How do notes work on free and clear properties?

Question

Can you sell a note if you own a property free and clear? Sorry for the newb question, but there is a lot of terminology in this sub-forum that I don't understand.

Account Closed · Answer

You own a free and clear house that is worth $100,000.  You want to buy an airplane that is worth $50000.  You ask Mr. Airplane owner, "If I gave you a note for $50,000 at 6% interest with payments of $500 per month secured by a house that I have owned for years, would you give me the $50000 airplane? " He says yes.  Now you own a free and clear airplane and you owe $50,000 on your house. Mr Airplane owner is the morgagee. You are the morgagor.    If you want some cash, sell the airplane.  Anywhere, in this answer, you see the word airplane, you can replace it with house ,lot, business,RV, diamond ring, racehorse .  If that note and mortgage did not have a due on sale clause, you could sell the house and let someone assume that mortgage or better yet, wrap another mortgage around it.

Bill Gulley · Answer

Good example of collateral substitution Ron, so long as the owner of the airplane doesn't insist on a lien on the airplane and the house.
Check with your state laws on installment sales of personal property the lien may need to be on the property sold and first secured in default but additional collateral can also be assigned. The technique is good for like kind property, give a note on your house for another house.

James Hiddle · Answer

Leave it to Bill to crush yet another dream lol :)-

Bill Gulley · Answer

I believe you asking a popular thought of nebies, you have a property and you want to make a note on it and sell it to obtain cash..right?

If so, no. You can't originate a note to pay yourself and then sell it, it's not at arm's length or a valid contract,  easiest way to say it.

Next, if you made a note to pay someone else, the payor, they are then a lender, but they did not give consideration for the note, again, a sham transaction. Doing so and then selling the note or attempting to do so is fraud, the note is worthless as money was never paid for the extention of credit or creating a valid debt.

Not a new idea, but you're thinking!  :)

How do notes work on free and clear properties?

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