-I'd contribute the property above (Property #4) as collateral to setup the note.

You're effectively refinancing your debt using your moms house as collateral.

What exactly was the collateral against which you loaned money?

Originally he scoffed at my collateral (unimproved land) but eventually changed his mind.

Maybe ask the seller to carry all or a portion of the rehab since you'll be improving his collateral anyway.  1 year balloon maybe. 7% interest only? 

All notes secured by real estate are a mortgage, real estate is pledged as collateral. 

Richard "Rick" Clatfelter, 42, of Phoenix, also is named in the lawsuit as executive vice president of the business and his assets were also frozen.Deucher and Clatfelter guaranteed their investors they would see returns by "represent(ing) that investments were safe and low risk because the notes and investment contracts were 100 percent collateralized by valuable real property," the SEC said in a statement in January."

If you pay too much, if you get wiped in bankruptcy, if you let tax sales go through, HOAs in some states, incomplete collateral that prevents you from completing the foreclosure..There are multiple ways to lose but most of the above can be detected in the due diligence or fixed after your purchase.

If NOI right now is 1500/m and the property is used as collateral how long would it take to the newly formed LLC to qualify for financing as the trustee. 

If a person loses their house to a bank, the bank will most likely still win because the bank will have established significant collateral... the house, as well as lender paid private mortgage insurance (LPMI) in some cases.But your point is well taken, rule breakers are rule breakers.