Can you easily locate the original promissory note created when you sold your seller-financed property? This important legal document should be kept in a safe place, and here is why!

The note is a promise to pay (or IOU) from the buyer which outlines the specific amount owed and terms of repayment. It is considered a negotiable instrument in the same sense as a check. And just like a check, the original note must be presented in order to prove ownership and establish a legal right to collect on the underlying debt.

If the note holder decides to sell and assign the note payments to an investor, the investor will require that the original promissory note be surrendered at closing. The promissory note is then endorsed over to the investor (again, similar to endorsing a check). Something akin to the following will be written on the back of the note:

Pay to the order of, [Insert name of investor], without recourse.
      [Seller Signs and Dates]

In some instances, the note endorsement is executed on a separate piece of paper called an allonge. The word “allonge” derives from the French word allonger, which means “to lengthen.” The allonge serves to provide space for additional endorsements when there is no longer sufficient space on the original instrument (note). In that sense, the allonge physically lengthens the original promissory note document. The allonge is then attached as a permanent rider to the original note. The endorsement enables the investor to prove they are a holder in due course, with the same rights of repayment as the original note holder.

When closing a note sale transaction, an investor may also ask for the original recorded mortgage or deed of trust. It’s certainly best if the note seller can produce the original security document. If this original is lost, however, an investor will usually accept a certified copy from the county recorder’s office.

Losing the original note, on the other hand, creates a problem that can be more difficult to rectify. In most states the note is not recorded by the county. If the original note is lost, a note investor can ask for a duplicate or replacement note to be signed by the payer (or maker). This would mean asking the original property buyer to re-sign a duplicate note, a step that requires their cooperation and can cause delays.

The investor will also ask for a “lost note affidavit” from the seller or note holder. This legal document states that the original note has been lost, and establishes a promise that the seller will present the note buyer with the original note should it be found at a later date. Some investors will consider accepting just the lost note affidavit with a copy of the original note.

While all hope isn’t lost with a lost note, by far the best option is to avoid losing the note in the first place by keeping it in a safe deposit box or a fireproof and waterproof safe. Some sellers elect to have the original documents held by their attorney or a third party escrow servicing agent for safekeeping. Whatever method you choose, be sure to keep the original note in a safe place that is easily located!

Did you find this article helpful? Let us know by leaving a comment below or follow us on Facebook.