REAL ESTATE PAPER
sponsored by Frank Lamb and Associates
1-800-249-0496
- Welcome to the world of paper! Within the real estate industry, the word "paper" generally
means documents relating to financial aspects of the business. Paper can be created! It can
be used to purchase property; to promote the sale of property; to create funds for a new
project! Paper can be bought and sold.
- Promissory notes, and their most commonly used security devices - deeds of trust and
mortgages - will be discussed below. Our intention is to cover these, and also more exotic
documents, in greater depth in newsletters and pamphlets, while giving here the basic
information required to follow discussions in the home-page topics.
- In all of our discussions we will use the terms "real estate" and "real property" to mean the
same thing, as is done in some states.
NOTES
- A note is a signed promise to pay a debt. When we borrow money to buy real estate, the
lender requires that we sign a note. If the seller of the property agrees to "carry back" a
note, the note we sign will state that payments will be made to the seller, and that means we
can avoid having to borrow money for that part of the deal. Notes created by such seller
financing can be arranged to provide benefits for both parties.
- The amount of money loaned, or the amount the seller has agreed to carry back, is the
"principal" amount of the note. Depending upon the agreement, this principal may be
reduced as payments are made during the "term" of the note, that is, during the period of
time allowed for the debt to be paid off. When the principal amount is reduced by the
payments during the term of the note, the note is said to be "amortized" and it may be fully
or partly amortized. A fully amortized note has no balance remaining to be paid at the end
of its term, while at the end of the term of a partly amortized one there will be a "balloon"
payment required to pay off the remaining balance.
- Financial institutions charge interest on the money they loan out, and interest is also
charged by sellers who carry back notes. As with other legal matters, competent counsel
should be sought when there is any question as to the legality of the interest rate being
charged in a particular situation. In general, the interest rate on seller carry-backs is
whatever can be negotiated between the two parties, since the seller is not making a loan
but forbearing the immediate collection of an amount owed.
TITLE TO REAL PROPERTY
- There is no single document giving "title" to real estate. Having title means that the right to
ownership can be shown by going back through the records. The records are maintained in the county in which the property is located, and are available to the public.
DEEDS OF TRUST
- A deed is a document used to transfer an interest in real property from one party to another,
and there are a variety of deeds used for different purposes. Our concern here is with trust
deeds, which are used in some states to provide security for the payment of debts.
- The party to whom a debt is owed needs assurance that if the note requirements are not
met, generally by the debtor failing to make the payments, the outstanding amount of the
debt can be recovered. This is accomplished by splitting the title to a specific piece of real
estate into its "legal" and "equitable" components and using a deed of trust to transfer the
legal title to a trustee. Then, if the debtor (the trustor) fails to meet the requirements of the
note, the beneficiary of the trust deed (to whom the debt is owed) can instruct the trustee to
sell the property to recover the debt. There are, of course, certain steps that the trustee must
follow under the statutes of the particular state.
- Obviously the note and its security instrument, the deed of trust, belong together, and if we
speak of buying or selling one of them we are speaking of both. Thus, if we buy a deed of
trust we are actually buying the underlying note together with that instrument.
MORTGAGES
- The purpose of a mortgage is similar to that of a deed of trust; but there is no trustee. The
legal title is transferred to the mortgagee (the party to whom the debt is owed) and if the
note's requirements are not met by the mortgagor (the debtor) then the mortgagee
forecloses to recover the debt by selling the property. The note and its security instrument,
the mortgage, go together. If we sell a mortgage we are also selling the underlying note.
Traditionally it was more difficult to foreclose on a mortgage than a deed of trust, but many states have adopted alternative methods of speeding up the process.
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