If you are a newbie real estate investor, you should know that there are quite a few documents you need to facilitate the sale, purchase, or financing of real estate assets.
These documents are of different types, and one of them is a promissory note. Promissory notes are common for international export business, but what does it have to do with real estate deals? Do you even need one for real estate deals? Continue reading to learn more.
Promissory Notes and Real Estate Deals
If you are looking to buy a home, you will need the funds for it. Your best option, if you don’t have the cash, is to turn to a mortgage finance company. Mortgages are not necessarily loans but a percentage stake in real estate that the lender issues to the borrower to enable him to secure a loan.
With a mortgage, the lender is confident enough to lend the borrower the money because the real estate assets in question are going to serve as a security in case the borrower defaults.
For this transaction to become binding, a document has to be signed between both parties, and this document is called a promissory note or a mortgage note. The moment the borrower uses the loan to pay for the house, he is obligated to repay it with interest.
For mortgage real estate deals, the lender is called the payee, while the buyer is the person responsible for issuing the promissory note. One dynamic feature of a promissory note is that it is transferable.
The lender can transfer the note to another person or party by selling it. When this happens, the debt is transferred from one lender to another, who will then become the beneficiary of the debt instrument.
From then on, any future payment made by the borrower will be made to the new owner of the debt. For the debt transfer, the original owner of the promissory note receives money for sale, and this action does not affect the contract in any way; only the name of the holder changes.
Is a Promissory Note for Real Estate Deals Necessary?
Is a promissory note for a real estate deal necessary? The answer is only if the deal is a mortgage deal between the buyer of the real estate and the mortgage company.
For straight cash deals, a promissory note may most likely not be required unless where stated otherwise by Law. As you know, different jurisdictions have different rules and regulations regarding real estate deals and financing.
Promissory notes are written and signed with a promise to pay an amount of money, including the interest, at a specific date. The maker of the note is often the borrower, and the receiver of the note is the payee or lender. While the maker or borrower has to sign the note to make it legally binding, the lender doesn’t have to do so.
Negotiable Promissory Note
There is a different type called a negotiable promissory note. This is simply the transfer of the note from one lender to another. So, in a nutshell, once a promissory note is transferred from the original lender to a new lender, it becomes a negotiable promissory note. The new holder only gets it after exchanging something of value for it (cash in most cases).
Holder in Due Course
For negotiable promissory notes, there is another concept called holder in due course. This explains the right the new holder of the note has over the financial benefits of the contract. In this case, the new holder is called a holder in due course, and there is nothing the borrower or issuer of note can do in this case.
The freedom to transfer notes from one holder to another has made it easy for mortgage investors since they don’t have to wait for the full timeframe to get their money and interest paid in full.
What a Promissory Note for a Real Estate Deal Should Contain
A real estate promissory note should contain the following:
- Principal Amount: The total value of cash borrowed by the borrower or note maker must be included in the promissory note. This is the full value of the loan. A note is invalid without this information.
- Interest Rate: The interest charged on loan is another piece of information. Rates are calculated in percentages, and this is what generates profits for the lender. Interest rates increase the liability of the note maker, so it must be shown clearly to prevent future disputes.
- Term: The note should show the contract duration and the total interest and principal amount to be paid. This can stretch from 1 year to 2 years or more.
- Loan Amount: The amount received by the note maker or borrower must be clearly stated.
Not all states and regions require promissory notes for real estate deals; for those that do, the requirements vary from place to place. When preparing a note, revert to your local laws to prepare yours correctly.