As the name suggests, a promissory note is a “promise” to pay a specified amount owed on a debt to a specific person, by a specific date or on demand.

In real estate, a promissory note is created to define the details of a property purchase. The terms of the purchase include the loan amount, interest rate, payment amount, amortization schedule, and the consequences of defaulting on the loan.

How Does a Promissory Note Differ from a Mortgage?

The promissory note is basically an IOU (“I owe you”) that specifies the terms of a loan and states that someone is promising to repay the loan.

The mortgage or deed of trust provides the security for the loan that is evidenced by the promissory note. It will also contain an acceleration clause that allows the lender 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.

In the event the loan is fully paid off, the lender records a release (or satisfaction) of the mortgage or a deed of reconveyance (which is used in conjunction with deeds of trust) in the county land records.

Why Real Estate Notes Are Bought and Sold

A noteholder in the world of real estate is the person or party who receives payments on the note.

If a noteholder is having difficulty receiving regular and timely payments on the note, or if they are in need of a lump sum of cash, they may choose to sell the note to a real estate investor. They would sell the note at a discount, since it is being purchased based on future payments using today’s dollars. The sale of the note provides the noteholder with instant access to cash, and removes them from any further responsibility in collecting payments on the note.

An investor who purchases a promissory note often does so because it offers a versatile, collateral-backed real estate investment that is unaffected by the fluctuations of the stock market. Because the notes are purchased at a discount, an investor earns returns through the difference in the discounted purchase price and real value of the note, as well as through regular monthly principal and interest payments. They can also offer a faster and higher return on investment than stocks and bonds.

Have Questions About Note Investing?

At Alvernia Capital Management, we purchase promissory notes in affordable neighborhoods throughout the U.S. Our intent is to stabilize these neighborhoods while avoiding the displacement of its residents.

If you’d like to get in touch with a member of our team, fill out the form here to let us know more about your situation.

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