Lend Money to a Friend?

Question: I am using a loan from a friend to help fund our first deal but we don't have a specific property under contract as yet. How do you structure the promissory note when you need to secure the lender's interest with the real estate you intend to buy. I have seen many promissory notes that relate to real estate that naturally leave a blank line to input the property's address as the security for the loan. How would I handle this issue? I appreciate any suggestions/advice Answer: This is bad practice. You're talking about an unsecured loan between friends, a recipe for disaster. I don't know why the loan would be made prior to a property being purchased. Perhaps you want to appear to be a pure "cash buyer" when bidding. If your friend will not be on title, then I'd advise that you submit offers as a "financed buyer", but with a large EMD, a fairly short closing time frame, and with a letter of funding commitment and a bank statement from your friend. That is still a very strong offer.

A Foreclosing Lender Must “Hold” Both Note & Mortgage

In a case with national implications, the Massachusetts real estate community has been waiting 8 long months for a decision from the Massachusetts Supreme Judicial Court (SJC) in the much anticipated Eaton v. Federal National Mortgage Association (link) case. The decision came down June 22, and now that the dust has settled, I don’t think there is any question that lenders and the title community have been given a judicial Maalox. The SJC held that lenders must establish they hold both the promissory note (indebtedness) and mortgage - a major problem for securitized or MERS mortgages where the note and mortgage are split between securitized trust and servicer. However, responding to pleas from the real estate bar, the Court declined to apply the new rule retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. Even better, the Court outlined new sensible procedures, including filing a statutory affidavit, to ensure that foreclosures are compliant going forward. The ruling clearly favors lenders and the foreclosure industry, and will clear the way for foreclosures to accelerate and run their course in Massachusetts and possibly other states if the ruling is followed.

Does a promissory note have to be signed by both parties

Epson WorkForce WF-2540 All-in-One Printer C11CC36201 (Google Affiliate Ad) Only the borrower needs to sign a promissory note. A promissory note is essentially a written IOU and it's simply a promise that the borrower is making to repay the lender. The lender need not sign because it will be the lender filing the suit to enforce the promise of the borrower.

How to Write A Promissory Note

Every entrepreneur at one time or another has probably worried over presenting a brilliant business concept to a family member, friend or colleague hoping to get a check for $12,000 for the business. Money from family, friends or acquaintances is often the fastest and cheapest source of capital available to budding entrepreneurs. These types of loans account for more than 50 percent of all start-up business investment dollars.
Banks provide their own promissory note forms, but if you borrow money from an individual, you’ll need to come up with one on your own. There are emotional pitfalls to loans between family and friends, along with financial risks and administrative requirements. There are websites such as www.One2OneLending.com that will guide you through the process of creating a legally binding promissory note.
Often, small business owners fail to follow the basic but important lending guidelines when they borrow from an individual. This can result not only in any number of personal conflicts but also tax difficulties.
Documenting the loan can do no harm, and it can head off misunderstandings about whether the money is a loan or a gift. With a gift no repayment is expected, a loan requires repayment, while an equity investment is in return for shared ownership.
The obvious reason to hammer out all the details of the loan in writing is to keep harmony. Second, it becomes a taxing situation if you can’t prove the loan is formal and legal. Many entrepreneurs have been dragged into IRA audits over personal loans.
Let’s say you deposit a $25,000 check from your relative; your bank automatically informs the IRS about the deposit. In fact, all deposits over $10,000 are reported to the IRS. When the deposit does not show up on your personal or business taxes as income, the IRS will want to know why.
Always keep in mind this is debt obligation. A promissory note means that by nature you have the money to make payments on the loan. Be sure to have the cash flow to service the debt. If you have uneven cash flow you should not enter into a promissory note; perhaps you should look into an equity arrangement.
Treat a personal loan as carefully and as formally as any other business transaction. This and all other information about promissory Notes and their benefit can be found in the Resource Center at www.One2Onelending.com.
5 Key Aspects to Writing A Promissory Note:
1. Create a Promissory Note
A promissory note can be a do-it-yourself document. It is a simple contract whereby the borrower creates a note promising to pay the money back by a certain date.
There are free promissory notes or personal loan agreement forms available online. But also take a look at forms in One2OneLending.com.
Most of the time you can find a form that fits your situation. If there is something unusual about the repayment terms, then it may make sense to have the note reviewed by a lawyer.
The need for a lawyer rises with the more money you are trying to borrow. For a $1,000 note it doesn’t make economic sense to hire an attorney. But if you are talking more than tens of thousands of dollars consider consulting an attorney.
A promissory note basically includes the name of both parties (lender and borrower), date of the loan, the amount, the date the loan will be repaid in full, frequency of loan payments, the interest rate charged on the loan payments, and any security agreement.
2. Charging Interest
There is no legal limit to the amount you can borrow, it can be anywhere from $1,000 or $1 million. However, there are guidelines about charging interest. The lender must charge an interest rate that reflects fair market value. This has to be at least the applicable federal rate, which is another of layer of scrutiny the IRS uses to determine if this is really a gift or a loan. You can find at list of rates at the IRS.gov. The AFR is adjusted monthly and currently ranges from around 0.7 percent on loans of three years or less to under 4.5 percent on loans longer than nine years.
Do a statewide search. States have usury laws for the highest rate of interest you can charge on personal loans. This was done to reign in predators and loan sharks.
What type of credit risk is being taking on? That should also dictate how much interest is assessed. If you as the borrower are a good credit risk (you have the ability to pay and the assets to back it up) then the interest charged should be at the lower end of the spectrum and vice versa.
3. Scheduling Repayment Terms
When you sit down to create a schedule for your repayment, think first about what you can afford, and create a schedule that makes keeping up with your payments possible. With private loans you have the option of designing a repayment plan that is more in line with the business’ expected profits. A promissory note usually requires making that first payment in 30 days. But you could have a six month grace period after which point regular payments are made with an interest-only agreement.
The legal and practical terms of promissory notes can vary considerably, but the most important thing is to set a repayment plan that’s right for you. These are the types of repayment schedules to consider:
1. Amortized payment: You pay the same amount monthly or annually for a specified number of months or years. Part of the payment goes toward the interest and the rest goes toward principal.
2. Interest only payment and final balloon payment: You make regular payments of interest only over a number of months or years. However, the principal does not decrease. At the end of the loan, you must make a final payment to repay the principal and remaining interest.
3. Single payment of principal and interest: You can opt to pay the loan off all at once and avoid regular ongoing payments. At a specified future date, you would pay the entire principal amount and accrued interest. This is best for short-term loans.
4. Pledging Security
The advantage of borrowing money is that you don’t have to give up equity ownership in the business. You just have a financial obligation to pay your debt. However, sometimes a lender may want a security agreement, meaning that you are pledging or offering some type of collateral.
“If you are going to offer collateral than that needs to be listed on the note and the terms under which if you go into default what happens to the collateral to satisfy the obligation,” says Freeman. “And it needs to also clearly spell out that if the collateral is liquidated for more than what is owed on the note then who get the excess.”
Once you agree on the loan terms, be aware if you are signing on behalf of the business or yourself, says Freeman. “Are you personally liable for the loan versus signing it as a representative of your business entity whether it is a corporation or LLC?”
5. Handling Missed Payments or Loan Default
You don’t have to be an entity; any individual can garnish another person’s business and personal bank accounts for failure to payback a loan. Once a borrower defaults and property or business assets are pledged, a lender can take legal action in terms of a lawsuit. The lender would go to court and get a judgment for attachment of property and force a sale to satisfy the debt. Seizing furniture or business equipment which can be sold to satisfy the debt is also recourse.
You have to be as specific as possible. “Sometimes a note will state that once a payment is missed then the loan is accelerated and the entire amount becomes due at that point,” adds Freeman. Make sure there is a clause that says there is no prepayment penalty.
Lastly consider having the completed promissory note witnessed by a notary.

