Promissory Notes – Secured by a lien of a deed of trust or mortgage

You’ve decided to be a Real Estate INVESTOR  without the headache of actually owning property. This usually means you’re going to provide funding for someone else to buy property and the property will serve as security for your loan, OR…..

It could be you just want to loan a friend or relative some money,  but you’re savvy enough to recognize that you should have something in writing (of course!) and a way to recoup your investment, should the borrower fail to repay the loan under the terms and conditions that to which you’ve agreed.

Our legal document preparers (“LDP’s”) will walk you through the process and ask the right questions, but here’s the initial list so that you know what you need to discuss with your Borrower.

  1. What’s the amount of the Loan? (Duh!)
  2. Will the Borrower pay interest to the Lender? If so, what is the interest rate?
  3. If the Borrower will pay interest when will interest start?
  4. When will the first payment be due?
  5. Will the borrower make monthly payments? Annual payments? Or a different schedule?
  6. Speaking of the payments… How will the payment be determined? Will payments be amortized over a period of time (for example, 30 years? 15 years?)

FYI…If the payments are amortized over a specific number of years, that does not preclude an earlier “all due and payable” date. It would simply mean there will be a large “balloon payment” due at the end. 

  1. If the payments are interest only payments, determine a date when the principal is all due and payable so that the loan will not continue indefinitely. You can make it all due and payable many years in the future or in just a few months, or by an occurrence of an actual event, such as upon sale or refinance of the property, but there needs to be an ending specified.

Note: If interest only payments, you should specify a date in which the loan must be repaid. There should be a date when the loan becomes “all due and payable” even if that date is many years in the future

  1. Do you want a “Due on Sale” clause in the Note? 
  2. Is there a prepayment penalty? If so, how will that work?
  3. Are there late charges to be assessed? If so, what are the late charges and when will a late charge be due?
  4. If a late charge is due and the payment is made without the late charge included, will the payment be ACCEPTED? REJECTED? If the payment is ACCEPTED will the late charge be added to the loan and accrue interest at the same rate as the principal? Or will the late charges be kept on a separate balance sheet and be paid before the loan is considered “paid in full”?

Wow. That’s a lot to consider! And the list is for a simple loan. 

Just so you know, your agreement can be as complicated or as simple as the Lender and Borrower need it to be. I am of the opinion that whenever possible, keep it simple, but we understand that sometimes that isn’t possible. Complicated or not, our LDP’s will memorialize your Agreement by creating a Promissory Note.

We will also help you by creating and recording the appropriate document to secure the Promissory Note, such as a Deed of Trust or Mortgage. This is the document that will be recorded and create the lien on the property.