Even in our difficult economy, inability of a homeowner to make timely payments on mortgage or trust deed debt does not always lead to foreclosure. A deed in lieu of foreclosure may avoid the foreclosure process for both lender and borrower. With a deed in lieu of foreclosure, the property owner deeds the property back to the lender in exchange for release of the debt. The lender typically promises not to initiate foreclosure proceedings and to terminate any existing foreclosure proceedings. The lender may also forgive any loan deficiency (the amount of the loan not fully recovered by the lender upon subsequent resale).
In today’s real estate market, many borrowers may offer seller-carry lenders a deed in lieu of foreclosure. Whether accepting the deed makes sense for the lender depends on many factors, including: value of the property, buyer/borrower’s over-all financial situation, amount remaining on the mortgage/trust deed, and whether the buyer/borrower has further encumbered the property since purchasing from the seller/lender. If the property has no other encumbrances and substantial market value in excess of the amount outstanding on the note carried by the seller, a deed in lieu may be a good way for a lender to resolve the situation and avoid the cost of a foreclosure. On the other hand, if the value is questionable, or if the buyer has created junior encumbrances, a deed in lieu may be a mistake for the lender.
For more detailed information about deeds in lieu of foreclosure and other real estate law issues, call or visit our office today.