Private Lender Seeking to Avoid Foreclosure upon Default

[Mark Scarola]

I'm selling a house in Pennsylvania that I own free and clear. It needs a lot of work and so it is going to be sold as a fix and flip. I'm willing to offer seller financing, but in the event of a default I don't want to have to go through the expense and time to foreclose. I know that there's a way to arrange it such that in the event of a default, ownership of the mortgaged property would immediately return to me (again without having to go through the foreclosure process). What I need help with is the process. What do I need to do to set this type of arrangement up? Is it a quitclaim deed that I need or is it called something else? I can't remember. Thanks in advance!

[Jeff S.]

The easiest way to avoid foreclosure, @Mark Scarola, is to not offer seller financing. If your buyer is an experienced flipper and you're offering a viable deal, he or she shouldn’t have a problem getting their own financing, allowing you to walk away cleanly. If they are not experienced, what condition do you think the house will be in if you have to foreclose a busted flip?

You’re probably thinking of a Deed-in-Lieu. As an option to avoid a long drawn out foreclosure process (Pennsylvania is a mortgage state and will require a judicial foreclosure), you might be able to negotiate a deal with your delinquent borrower to hand you the keys by signing a Deed-in-Lieu in return for perhaps tearing up the note. In this case, you obtain ownership subject to any mechanics liens, tax liens, subordinate loans, and all other encumbrances the property accumulated while your borrower owned the property. Congratulations.

A third option, is a membership pledge. Here you would foreclose via a UCC filing, and take ownership of their entity. This is fast and you would have control of the property (along with the same liens noted above, as applicable). A foreclosure would still be required to obtain clean title, but at least you have a way to quickly protect the property.

If you choose the DIL or Membership Pledge route, better speak with an attorney and a title company first. And don’t even think of a pre-signed DIL, as discussed here on occasion. Pre-signed DIL’s are generally unenforceable if your borrower objects in court, since you are circumventing their right to foreclosure.

I’d vote for option 1, Mark.  Good luck.