A “Deed in Lieu” agreement is a resolution to a foreclosure that gives the deed to the lender to avoid a the continuation of the foreclosure and potential liability by the property owner for a deficiency. This agreement allows the lender to avoid a protracted foreclosure proceeding by gaining ownership over the property through a voluntary transfer of the deed to the distressed property to the lender. In return the lender usually agrees not to pursue a deficiency and other terms that the property owner is able to secure.
There are two issues with a “Deed in Lieu” arrangement. The first issue is one whether there are secondary liens on the property. If there are the “Deed in Lieu” Arrangement would usually not work for the lender who would still need to foreclose to eliminate the secondary liens. The second issue is whether the forgiveness of any liability for a potential deficiency would result in a tax to the property owner. Where the property is not an investment property and is the property owners home, there is usually an applicable exception to such tax based on an insolvency exception where the property owner was insolvent or rendered insolvent because of the transaction.
The advantages with a Deed in Lieu is that the foreclosing lender agrees that there will be no deficiency if the owner of the property surrenders to them the deed. This ends a potentially costly litigation and the possibility of personal liability for a deficiency. Other advantages are that the owner does not have to pay basic obligations for the property going forward like real estate taxes and property insurance, Finally a deed in lieu looks better on the credit report than losing the property in a foreclosure..
The disadvantages of a deed in lieu are that the act of debt forgiveness by the lender can cause a tax liability based on debt forgiveness. But because most people in foreclosure are insolvent or are rendered insolvent this tax for debt forgiveness usually can be avoideed.
The limitations of a deed in lieu of Foreclosure is that it cannot be pursued if there are secondary liens against the property. Unless the owner or the lender or both can resolve/settle or payoff the secondary liens the lender still has to foreclose on the secondary liens. Here, subordination of the secondary liens is not enough since the very existence, not the position of the secondary liens forces the lender to continue to foreclose since the foreclosure will eliminate the secondary liens.
A Deed in Lieu is usually pursued where the owner has no or little long or short term advantages to keeping the property. For example a rental property in a low income area where the costs and risks and expenses of keeping the property exceed the value in terms of income or equity. The other situation where this is pursued is where the owner is concerned about a large potential deficiency and this is a way to assure that the the owner would not be pursued for a deficiency.
To do a deed in Lieu of foreclosure the needed documents are as follows: a lien search to determine if there are other liens on the property. To the extent that there are the owner would want payoffs from all holders of liens to determine if secondary liens can be settled or paid off. It is a good idea to get an appraisal to determine that the property is upside down with the mortgage exceeding the value of the property. Otherwise, the owner would be better off selling the property if there is equity. To the extent there are no liens other than the main mortgage, or alternatively to the extent that other liens are either small or very upside down (have no supporting equity) and can be reasonably settled, the deed in lieu agreement can proceed. The deed is prepared deeding the property to the lender and filed. At that point the lender has taken ownership to the property.
Our office has the capability of strategizing with you and the lender to determine your options and whether a deed in lieu is a good option for you. If it is we can negotiate the deed in lieu agreement. If a deed in lieu is not possible we will look at alternatives from the perspective of your best interests. Because of our expertise in negotiations, modifications, bankruptcy and litigation as it applies to distressed property we are in a unique situation to not only aggressively pursue your best options but also adjust our goals when it is in your interest to do so.
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