You must often take the lead when it comes to getting the deal done because your private money partners will most likely not have had the experience that is needed to do it themselves. They may not have ever completed a private mortgage or a promissory note.
Promissory Note (more likely) – This is a commitment or promise of one party to pay another party a specific sum of money either on demand or over a specified amount of time. Usually this is something that is not secured against a property at all, but it could be. In Ontario, these notes should be kept under $25,000 in order to keep any disagreements in small claims court.
Sample Demand Promissory Note This is an example of a promissory note that I have used, but is registered as a mortgage for added security to the borrower. If you intend to use it, you must have it reviewed by your own lawyer to ensure that you get independant legal advice.
Mortgage (less likely) – This is secured against a property and the terms are set out in the note and agreed upon with the lender. The loan is “secured” on the borrower’s property. This means that a legal mechanism is put in place which allows the lender to take possession and sell the secured property (“foreclosure” or “repossession”) to pay off the loan in the event that the borrower defaults on the loan or otherwise fails to abide by its terms.
The position of the mortgage is important. For example, a mortgage in the first position gets paid before all other liens are paid. If you are getting a loan from a private individual it may be possible to get a higher loan-to-value then you would from a bank lender, where you might only get 80% loan-to-value on a rental property. A mortgage from a lender might also be in second position after a first mortgage.
I would suggest that you have the lawyer that is completing the transaction with you and advise the lender on the proper paperwork in order to complete the transaction. You are going to want to ensure that all the closing instructions are given to the lawyer, with the money given in trust to your lawyer who is closing the transaction.
The lender usually keeps the original note, until it has been paid off by the borrower. When it has been paid off it is important that the mortgage has been released from the property.
Key Partners Can Multiply Your Business
Take time and develop your relationships with your lenders. Find out what motivates them. And deepen your relationship with them.
Remember these are people and not financial institutions. Bond with them and become friends. This type of relationship is more helpful than a strictly business relationship. Make sure to be consistent, and do what you say you are going to do. Communicate with them regularly and make sure that they feel that they are part of your inner circle or your tribe. And be sure to send out those Christmas and Birthday cards.