Author Topic: Promissory note advice. Time sensitive.  (Read 5229 times)

StartingEarly

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Promissory note advice. Time sensitive.
« on: April 22, 2016, 09:47:03 AM »
I am doing a promissory note with a long term friend, looking for advice about how to do it the right way. It is backed by their equity in the house which exceeds the value of the loan and from what I understand in Wisconsin the note gives me stake in the property.

Any advice would be greatly appreciated.

brotatochip

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Re: Promissory note advice. Time sensitive.
« Reply #1 on: April 22, 2016, 10:00:34 AM »
If you feel comfortable not getting a penny back from your friend then feel free to lend them money.  Most MMMers are against lending any $$ to friends/family.

ZiziPB

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Re: Promissory note advice. Time sensitive.
« Reply #2 on: April 22, 2016, 10:03:07 AM »
You need a lawyer to do it properly.  In order to have the benefit of the equity securing the loan, you will need to record a mortgage against the property.  Definitely hire a lawyer.

dandarc

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Re: Promissory note advice. Time sensitive.
« Reply #3 on: April 22, 2016, 10:13:05 AM »
+1 to needing a lawyer for this.  A promissory note simply documents the loan.  A mortgage is a separate document, at least where I am, and has to be filed with the state to be enforceable. 

Also look into the fees involved - a surprisingly large chunk of the closing costs on our mortgage in 2014 was the document filing fees / document stamp tax.  I imagine this varies widely from state to state, and possibly even county to county.

bobechs

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Re: Promissory note advice. Time sensitive.
« Reply #4 on: April 22, 2016, 10:25:58 AM »
You can draft your own locally valid mortgage and/or deed of trust from example forms on public record at your courthouse.

But if you didn't already know that there are probably a hundred other fairly vital things to know that you don't.  Heck, you don't even know that you don't even know.

You could file a jack-leg notice of lien claim that would ball up a standard sale long enough for you to react in time, but would not protect you from a debtor focused on cheating you.

You definitely need professional help.
« Last Edit: April 22, 2016, 10:27:35 AM by bobechs »

BFGirl

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Re: Promissory note advice. Time sensitive.
« Reply #5 on: April 22, 2016, 10:29:09 AM »
Yes, get a lawyer to do this, especially if you want to have a valid security interest in the house.

StartingEarly

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Re: Promissory note advice. Time sensitive.
« Reply #6 on: April 22, 2016, 10:44:56 AM »
Well, a promissory note is supposed to be backed by the home equity in Wisconsin. If they default I put a lien on the property and the bank typically settles before it goes into foreclosure.

ZiziPB

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Re: Promissory note advice. Time sensitive.
« Reply #7 on: April 22, 2016, 10:48:57 AM »
Well, a promissory note is supposed to be backed by the home equity in Wisconsin. If they default I put a lien on the property and the bank typically settles before it goes into foreclosure.

Please do yourself a favor and speak with a lawyer about this.  What you are describing generally doesn't work as you think it works.

frugaliknowit

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Re: Promissory note advice. Time sensitive.
« Reply #8 on: April 22, 2016, 02:31:22 PM »
My $.02:  If your friend can't get a home equity line, what makes you think he won't default on you?  If you take his property back, will it be worth the loss in friendship (it WILL be the end of it...)?

bobechs

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Re: Promissory note advice. Time sensitive.
« Reply #9 on: April 22, 2016, 06:24:32 PM »
Well, a promissory note is supposed to be backed by the home equity in Wisconsin. If they default I put a lien on the property and the bank typically settles before it goes into foreclosure.

Please do yourself a favor and speak with a lawyer about this.  What you are describing generally doesn't work as you think it works.

This is what I referred to above as a jack-leg maneuver.  It can work, but it relies upon all the critical  people in the transaction you are attempting to disrupt being more scrupulous and honest than you are.

Any plan, especially devised by the naive, that depends on being the least honest person in the room has a big  and obvious flaw from the get-go. 

Not that it won't ever work.

chesebert

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Re: Promissory note advice. Time sensitive.
« Reply #10 on: April 23, 2016, 04:07:55 PM »
Well, a promissory note is supposed to be backed by the home equity in Wisconsin. If they default I put a lien on the property and the bank typically settles before it goes into foreclosure.
Promissory note + mortgage + intercreditors agreement (if there is a senior lien) + recording + all other ancillary dox typically included in a HELOC application. Your state may have specific rules on residential mortgages. Suffice to say if you have to ask you don't know what you are doing and I hate to see you throw away your money.

