"Deed-In-Lieu" of Foreclosure and Other Things

This is my 200th article for LFTP (Lessons from the Pros). Sometimes it’s hard for me to believe that week in and week out there is so much news and so many strategies to share about real estate. I really appreciate having the opportunity to share what’s going on with all of you. I love the feedback you provide me, keep it coming. When I started out writing for LFTP, the market was a very different place than it is today. All we talked about four years ago were things like the shadow inventory, short sales, REO’s and foreclosures. Now we wish some of that shadow inventory would appear because there are so many more buyers than there are properties. Funny how things can change.

No matter what situation you find yourself in, looking for a property, selling a property, modifying your loan, or getting from under a property, you will need to be persistent and informed.

So, if foreclosure is something you or someone you know is considering, here is an option, “Deed-in-Lieu” of Foreclosure. It’s an alternative to foreclosure. This process can have significant benefits for both parties. For lenders, it helps avoid or reduce the delay, expense and possible uncertainty of going through the foreclosure process. For borrowers, it can eliminate or reduce the embarrassment of a public foreclosure sale and provide a resolution of personal liability and personal guarantee issues with respect to the debt.

A few things for a borrower to consider:

  • Borrower will want to negotiate for release of any personal liability, no negative report to credit agencies and a covenant not to sue.

  • Obtain an assurance from the lender that the holder of the promissory note has canceled the original note.

  • Tax consequence of a “Deed-in-Lieu” is generally treated as a sale of the property, with gain or loss determined by the difference between the amount of the debt and the adjusted tax basis of the property. The borrower might have to come up with cash for the equity portion.

A few things for a lender to consider:

  • If a loan is recourse, the lender may want to require some cash payment from the borrower to satisfy some portion of the debt, or maintain the ability to pursue the borrower and guarantors for a portion of the debt.

  • Consideration must be given to potential problems and liabilities relating to leases, especially for tenants with whom the lender does not have a subordination agreement.

  • The state of title to the property is critical for the lender. A junior-lien is not extinguished by a “deed-in-lieu” as they would be on a foreclosure.

You can see that there are many pitfalls for lenders to consider “deed-in-lieu” transactions and many circumstances in which a lender will not want to accept a “deed-in-lieu.” The potential benefits for lenders and borrowers in appropriate situations make it worth consideration.

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