Note against property

[Karen Margrave]

@Bill Gulley Someone was asking me a question on their home. The Seller is carrying back a note secured by a 2nd deed of trust. The agreement they have is that there are to be no payments on the note, and the buyer will pay off the off the note when they flip the house, but not to exceed 2 years. However; in looking at the note there is no provision for what happens if the house doesn't sell in the specified amount of time.

I explained that all those possibilities need to be accounted for, including if it doesn't sell what happens, and everything spelled out in writing (how long seller will carry, interest rate, payments, etc.), and agreed to by all parties.

Apparently someone at the title company gave them a copy of a blank note to use as a template, that didn't include any of that; and they are under the impression that by crossing out the interest provision and term provision, that means that there's no interest or payments that need to be addressed, and if it doesn't sell in the 2 years it will be addressed and negotiated then.

Can you please answer this to back me up?

1. Does the note have to be written by a mortgage broker?

2. What exactly needs to be included in the note? (interest rate, term, etc.)

3. If property doesn't sell by the end of the term, then the exact terms of how payment will be made need to be addressed isn't that correct?

Thanks!

[Account Closed]

Karen: Depends on who you are trying to protect. IMO the note is fine the way it is if the goal is to secure the seller/lender. If the property doesn't sell by the balloon date, the seller/lender can foreclose or extend.

What isn't so great is being in second position. Assuming this is CA, the seller should make sure to record a Request for Special Notice so they are notified if the borrower defaults on the first (hopefully this was done at closing, but best to check). And of course, to make sure the seller/lender is named as additional insured on the insurance policy. Oh, and to make sure that the insurance the borrower is carrying is actually a rehab policy and not some cheap CA FairPlan policy or other policy that doesn't cover rehabs. Lending is risky. Lending to rehabbers in 2nd position? No thanks. :)