What is a Promissory Note?
As its name suggests, a promissory note is a promise. A note promises to pay a specified amount of debt to a specific person, either by a specific date or on demand.
In real estate, a promissory note is created to define the terms of a property purchase. The note spells out the loan amount, interest rate, payment amount, amortization schedule and consequences of defaulting.
How Does a Promissory Note Differ from a Mortgage?
The promissory note is basically an IOU (“I owe you”). It specifies the terms of a loan and states that someone is promising to repay the loan.
The mortgage or deed of trust provides security for the loan, evidenced by the promissory note. An acceleration clause allows lenders to demand the entire balance of loan be repaid if the borrower defaults.
The mortgage or deed of trust is recorded in the county land records, usually shortly after the borrower signs it, finalizing the transaction.
What happens when a loan is fully paid off? The lender records a release (or satisfaction) of the mortgage, or a deed of reconveyance (used with deeds of trust) in the county land records.
Why Real Estate Investors Buy and Sell Promissory Notes
In real estate, a noteholder is the person or party who receives payments on the note.
If a noteholder has difficulty receiving regular and timely payments on the note, or if they need cash, they may choose to sell the note to an investor. They sell the note at a discount, based on future payments using today’s dollars.
The sale of the note gives the noteholder instant access to cash. It also removes them from all further responsibility for collecting payments.
Investors who purchase a promissory note gain a versatile, collateral-backed real estate investment that’s unaffected by stock market changes. Since notes are purchased at a discount, investors earn returns from the difference in the discounted purchase price and the real value of the note, plus monthly principal and interest payments.
Notes can offer a faster and higher return on investment than stocks and bonds.
Questions About Promissory Note Investing?
We purchase promissory notes in affordable U.S. neighborhoods to stabilize neighborhoods and avoid the displacement of deserving residents.
