What is a real estate note?

Take out your wallet and you will find a lot of notes. Each bill is actually a Federal Reserve note, and they have printed on them, “This note is legal tender for all debts, public and private.”

So, a Promissory Note can be something as simple as a small piece of paper that promises to pay you a certain amount, or you can use it as legal tender to take care of a debt. Even a scribbled napkin with the amount, terms, payment, and a signature is a note. This is a form of unsecured promissory note.

When you buy a car, your contract is also a Note, since you are paying a certain amount, at a certain interest rate, for so many months. So we see that notes can be written for many transactions.

A Real Estate Note is a similar document; although it is usually an amortized payment plan, usually four to five pages outlining the same information. Amortized literally means kill. You will pay the Note and interest on the final payment in full.

The promissory note is different from the mortgage, which is the security document related to the property, so it is guaranteed. The promissory note is the promise to repay the mortgage loan, and the debt is secured by the mortgage. It describes the amount of money you are borrowing from the lender, at a given interest rate, for a given time. That rate may remain fixed and the payment will remain the same throughout the term of the Note. The Note may also have a variable interest rate, usually linked to the prime rate, with the monthly payment varying as the interest rate rises or falls.

Other Note features sometimes allow you to pay for it early or not; with and without penalties, loan fees, and what happens when you don’t pay. A key feature of most, if not all, mortgages is the ability to sell all or part of the Note to other investors.

Some notes have a balloon payment, which means the entire balance is due after a short period. After the housing crash, balloon payments are for the most part not used on consumer home purchases due to the ability to cause problems for the homeowner if they are unable to collect the amount owed by another lender.

As long as the homeowner makes the payments, it is considered a performance note, and as you continue to pay, it will remain so. It has a high resale value, typically 75-85% of the UPB (unpaid principal balance). When they stop paying, it’s a delinquent note and its value is greatly reduced. We typically pay between 20 and 50% of the FMV (fair market value) of such notes. These are called Difficulty Assets or Toxic Assets.

If they start paying again, it is now a Re-Performing Note, and after a year of payments, they can be sold for close to the price of a Performance Note.