Real estate investors have long used private money lenders to finance their real estate investments. A real estate investor, who we funded loans for in the past, confided in me that he was preparing to do a new property acquisition using a friend’s private funds. I asked how the lender planned to secure the loan and the investor informed me that the lender would only require a promissory note to be signed to secure the loan. The problem with this lender making this loan is in the Promissory Note that is intended to secure the debt on the property.
A promissory note is only a “promise to pay,” but it is generally not recorded. In order for a private money lender to secure repayment of a promissory note with the real estate, a lender must use a deed of trust, or a mortgage. If the private lender makes the loan to the investor and secures it to the real estate with only the promissory note, this will not be sufficient security. But why? A deed of trust is sometimes referred to as a security document because it secures the promissory note to the real estate by creating a record in the County where the real estate is located. This recorded document creates the lien against the property that is a notice to the world that there is a debt owed to the lender. Without it, the investor could resell the property without paying back the private money lender.
Bottom line, if you’re planning on making private money loans to friends, investors, and others - pay attention to this. Always use a Deed of Trust or a mortgage to secure repayment of a promissory note with real estate.
@Corey Dutton, nice run down on essentials for a private lender
@Corey Dutton thanks for the info! You spelled it out nice and clear, which is always appreciated. And a great heads-up!
Thanks Corey. This information is great for beginners like me.
@Corey Dutton a loan on Real Estate without a security instrument is NOT a loan on Real Estate its simply an unsecured loan just like a credit card ..
Its the security document that makes it a Re Loan.
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