Borrower defaulted - should I accept deed in lieu of foreclosure?

Question

Hello,

I have a question regarding deed in lieu of foreclosure vs. foreclosure itself. My borrower is in default and offered to "sign the title over" to me.  If I have a title search done and it comes back with no junior liens or encumbrances, is it safe to do a deed in lieu of foreclosure? This property is located in Florida.

Thank you.

Jeff S. · Answer

The devil is always in the details, Account Closed, and you provided very few.  For example, if the house has been demo’d and is basically a busted flip, do you know how to rehab it or do you know other rehabbers who could?  Would they take it off your hands at a price that would enable you to come out whole?

Is he walking because there is something fundamentally wrong with the property or other skeletons in the closed?  Unreasonable demands from the city?  Unexpected repairs that blew the budget?  Here, you definitely don’t want to take it over.

Your borrower is the owner.  Is there a reason he can’t get rid of it himself?  Do you know the borrower?  Have you seen the house?  Ever rehab a property out of state?

You might explain why your borrower is walking and willing to leave you holding the bag.  What is appealing here to make you want the house?

Foreclosure is the cleanest way to either get rid of the property or own it (more) safely, Michelle, especially if it’s a friendly foreclosure.  Buy and hold real estate investors love to tell the stories about how they cleaned title and solved all sorts of problems.  To them it’s a challenge.  Most lenders I know won’t touch a deed in lieu and will go to great lengths to avoid ownership.  That’s just not our business.

Merely stating that a title search came back with no junior liens or encumbrances does not mean that this is a property you should own.  Certainly not without a bit more thought and explanation.

Best of luck to you, Michelle.

Pat L. · Answer

We've done this a number of times especially to re-sell it. Our attorney ensures clean unclouded title & we take it back. One we did last year did have a lot of liens but they were well over 10yrs old never reactivated so we got clean title on that as well. Another had a $2,500 CC judgement & we paid them a $250 'processing fee' to remove the lien from the title & we sold it immediately.

Another we were looking at had several liens of $12k attached & after several months of tossing around taking it back we found out that the liens were suddenly satisfied?? Our attorney found out that the NYS Sale Tax & NYS Workers Comp guys found the owners bank accounts & cleaned them out to satisfy the liens PLUS interest etc. His wife has since moved out as she had no idea that he had the liens or the stealth bank accounts.

The webs we weave...REI is such an interesting pursuit !!!

Joseph Cacciapaglia · Answer

Is it a residential property or commercial? One reason some lenders don't want to take a deed in lieu, is environmental risk. In some states, you get more protections as a foreclosing lender than one where it was signed over to you. If it's residential, this may be less of an concern. There may be other protections you're giving up, so it would probably be worthwhile to consult your attorney.

Pat L. · Answer

Account Closed we have taken back some as an 'uncontested' Foreclosure just to get rid of the judgements & liens. But our attorney has advised us that some Title companies will not insure a property that has had several mortgages & foreclosures against it. I was surprised to discover there are a few out there that meet that criteria & that will be a nightmare when you attempt to sell it later.

Account Closed · Answer

Thank you for the warnings on possible scenarios @Jeff S., I know you are a very seasoned lender and I appreciate your advice.

It does look like the borrower is going to be able to finish the flip after all, albeit well past our contract due date but I would rather it go this way than have to take the house back and finish it myself. I did/do have a realtor and contractor local to the area lined up just in case.  I hope to update this thread in a few months with a positive outcome!

I appreciate everyone's input, we have such a great community here!

Roman M. · Answer

Is it a single family or condo? If condo beware if the condo assessment that may not be a lien yet but they can lien later.

I had taken deed in lieu in Florida but my attorneys prepared a settlement agreement and also has inserted a language into the deed that it will not merge into the title held by my Co; said mortgage shall continue in full force and effect until satisfied by my Co. This was done in case any other liens pop up and I can still foreclose everyone else out. I suggest to have an attorney handle the paperwork and can also buy title insurance.

I think another way is to deed it to another newly formed entity so you preserve your current lien.

Justin Abdilla · Answer

Talk to a Florida lawyer first, but I don't think you should.

I have done a ton of foreclosure defense in Illinois, more than all but a small handful of lawyers.  We would typically jump at the chance of a deed in lieu.  Deed in lieu usually means a waiver of all claims of back owed money.  That means as an investor, you're accepting that they're just going to move out instead of paying debts.  Not the best for your bottom line.

The other consideration is whether you think your borrower is going to destroy the property.  I find that is a real rarity in foreclosures, and in several hundred foreclosures, I had precisely two clients damage the property to any significant extent.

I saw you received some advice about considering the environmental factors in your foreclosure resolution.  That's great advice because you need to be cognizant of Fair Debt Collection laws.  You want to maximize the protections that you have as a landlord and minimize the recourse that the resident has against your debt.

Still, best practice is to call a Florida lawyer.  Good luck.

Jeff Tumbarello · Answer

If the title is clean and you have the ability to get your investment out, then why not

Account Closed · Answer

Also, I guess I should have been more clear, my borrower is a flipper. Sorry for any confusion!

Account Closed · Answer

@Justin Abdilla Thank you, this is all such good advice as this is a road I knew I might have to take some day but didn't know how best to go about it.  I am glad to have the BP community wealth of information.  When my borrower suggested/hinted at signing over title, I figured I'd better start looking for advice as well as an attorney to handle the paperwork. I am not worried about the borrower destroying the property, he seems like a genuinely good guy, and I did just hear from him and I think we might be able to work something out.  I certainly hope so.

Borrower defaulted - should I accept deed in lieu of foreclosure?

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