What is a Real Estate Note
If you want to get a mystified, quizzical look from someone, then mention the word real estate note to them. I would bet that most realtors and bankers could not even provide a good definition of the term, so let’s do that now. A real estate note is created when a property is sold using owner financing, with the note being the document that states how the property is to be paid for. A well-written note always includes the following, at a minimum:
- original amount owed
- interest rate charged by property seller
- term of note, in years and months
- payment amount, including when the first payment and all following payments are due
- what happens in case of a late payment and default
- signature of payer
A real estate note is a legal document that accompanies the deed of trust or mortgage. The latter items hypothecate the property — in other words, they make the property collateral to make sure that the note is paid back.
A real estate note can go by several names — mortgage note, deed of trust note, promissory note, or just note. Regardless of the name, it is basically the “I.O.U.” so that both buyer and seller are clear on the payment plan. The buyer is obligated to make payments per the terms of the note, and failure to do so can cause them to lose the property in foreclosure.
The note holder (seller of the property) is acting in a similar capacity to a bank. He cannot unilaterally change any terms on the note, of course, but can decide how flexible to be if the buyer violates any terms on the note. The note holder usually has the option of selling the note to a mortgage buyer, in which he is simply transferring his right to the note in exchange for receiving money upfront. The mortgage buyer would then receive payments directly from the original buyer of the property. The”mortgage notes” page of the Seascape Capital website can provide more information about the process, and includes several documents and videos.