Getting A Deed In Lieu at closing to store away

[Chris Seveney]

There are gurus out there who will tell you when seller financing to have the borrower sign a deed in lieu at closing so if they stop paying you can just record the deed in lieu. Every attorney I have ever talked to has always said never to do this as its predatory and would never stand up in court. 

Well I have seen this come into play - I had someone who has a note in florida that was a non-owner occupied loan and the lender claims the borrower failed to make payments on this and attempted to record the deed in lieu. The case is in court right now with the lender filing a case to foreclose and the borrower filing a counterclaim against the lender:

Here is what I have found reviewing this case:

1. The lender did not use a servicing company, and the pay history is being contested (which should be easy to prove)

2. The courts did not take lightly the forced deed in lieu at signing and rejected it.

3. The counterclaim states that since the deed in lieu language was part of the loan, the entire loan is invalid. (not sure on state law but this probably is a tough sell)

4. This has been tied up in court and does not really have an end in sight at this time.

5. It does not appear the lender used an attorney to draft the note, as its the worst note I have ever seen for a $2M loan.

Lessons learned: if you want to be a professional, then act like one. From not having an attorney draft the docs, to trying to cheat the system with the deed in lieu to not professionally servicing the loan. The lender did everything wrong in this situation and now are paying for it.

Now they are trying to sell the loan at a slight discount (oh did I say its a 0% interest loan and they jacked up the UPB of the loan instead of adding interest) - again another rookie mistake. Most likely trying to find a sucker to buy this and take over the costly legal battle they are entailed in.

So next time someone is like "yeah just get a deed in lieu at closing", think twice about that.

[Don Konipol]

Quote from @Chris Seveney:

There are gurus out there who will tell you when seller financing to have the borrower sign a deed in lieu at closing so if they stop paying you can just record the deed in lieu. Every attorney I have ever talked to has always said never to do this as its predatory and would never stand up in court. 

Well I have seen this come into play - I had someone who has a note in florida that was a non-owner occupied loan and the lender claims the borrower failed to make payments on this and attempted to record the deed in lieu. The case is in court right now with the lender filing a case to foreclose and the borrower filing a counterclaim against the lender:

Here is what I have found reviewing this case:

1. The lender did not use a servicing company, and the pay history is being contested (which should be easy to prove)

2. The courts did not take lightly the forced deed in lieu at signing and rejected it.

3. The counterclaim states that since the deed in lieu language was part of the loan, the entire loan is invalid. (not sure on state law but this probably is a tough sell)

4. This has been tied up in court and does not really have an end in sight at this time.

5. It does not appear the lender used an attorney to draft the note, as its the worst note I have ever seen for a $2M loan.

Lessons learned: if you want to be a professional, then act like one. From not having an attorney draft the docs, to trying to cheat the system with the deed in lieu to not professionally servicing the loan. The lender did everything wrong in this situation and now are paying for it.

Now they are trying to sell the loan at a slight discount (oh did I say its a 0% interest loan and they jacked up the UPB of the loan instead of adding interest) - again another rookie mistake. Most likely trying to find a sucker to buy this and take over the costly legal battle they are entailed in.

So next time someone is like "yeah just get a deed in lieu at closing", think twice about that.

Actually, I use the deed in lieu.  However, to be enforceable and withstand legal challenge, it can only be used AFTER a default has occurred.  So having a borrower sign a deed in lieu AS A CONDITION FOR MAKIMG A LOAN is not going to stand legal challenge.  The way we used it was when a borrower was in default, and say was expecting to be able to pay in the near future.  He signs a deed in lieu which we will record IF he does not fulfill a separate forbearance agreement outline the payments he needs to make to reinstate the note.  The borrower MUST receive something of value for the deed in lieu, agreeing not to foreclose immediately and giving the borrower time to reinstate, or providing a modification, is that something of value.

I need to clarify that these notes are commercial and investment property, so do not have to comply with residential lending requirements.

With a deed in lieu there is no foreclosure, judicial or non judicial.  The lender just records the warranty deed and is the owner of the property.  The borrower has already signed the warranty deed, it’s being held “in escrow” pending the fulfillment or non fulfillment of the forbearance or modification. 

The agreement of forbearance or modification should have the borrowers knowledge that they are in default, that they understand that the lender is forgoing foreclosure at this time in exchange for the deed in lieu, and that the borrower is represented by legal counsel.  

we pay a LOT of money for legal advice, legal document preparation, etc., the result is that we aren’t challenged when we need to take ownership if the borrower can’t perform.