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What Is a Promissory Note?

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What Is a Promissory Note?

A promissory note is a legally binding document in which one party promises to repay a specific amount of money in a given time frame. This is very similar to a contract, except that promissory notes can often be less formal and rigid.

In a real estate context, a promissory note often deals with repayment of money or loan amounts. The main difference however with a real estate promissory note is that the borrower’s property may be subject to a lien in the event of a default on the payment. For instance, if they fail to pay the agreed-upon amount within the time frame, the other party may be able to claim ownership of some or all of the listed property through a lien.

Are Promissory Notes Different from Loan Contracts?

As mentioned, promissory notes are very similar to loan contracts in many ways. Both can create legally binding obligations, which may be met with consequences if breached or defaulted upon. However, they are also different from each other in many ways, such as:

  • Details and formalities: Promissory notes often contain fewer details and instructions regarding payment amounts and repayment schedules.
  • Default consequences: Contracts often contain specific instructions in the event of a breach or default, whereas promissory notes might not always contain these points.
  • Signatures: In some cases, a promissory note may only require the signature of the borrower. Conversely, contracts generally require the signature of both parties, especially for mortgage loans and similar agreements.
  • Payments: Formal loan contracts typically demand payment in installments, whereas promissory notes can have more flexible repayment schedules and terms.

Thus, promissory notes can often be helpful in situations where less detailed instructions are acceptable, and where less formality is needed to solidify the real estate agreement. Contracts can sometimes take a while to develop, and may undergo many revisions during negotiations. This can delay the overall transaction or loan arrangement.

On the other hand, a formal real estate contract may be preferable in situations where the parties need additional instructions, details, or protections in relation to the loan. Contracts can also be necessary in situations where there is a high risk of fraud or a high risk of default on the payments.

What If I Have a Dispute over a Promissory Note?   

One major issue with promissory notes is that they are indeed less formal and contain less detailed instructions. Thus, various conflicts may occur if one of the parties is unclear about a repayment term. In such cases, legal action may be required to obtain a remedy for the conflict. This can result in a monetary damages award to compensate for economic losses. Other remedies might apply, such as the clarification of a term or the creation of a different type of promissory note.

Do I Need a Lawyer for Help with a Promissory Note?

Promissory notes can often be advantageous for certain types of loan agreements. You may need to hire a real estate lawyer if you need any assistance or legal research done with regards to a real estate promissory note. Your attorney can provide you with information and advice to assist you in your particular situation. Likewise, if you need to file a lawsuit, your attorney can guide you through that process as well and help you obtain a remedy.

Photo of page author Jose Rivera

, LegalMatch Legal Writer

Last Modified: 07-07-2015 09:15 AM PDT

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