My advice is leave residential lending to professionals. You do understand the reason why we have CDOs is holding individual mortgage is way too risky even if the borrower has perfect credit, right?


Indexer

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Re: Promissory note advice. Time sensitive.
« Reply #11 on: April 23, 2016, 08:06:22 PM »
I use to work in lending for a large regional bank. They should get a home equity line. With decent credit the interest rates are insanely low compared to other loans.

If they can't get approved for a HELOC at the bank... you need to turn them down as well. The personal banker at the bank has an incentive to help them get approved. The bank has an incentive to approve them. If the bank declines them then it means they are too high risk. If a bank doesn't like your credit they normally come back with a higher rate first, and only decline when you are too high risk even at higher rates.

You could even send them to lendingclub. ;)


Well, a promissory note is supposed to be backed by the home equity in Wisconsin. If they default I put a lien on the property and the bank typically settles before it goes into foreclosure.

Wisconsin might be different, but this isn't how it works in most places. Normally the first mortgage is the primary and they get their money before any subordinate secondary mortgages. If they have a mortgage then the bank already has a stake in the home. Their stake trumps yours. The house might be worth 200k with 100k of equity. If it gets foreclosed on the bank is just looking to get their 100k loan paid off. They aren't in the business of real estate and flipping homes. They want it off the books, and if someone offers 100k they will take it. This means your loan does not actually get paid back when the home it sold. The bank gets paid back first and they don't care about you so your stake in the property is worthless. Again, this might be different in Wisconsin but I would research that and hire a lawyer to be sure.

If your loan did have the ability to trump the original mortgage then the bank would have to ok that... which they won't normally do.
« Last Edit: April 23, 2016, 08:11:43 PM by Indexer »

RWD

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Re: Promissory note advice. Time sensitive.
« Reply #12 on: April 23, 2016, 08:20:24 PM »
If you are not in the first trust position you shouldn't even consider it.

StartingEarly

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Re: Promissory note advice. Time sensitive.
« Reply #13 on: April 24, 2016, 01:15:14 PM »
A promissory note in Wisconsin carries more weight than in most states. The house in question has equity exceeding the mortgage (house was bought during the housing crisis, now worth double the mortgage). The documents in question were signed in front of a notary and notarized. The reasoning for doing this was a transition from running his own business to transferring to a regular job in IT, which has taken longer than anticipated. The transition meant that he was shedding clients so that when he transitioned to a job he wasn't leaving people high and dry and could transfer people over.

I appreciate the advice. As it stands now I am fairly comfortable having the loan out. The amount is for 15k, which if I lost wouldn't ruin me. There is also greater than 15k just in vehicles that are owned outright should it have to go to small claims court to have a judgement put on it in the future, which I don't anticipate given the length of the friendship. The loan is for two years but should be paid off well before then, one of his several annuities will be available at that time to pay off the loan in full if it hasn't already been. It's just meant as a short term bridge for the transition.

Indexer

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Re: Promissory note advice. Time sensitive.
« Reply #14 on: April 24, 2016, 01:52:36 PM »
Well I like it more given the additional context. That doesn't mean I love it. I still question why he didn't just get a HELOC at the bank. The new information does bring up a secondary question...

Why doesn't he just close out an annuity now? Annuities have penalties for withdrawing before the surrender period but they normally scale down over time. So it is typical to have an 8-10% penalty in year one, but only a 2-3% penalty in the final couple years.

If you are charging him anything in terms of interest he is probably better off just closing the annuity. The exception would be if he is 57 1/2 to 59 1/2 years old because he can avoid the 10% tax penalty for early withdrawals by waiting for a short period. If this was his goal I'm completely on board with this, but I would want a contract(like the annuity itself) actually saying the annuity is the collateral(if you can in Wisconsin) AND naming you the irrevocable beneficiary.

StartingEarly

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Re: Promissory note advice. Time sensitive.
« Reply #15 on: April 24, 2016, 09:38:03 PM »
He didn't put the money into the annuities, a relative did. There is also a literal fuckton of family drama surrounding the annuity since he was the "favorite" and got more money than his cousins, so best not to stir that pot. He isn't the one controlling it, he's controlling her medical stuff, another is controlling the finances.