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How to Write A Promissory Note

Every entrepreneur at one time or another has probably worried over presenting a brilliant business concept to a family member, friend or colleague hoping to get a check for $12,000 for the business. Money from family, friends or acquaintances is often the fastest and cheapest source of capital available to budding entrepreneurs. These types of loans account for more than 50 percent of all start-up business investment dollars.

Banks provide their own promissory note forms, but if you borrow money from an individual, you’ll need to come up with one on your own. There are emotional pitfalls to loans between family and friends, along with financial risks and administrative requirements. There are websites such as www.One2OneLending.com that will guide you through the process of creating a legally binding promissory note.

Often, small business owners fail to follow the basic but important lending guidelines when they borrow from an individual. This can result not only in any number of personal conflicts but also tax difficulties.

Documenting the loan can do no harm, and it can head off misunderstandings about whether the money is a loan or a gift. With a gift no repayment is expected, a loan requires repayment, while an equity investment is in return for shared ownership.

The obvious reason to hammer out all the details of the loan in writing is to keep harmony. Second, it becomes a taxing situation if you can’t prove the loan is formal and legal. Many entrepreneurs have been dragged into IRA audits over personal loans.

Let’s say you deposit a $25,000 check from your relative; your bank automatically informs the IRS about the deposit. In fact, all deposits over $10,000 are reported to the IRS. When the deposit does not show up on your personal or business taxes as income, the IRS will want to know why.

Always keep in mind this is debt obligation. A promissory note means that by nature you have the money to make payments on the loan. Be sure to have the cash flow to service the debt. If you have uneven cash flow you should not enter into a promissory note; perhaps you should look into an equity arrangement.

Treat a personal loan as carefully and as formally as any other business transaction. This and all other information about promissory Notes and their benefit can be found in the Resource Center at www.One2Onelending.com.

5 Key Aspects to Writing A Promissory Note:

1. Create a Promissory Note

A promissory note can be a do-it-yourself document. It is a simple contract whereby the borrower creates a note promising to pay the money back by a certain date.

There are free promissory notes or personal loan agreement forms available online. But also take a look at forms in One2OneLending.com.

Most of the time you can find a form that fits your situation. If there is something unusual about the repayment terms, then it may make sense to have the note reviewed by a lawyer.

