Private Money Lender Seeking Advice RE: Deed In Lieu

[Sunny Shakhawala]

Hey Everyone,

About to originate a new loan for one of my borrowers. I've never used a deed-in-lieu of foreclosure before, but a few friends have told me to include it in my packet. 

Question: If I have the borrower's sign a deed-in-lieu before closing the loan, what would trigger my ability to exercise it? Or am I able to exercise it at any point? That hardly seems fair.. I mostly see the value of a Deed In Lieu if the borrower's sign it in advance (before getting themselves into trouble). I doubt any borrower would sign it after they have my money...

Can someone explain to me the correct way to document it? Does anyone have a template I can use?

Are there any borrowers here that have signed a DIL for a Private / Hard Money Lender at or before closing? If so, would love to see it. 

TIA.

[Jeff S.]

You can ask a borrower to sign anything you want in advance, @Sunny Shakhawala, but if you try to enforce a pre-signed deed-in-lieu, and your borrower contests it in court, it will likely be thrown out.

A pre-signed deed-in-lieu is essentially unenforceable since it circumvents your borrower’s rights in a foreclosure. As a violation of public policy, no judge will accept that. It could get worse.

Depending upon how far you get, the consequences against you can be severe, including a return of the property, repayment of any equity, and the profits from a resale. There could also be punitive damages. What would you do if your borrower declares bankruptcy? How would you protect from a claw-back? Do you know how to handle title insurance in this case or protect yourself from unrecorded lienholders?

There’s the deed and there’s the agreement, the latter of which is deal specific and not from a template. You also have to be careful how you behave not to show coercion, on which only a lawyer can advise you.

Talking someone else’s property is serious stuff, Sunny. Be very careful with this.

There was a pretty good discussion on the topic here, some years ago:

https://www.biggerpockets.com/forums/49/topics/72874-lenders-do-you-have-borrowers-pre-sign-dil?page=1

Here’s a pretty good legal write-up on the pros and cons of Deeds-in-Lieu from both the lender and borrower’s perspectives.

https://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting

Good luck, Sunny.

Jeff S. -- Private Lender from Los Angeles