Does a promissory note holds up in the court of law?

Asked about 2 years ago - Redmond, WA

We are thinking about investing in real-estate property run by our friend. She is looking to get investors on the endeavor. She will give us a promissory note detailing the terms of the investment and the returns. I'd like to know if the promissory note is a legally binding document. Also, does it need to be notarized to make it binding? Our names will not be in the title of the property. Can you let me know what other information or process I need to do to protect ourselves?

Attorney answers (3)

  1. Roger Thomas Dunaway


    Contributor Level 8


    Lawyers agree

    Answered . A promissory note (if properly written) is a legally binding document. It can either be secured (i.e; Deed of Trust encumbering real property) or unsecured. If the promissory note is unsecured, it may be harder to get paid in the event of default. A lawsuit for breach of contract would be necessary if there was a default with an unsecured promissory note. I would advise you to speak with an attorney about how best to protect your interests before giving your friend any money on this investment.

    This answer is merely for general informational purposes only and does not constitute an attorney/ client... more
  2. Richard Ronald Bernstein

    Contributor Level 13


    Lawyers agree

    Answered . Based upon what you write, this sounds like an investment in a business that owns commercial real estate or perhaps rental units. You have not indicated how much you intend to invest, nor how much your friend intends to raise in total. Unless you are getting something more than a promissory note to document the agreement, you would have no security for your money and would have to sue your friend to get your money back.

    Do yourself a favor and see a business lawyer before making the investment.

  3. Robert E. Millsap III

    Contributor Level 12


    Lawyer agrees

    Answered . 1. Promissory Notes are legally binding. They do not have to be notarized but it does make them look more substantial which never hurts. If you have security (e.g. a Deed of Trust), it is notarized so might as well have the Note notarized as well.

    2. A promissory note is a contract and would create an unsecured debt in your favor. I always want a client to have some security to protect their loan. The usual remedy to no security is a very high interest rate to make up for the risk of non payment, However, if a borrower agrees to pay a high interest rate, I have to wonder if it is a good risk.

    3. You did not say how much you are lending but I really think you need to have an attorney and even your accountant look it over and offer their thoughts. One general rule of thumb I tell clients is that if you are not an experienced real estate investor, don't invest in real estate without a good team of professionals to help navigate you around the speed bumps. I have seen too many projects go sideways resulting in the investors bankruptcy or at least significant reduction in net worth.

    4. Based on what you have written, you really aren't an investor but instead, a lender. That avoids the speed bump of personal liability in case the project goes sideways. A good accountant and attorney to discuss the upside and downside with you would be really helpful. Security would be really important as well.

    5. You have to consider the possibility you will not get any of the money back. What would that do to your family's security? In the equities world, they have the "know your investor rule" where you have to determine what type of financial risk can your client endure if things go sideways. This is another good reason I think for an accountant and even your investment adviser to get involved. Especially in a case like this. Why isn't your friend just getting the loan from the bank? The bank does it for a living. I am guessing the bank is thinking the loan is too risky.

    Hope that helps.

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