Real estate notes or promissory notes is a type of agreement, where there are two parties involved, that is a lender and a borrower. The real estate purchaser can become a borrower and the real estate seller may assume the position of a lender. This happens when the seller treats the balance due to him or her as a loan to the real estate purchaser, and charges some interest on this amount. This loan is for a shorter period than any loan that the borrower may be able to obtain from any banks or financial institutions.
A real estate note or promissory note is actually an undertaking by the borrower stating that he or his heirs would be liable to repay the amounts mentioned in the note. In addition, there may be an interest clause as well. Again, such note has to be signed in the presence of witnesses, and the date is important. A very important aspect of any promissory note is its validity, and period of limitation.
There are limitation acts which differ in a different country or state. Therefore, it is necessary to renew promissory note before it becomes invalid due to any Limitation act applicable to it. The borrower is obliged to repay a loan under promissory note, as and when the lender calls for it, in other words, the borrower agrees to pay the money on demand from lender. For this, the borrower may even have to borrow from others.
If the borrower or real estate purchaser has taken a loan from any bank, then he or she can repay the loan over a longer period, and in smaller installments. Both ways have advantages and disadvantages. If the borrower is not eligible for a loan as per the banks’ norms then executing a promissory note remains the only way, provided the seller or lender agrees.
- Since the borrower is liable only for interest under this type of borrowing, till he repays the loan in full, it is easier on his or her monthly cash flows. But the interest rate charged by the lender may be higher. In so far as the lender is concerned, there is a certain element of risk involved. Moreover, the value of the money depreciates considerably over the period, if the period is much too long.