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Distressed Real Estate Attorney

"Possession" is the physical occupation of property through actually living at the property or renting it to others or having one's furniture and belongings still being at the property. Possession can also be in the form of using the property to operate a business. Possession can be given up with or without ownership also being transferred (ownership in the form of the real estate title or a formal transfer of the deed). During the majority of a foreclosure case, prior to the foreclosure auction, the owner still has title, but can agree to give up possession, while remaining an owner. When possession is given after the former property owner has already lost ownership and no longer is the title holder, the transfer of possession gives the buyer at a foreclosure sale all the elements of ownership: possession, title and the cutting off of the former owner's legal rights to the property. However, as long as the former owner is physically occupying a property with their belongings or still occupying the premises with their person, the lender or high-bidder need to evict him once they become the actual owner. A deal where possession is transferred is a "cash for keys" agreement where in exchange for delivering the keys and the property vacant and "broom clean" the lender agrees to give the property owner an agreed cash payment.

Legally, being the named party under the deed for the property (otherwise referenced as having "title" to the property) is the most important part of "ownership". The deed once it is transferred must be recorded to give notice to the world as to which version of the deed is the most recent and official version demonstrating ownership. The deed must ultimately be transferred in any voluntary real estate deal or involuntary foreclosure auction. The deed in a foreclosure action is actually transferred from the court assigned referee to the highest bidder at the auction; the high bidder first needs to give a downpayment after they prevail with their bid at the auction and pay the balance within 30 days, when the referee's deed is officially transferred to them. If the high bidder doesn't close within 30 days they risk losing their downpayment unless the referee allows an extension for the closing. However the deed can also be transferred prior to the property being foreclosed on in a "deed in lieu" agreement where the lender usually agrees not to seek a deficiency against the property owner. However, the lender would not usually agree to this remedy if there are significant secondary liens on the property (secondary mortgages and/or judgment liens by third parties) that have to be foreclosed on to obtain and sell clean title free of liens.

Giving the debtor a consent to proceed forward in a foreclosure proceeding by agreement is a way to move the foreclosure along in a situation where the property owner is not looking for additional time at the property. A property owner can consent to being served, to jurisdiction, to summary judgment or an order of reference, to appointing a referee, to a referee's report, to a judgment of foreclosure and sale, to the scheduling and notice for an auction, to the property being sold at the auction and to the referee's deed being transferred to the high bidder. Therefore there are many points at which the property owner can agree to consensually expedite the litigation and its conclusion. A foreclosure proceeding otherwise can be more protracted if the property owner is actively defending the foreclosure litigation. However, consenting to the various proceedings in the foreclosure action bypasses most of the potential litigation and allows the lender to schedule a foreclosure sale and conclude the property transfer relatively quickly. This is a viable remedy where a Deed in Lieu is not possible because of secondary liens by third parties against the property. Rather than giving the lender the deed, the property owner gives the lender consent to a quick foreclosure action so that they could expedite the foreclosure proceeding against all the liens on the property. Otherwise a Consent to Judgment of Foreclosure agreement, like a Deed in Lieu agreement, seeks to transfer rights from the property owner. The Consent to prevailing in the foreclosure is just not as close to the finish line, giving the lender the obligation to actually conduct a foreclosure auction to finalize the transfer of ownership. As with the Deed in Lieu agreement, a lender may in exchange agree to not to pursue the borrower for a deficiency.

A Voluntary Sale of the Property does require a formal agreement with the lender, as long as the lender receives a full payoff at the closing and all other liens or encumbrances on the property are paid and/or resolved. A Voluntary Sale is different than an involuntary sale at a foreclosure auction in that it is conducted and controlled by the property owner. A Voluntary Sale to a Third Party is considered a non-retention option because the property owner almost always needs to vacate after selling the property. A Voluntary Sale to a Friendly Party on the other hand is considered to be a Retention Option if the friendly party allows the property owner to remain in possession at the property. In a regular voluntary sale there is enough equity in the property to allow all liens to get paid in full and any profit, beyond paying necessary expenses at the closing, would go to the property owner.

A Third-Party Sale happens where unlike in a regular sale there is negative equity in the property and lenders need to allow a lessened payoff to close a sale. One of the most common non-retention options is a short sale to a third party which at the end causes the homeowner to have to turn over possession to the third party buyer. If the buyer is not friendly and or allied with the homeowner/ seller, the third party is looking to invest or possess the property and almost always wants to gain possession. A Voluntary Short Sale is different than a regular sale in that there is more owed in liens against the property than the proceeds available at the sale to pay off the liens. Therefore agreements are needed with any lien holder that is getting less than the full payoff of their claim. That is especially true of what is usually the first position lien on the property which is the main/first mortgage on the property. To do a short sale it is much simpler if there are no secondary liens against the property. However to the extent they exist they can be dealt with differently. Where first lien and/or secondary liens are very upside down, they may allow the closing for significantly less than what is owed to them as long as they are convinced that they received the best, or at least a reasonable deal under the circumstances. If there are multiple liens on a property they all need to agree to a lessened payoff amount to allow the sale to proceed or other terms that allow all the lien holders to release their liens. Typically the lenders agreeing to lessened payoffs also agree not to pursue a deficiency. Such forgiveness while it is common raises a question as to whether the former property owner would be on the hook for "debt forgiveness taxes" to the IRS which regards the forgiveness of debt as a taxable event unless the transferor is insolvent or was rendered insolvent by the transaction. Most homeowners in foreclosure can show that they are insolvent and therefore this potential tax is not usually an issue.

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 surplus. 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.

This is a popular Non-Retention option, especially when there are secondary liens and other potential encumbrances that may get in the way of a Short Sale or a Deed in Lieu which usually require that there be no other liens on the property other than that of the primary lender. Here what is given up is possession in return for a cash payment upon surrender of the keys and broom clean, permanent vacating of the premises with all of the property owner's belongings so the property is left broom clean. Cash for Keys is a more frequent option exercised at the end of a foreclosure or in the beginning of an eviction when the time for the property owner to leave may be near. However, where this deal is pursued in the beginning of a foreclosure it could result in a higher amount for the property owner, given the additional time that the foreclosure may take given that it only started.

Giving the debtor a "Consent Judgment of Foreclosure" agreement is a way to move the foreclosure along in a situation where the property owner is not looking for additional time at the property. A foreclosure proceeding otherwise can be more protracted if the property owner is actively defending the foreclosure litigation. However, consenting to the Judgment of Foreclosure essentially bypasses most of the potential litigation and allows the lender to schedule a foreclosure sale relatively quickly. A Consent to a Judgment of Foreclosure is a viable remedy where a Deed in Lieu is not possible because of secondary liens by third parties against the property. Rather than giving the lender the deed, the property owner gives the lender a quick foreclosure judgment so that they could expedite the foreclosure proceeding against all the liens on the property. Otherwise a Consent to Judgment agreement, like a Deed in Lieu agreement, seeks to transfer rights to the lender. The Consent to Judgment is just not as close to the finish line, giving the lender the obligation to actually conduct a foreclosure auction to finalize the transfer of ownership. As with the Deed in Lieu agreement, a lender may in exchange agree to not to pursue the borrower for a deficiency.

There are times where the property value has so declined because of potential liability, pollution or crime in an area, high taxes or onerous local government requirements or other problems associated with the property that the lender would not want the property even if the mortgage is not being timely paid. While abandonment of the property does not automatically transfer the deed, the non-payment of real estate taxes for several years may cause such abandonment.