

Do I Have A Realistic Budget?

Are There Building Permits Required? If So, Do I Have All The Proper Building Permits?

Are There Zoning Changes Required? Do I Need To Obtain A Variance?

Operating Procedures:

What Are The Common Operations/Tasks That Get Repeated In My Business? _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________

Do I Have Documented Processes For Handling These Common Operations So My Business Is Efficient And Consistent? _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________

Appendix D 107


Appendix E 109

TABLE OF CONTENTS

Worksheet 1: Agreement Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Appendix E110

Agreement Checklist

Scope of Work Agreement

Use This Checklist To Help You Determine What Types Of Agreements You May Need For Your Real Estate Business.

Are You Hiring A Contractor To Do Repairs For You?

Are You Hiring An Employee?

Employment Agreement

Confidentiality Agreement

Non-Compete Agreement

Are You Buying or Selling Real Estate?

Purchase Agreement

If Being Purchased/Sold Through Conventional Financing or Seller Financing, Then Deed, Promissory Note, and Mortgage Are Needed

If Being Purchased/Sold Through Land Contract, Then You Need A Land Contract Agreement

If A Short Sale Is Involved, Use A Proper Affidavit of Understanding

Are You Hiring A Contractor To Perform Other Work For You?

Professional Services Agreement

Confidentiality Agreement

Lease Option To Buy

Are You Leasing With An Option To Purchase Later?

Option To Buy

Are You Obtaining A Right To Buy A Property At A Certain Price For A Certain Period Of Time?

Appendix E 111


Appendix F 113

TABLE OF CONTENTS

Worksheet 1: Diversification Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Appendix F114

Diversification Worksheet

Income From Real Estate

Income From Tax Lien Certificates

Income From Stocks, Bonds, or Other Investments

Income From Other Products/Services

Have Disability Insurance To Protect Your Income In The Event of Disability

Use This Checklist To Help You Determine Various Ways You Can Diversify Your Real Estate Business.

Ways To Diversify Your Income:

Ways To Diversify Your Financing/Banking:

Use Separate Banks/Investors To Finance Different Deals

Maintain Your Business Checking Account(s) At Different Banks Than Where You Have Loans

Ways To Diversify Your Company Operations:

Use Cross-Training To Ensure There Is Always More Than One Person Who Knows Key Details

Have Procedure Manuals To Document Common Procedures

Use Non-Compete Agreements With Employees

Other Diversification Ideas:

Appendix F 115


Appendix G 117

TABLE OF CONTENTS

Worksheet 1: Agreement Checklist For Intellectual Property. . . . . . . . . . . . . . 118

Appendix G118

Agreement Checklist For Intellectual Property

A clause specifying who owns the intellectual property being created (MUST be specified in written agreement or CONTRACTOR owns copyright automatically) A confidentiality clause (or separate Non-Disclosure Agreement) A clause specifying project description A clause specifying the payment amount A clause specifying the deadline, if applicable

Use This Checklist To Help You Determine The Types of Clauses To Include In Your Agreements With Contractors and Employees.

What To Include In Agreements With Contractors:

A clause specifying who owns the intellectual property being created A confidentiality clause (or separate Confidentiality/Non-Disclosure Agreement) A clause specifying the job description A clause specifying the work hours, location, etc. A clause specifying the salary/wage to be paid Is a Non-Compete Clause/Agreement appropriate for this position? If Yes, include a Non-Compete, either as part of the Employment Agreement itself or in a separate agreement.

What To Include In Agreements With Employees:

Appendix G 119


Documents

TERMS AND DISCLAIMERSomegawealthprotection.s3.amazonaws.com/OmegaManuals/... · 2011-10-25 · His real estate investing experience includes rehabbing, ... real estate business that