Private Money: What is involved in offering a Note?

When I speak on raising private money, I often get the same questions from audience members asking about the details of how the Note is made and what is involved.  This post is a summary of information to answer those questions. We’ll talk about secured notes and unsecured notes.


Usually when raising private money, we are talking about secured notes, or a note secured by a real property commonly known as a mortgage.  This is the structure most common as anyone who has bought a home with a bank loan is familiar with it.  The investor with a note is just like the bank. The investment consists of a Mortgage Deed, which shows the amount owed on the property and defines the responsibilities of the lender and borrower, and a Note, which defines the terms for repayment of the loan.

Secured Notes can be used to purchase a new property or they can be created after a property is owned for refinancing.  The documents can be created by alwayer or you can talk to your title company and they can arrange a lawyer to draw up everything.  After the loan is made, the mortgage will be recorded with the county so it is on record with the property. If you use a title company, they will usually do the recording.  If not, you can file the documents yourself with the county.

Here are the details of what is included in each document:
Mortgage Note
·       Names of both parties involved
·       Legal description of property used as security
·       Detailed terms for repayment of investment
·       Interest rate earned on investment
·       Recourse for late payment
·       Recourse for event of default
 
Mortgage Deed
·       Names of both parties involved
·       Record information for property deed
·       Amount of money in lien against property
·       Legal description of property used as security
·       Explanation that all property’s buildings, improvements, land, etc. are included in mortgage.
·       Obligations of the property owner:
o   Repayment of the mortgage note
o   Maintenance of property
o   Provide property insurance
o   Payment of taxes
o   Filing of records and providing information to investor
o   Fulfillment of investment in case of sale, award, or insurance settlement for property.
o   Compliance with any municipal ordinances and regulations
·       Definition of Events of Default
·       Process of Remedy for default through foreclosure
·       A Release of Lien will be signed and recorded after the fulfillment of the Mortgage Note
·       Sale of or Title transfer of property makes the investment immediately due
·       Notary Acknowledgement

Unsecured Notes refers to a loan that is not secured by real estate.  Usually this is in the form of a Promissory Note. These loans would be to a person or business entity and the document would only include the loan and repayment information. Though unsecured sounds riskier, a promissory note is secured by the person and all that they own.  So if there were a default on the Note, legally the lender could collect on any asset owned by the borrower. 

In real estate secured notes called mortgages are the most common and should be used by any investor planning to offer notes, however there are instances where unsecured notes are useful.