What is a Real Estate Note

Mortgage Notes, real estate notes, promissory notes, or simply just a note. However you refer to them, they are an essential part of the real estate ecosystem. But what exactly is a real estate note? How are they used? And what terms should they contain? Well… let’s go ahead and find out.

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What is a Real Estate Note?

There is often some confusion as to what a real estate note actually is. In fact, there are two parts to what most people refer to as a note, those are; a promissory note, and a lien. Both are equally as important, but serve very different purposes.

A real estate note is a promissory note containing the terms of a loan loan including the amount, interest rate and repayment schedule

The actual note itself is an IOU. Simply put, a real estate note is a contract between borrower and lender. The note defines the terms of the loan, and it is accompanied by a lien.

The lien is a separate document – usually a Mortgage Deed or Deed of Trust – and acts as security for the lender. The lien is recorded against the title to a piece of real estate in the County records. If the borrower defaults on the terms of the promissory note, the lender can accelerate or foreclose the loan in order to settle the lien and recoup their money.

Related: Note Investing 101 – Everything you Need to Know About Real Estate Note Investing

What Terms Should a Real Estate Note Contain?

The promissory note contains the terms of loan. These terms will usually include:

  • Total amount of the loan
  • Monthly payment
  • Origination date
  • Maturity date
  • Loan term (length of the loan)
  • Interest rate before default
  • Interest rate after default)
  • Borrower’s address
  • Lender’s address
  • How payments will be applied?
  • Late payment provisions
  • Usury Savings Clause

A real estate note will also contain waiver clauses, including:

  • Notice
  • Demand
  • Notice of intent to accelerate
  • Notice of acceleration
  • Maturity protest
  • Notice of protest
  • Foreclosure notices that can be waived by law
  • Anti-deficiency statutes

Every real estate note is different. So if you are thinking of buying a real estate note as an investment, you should seek the advice of a suitably qualified attorney to ensure that the note contains all the relevant terms and conditions (and correct legal language) specific to the State the real estate is located in.

There are also some specialist nationwide companies such as Richmond Monroe, who review notes and deeds for note investors. Ultimately, you want to be certain that both the note and the mortgage or trust deed contain terms sufficient to protect your investment in a worst case scenario.

 

Is a Real Estate Note Recorded?

No. The mortgage note is not recorded in the County land records. The lien (mortgage or deed of trust) is recorded, and must usually be settled if the real estate is sold or transferred.

A Lien such as a mortgage deed or trust deed Secures Your investment

Who Owns the Note?

The Lender holds the note, so this could be the original lender, or an investor that has purchased the note. Whoever owns the note at the time holds it in their possession. When the note is repaid in full, it is marked as paid and returned to the Borrower.

Performing vs Non Performing Mortgage Notes

There are two types of mortgage note: performing notes and non performing notes. A real estate note is considered to be performing when the borrower is current on all payments. Performing notes are valuable, income-producing assets, and so they trade at, or close to, face value.

Return on investment for performing notes

Non performing notes are effectively bad debt because the borrower has stopped making payments. A note becomes sub performing if the borrower is 30 days overdue, and is considered non performing when payments fall 90 days or more behind.

Banks, credit unions and other lenders sell non performing notes at a discount to the unpaid balance of the loan to recoup some of their capital and avoid costly and lengthy foreclosure proceedings. If a lender is selling non performing loan, they have usually exhausted all options and consider the debt irrecoverable.

It is the discount at which these non performing notes are sold which makes them potentially very profitable. Investors buy these types of real estate notes to try and modify the loan the get the borrower paying again (reperforming note), or to take control of the real estate by arranging a short sale, taking a deed in lieu, or foreclosing the loan.

Related: Non Performing Notes – Everything You Need to Know

How to Buy Real Estate Notes

if you want buy performing real estate notes to add more monthly income to your retirement account, or maybe you want to have a go at chasing the potential home runs with a non performing note, there are plenty of place you can find real estate notes listed for sale.

If you want to try buying notes directly from a bank or credit union, you can use an online tool like BankProspector to locate non performing notes for sale. If you would rather find notes openly listed to the general public, there are a number of note trading platforms where you will find mortgage notes for sale.

Related: Join 5,000 Private Investors and Get Real Estate Notes Listed For Sale Delivered to Your Inbox Every Thursday

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