The need for a lawyer rises with the more money you are trying to borrow. For a $1,000 note it doesn’t make economic sense to hire an attorney. But if you are talking more than tens of thousands of dollars consider consulting an attorney.

A promissory note basically includes the name of both parties (lender and borrower), date of the loan, the amount, the date the loan will be repaid in full, frequency of loan payments, the interest rate charged on the loan payments, and any security agreement.

2. Charging Interest

There is no legal limit to the amount you can borrow, it can be anywhere from $1,000 or $1 million. However, there are guidelines about charging interest. The lender must charge an interest rate that reflects fair market value. This has to be at least the applicable federal rate, which is another of layer of scrutiny the IRS uses to determine if this is really a gift or a loan. You can find at list of rates at the IRS.gov. The AFR is adjusted monthly and currently ranges from around 0.7 percent on loans of three years or less to under 4.5 percent on loans longer than nine years.

Do a statewide search. States have usury laws for the highest rate of interest you can charge on personal loans. This was done to reign in predators and loan sharks.

What type of credit risk is being taking on? That should also dictate how much interest is assessed. If you as the borrower are a good credit risk (you have the ability to pay and the assets to back it up) then the interest charged should be at the lower end of the spectrum and vice versa, Freeman explains.

3. Scheduling Repayment Terms

When you sit down to create a schedule for your repayment, think first about what you can afford, and create a schedule that makes keeping up with your payments possible. With private loans you have the option of designing a repayment plan that is more in line with the business’ expected profits. A promissory note usually requires making that first payment in 30 days. But you could have a six month grace period after which point regular payments are made with an interest-only agreement.

The legal and practical terms of promissory notes can vary considerably, but the most important thing is to set a repayment plan that’s right for you. These are the types of repayment schedules to consider:

1. Amortized payment: You pay the same amount monthly or annually for a specified number of months or years. Part of the payment goes toward the interest and the rest goes toward principal.

2. Interest only payment and final balloon payment: You make regular payments of interest only over a number of months or years. However, the principal does not decrease. At the end of the loan, you must make a final payment to repay the principal and remaining interest.

3. Single payment of principal and interest: You can opt to pay the loan off all at once and avoid regular ongoing payments. At a specified future date, you would pay the entire principal amount and accrued interest. This is best for short-term loans.

4. Pledging Security

The advantage of borrowing money is that you don’t have to give up equity ownership in the business. You just have a financial obligation to pay your debt. However, sometimes a lender may want a security agreement, meaning that you are pledging or offering some type of collateral.

“If you are going to offer collateral than that needs to be listed on the note and the terms under which if you go into default what happens to the collateral to satisfy the obligation,” says Freeman. “And it needs to also clearly spell out that if the collateral is liquidated for more than what is owed on the note then who get the excess.”

Once you agree on the loan terms, be aware if you are signing on behalf of the business or yourself, says Freeman. “Are you personally liable for the loan versus signing it as a representative of your business entity whether it is a corporation or LLC?”

5. Handling Missed Payments or Loan Default

You don’t have to be an entity; any individual can garnish another person’s business and personal bank accounts for failure to payback a loan. Once a borrower defaults and property or business assets are pledged, a lender can take legal action in terms of a lawsuit. The lender would go to court and get a judgment for attachment of property and force a sale to satisfy the debt. Seizing furniture or business equipment which can be sold to satisfy the debt is also recourse.

You have to be as specific as possible. “Sometimes a note will state that once a payment is missed then the loan is accelerated and the entire amount becomes due at that point,” adds Freeman. Make sure there is a clause that says there is no prepayment penalty.

Lastly consider having the completed promissory note witnessed by a notary.

How to get a friend or family member to pay you back

Many people have loaned money to friends or family members. Chances are, they haven’t paid you according to your understanding. If you are lucky, you used a company such as One2One Lending to help you get your agreement in writing in the form of a promissory note. If you have a family member or friend who won’t pay you back whether or not you have created a promissory note, here are some ideas for how to get your payments back on track.
Create an understanding of where your loan stands now. Show exactly how much the borrower can afford to pay. This will let the (you) know that they are realistic and want to make the payments and when you should to expect them.
Talk to them about your interest in accepting payments. Sit down with the friend or family member and put an agreement in writing that they will pay you back in a set number of payments at specified times. This way, you’re adding structure to the agreement, and you’ll at least be getting something back. You also will not feel that it is wrong to nagging them about payment deadlines that have been agreed upon.
Be Persistent. If you’re starting to think that they will never have the money to repay you, and then get something else out of it. Think of it as security for the loan – something of equal value. This is a great way to let them off the hook for the money, but still receive some value for your efforts.
Give the money to them by forgiving the loan. If never getting the money back isn’t going to ruin your relationship, then just gift the money to them. You’ll feel good about it, the thoughts will be out of your head, and you can move on. If you’re not in a financial situation to give the money away without the expectation of getting it back, then you probably should not have loaned the money to them in the first place.
Loans between family members can ultimately sour a relationship and many families don’t talk to each other because of loans gone bad. Make sure that if you are ever moving ahead to help a friend or family member – get it is writing. With the help of on line services like One2One Lending it is not intimidating.