Demand Note

A demand note is a promissory note that is payable on demand — the holder can require full repayment at any time, without waiting for a scheduled maturity date. This contrasts with a term note, which is payable at a definite future time or on a set amortization schedule. Demand notes are common between related parties (family members, business partners, a company and its owner) and in short-term or informal lending, but they appear in real estate finance too, and their structure has important consequences for how — and whether — they can be sold.

How a demand note works

With a demand note, the borrower (maker) owes the principal plus any accrued interest whenever the holder asks for it. Some demand notes accrue interest periodically and require interest payments along the way; others let interest accumulate until the note is called. Because there is no fixed end date, the loan can theoretically continue indefinitely until the holder demands payment.

Demand notes and the secondary market

A pure demand note is unusual collateral for the kind of cash-flow note buying this site focuses on. The reason is predictability. Note buyers value a note by discounting a known stream of payments over a known term — the heart of present value analysis. A demand note has no defined term and may have no fixed payment schedule, so its future cash flows are uncertain. Buyers generally prefer amortizing term notes with a clear payment amount, interest rate, and maturity date, because those can be priced precisely.

That said, a demand note secured by real estate still has value — the holder can demand payment and, if unpaid, pursue the collateral. But the open-ended nature usually means a buyer will either restructure it into a term note, price in extra uncertainty, or pass.

Why it matters when you sell a note

If you hold a demand note and want to sell it, expect a buyer to scrutinize the payment arrangement closely. The cleanest path is often to convert the demand note into a fixed-term, amortizing note with documented terms before selling, which makes the cash flow predictable and the note far more marketable. If the note remains a true demand instrument, be prepared for a deeper discount or a buyer who wants to renegotiate terms with the borrower.

Example

An owner sells a property to a relative and documents the financing as a $100,000 demand note at 6% interest, with interest paid monthly and principal due whenever the owner asks. Years later the owner wants cash. A note buyer points out that, without a fixed maturity, the note is hard to price as a stream of payments. The parties agree to amend it into a 15-year amortizing note with a clear monthly payment, after which the buyer can value it with standard present-value math and make a firm offer.

This entry is general information, not legal advice. Demand-note enforcement, interest accrual, and statute-of-limitations issues vary by state; consult a qualified attorney.