Note Investing: Deed in Lieu
A deed in lieu of foreclosure is a deed in which the borrower conveys all interest in the property. The deed in lieu is sent to the lender to satisfy a loan that is in default to avoid foreclosure proceedings.
There are benefits to both the lender and the borrower in this transaction. The lender gets quicker control of the property, which tends to result in maximizing the value of the property. This is particularly important in an extended foreclosure timelines state, which tends to be the judicial foreclosure states. The benefit of a deed in lieu to the borrower is they avoid the stigma and the damage to their credit that comes from an actual foreclosure. The borrower may also be getting out from under a situation that would continue to drive them deeper into hardship.
When completing a deed in lieu, the lender must be aware of certain items on titles such as any junior liens like a second mortgage, any judgments, or tax liens because these generally need to be satisfied and released to get a clean title. If the lender is insured by the U.S. Department of Housing and Urban Development or HUD, HUD will, in some cases, allocate up to $2000 to pay off a second lien in determining eligibility for a deed in lieu.
The next step in the deed in lieu process is for the lender to get a broker price opinion or BPO to evaluate the current market value of the property. Once the lender accepts the deed in lieu, the borrower signs a grant deed in lieu of foreclosure to transfer ownership of the property to the lender. An estoppel affidavit is also signed, which outlines the agreement between the lender and the borrower and affirms the borrower acted freely and voluntarily without coercion or duress. To summarize, the deed in lieu transaction requires an absolute involuntary conveyance, proper turnover of the property, title insurance, and proper settlement of applicable tax.
Let’s talk about cash for keys. This is a term used to describe a financial arrangement typically between a lender and a borrower but can also be between a lender and a tenant, and it aims at inducing the occupant to vacate the home and leave it in reasonably good condition. The lender isn’t obligated to make this payment to the occupant, but it can be in their best interest to get the occupant out and ensure the home isn’t destroyed in the process. Homes can be vandalized, and fixtures can be removed, appliances taken, etc. when angry borrowers vacate. It could be far more costly than cash for keys payment. The payment from the lender to the borrower is typically up to a few thousand dollars. I’ve seen upwards of $50,000 when a high-value home was involved. Usually, the money is paid half up front, and the remaining half once the lender confirms the condition of the house is acceptable once the occupant vacates. The borrower or tenant typically uses these funds for expenses related to relocating, including getting a moving truck and maybe their first and last month’s rent in a new place.
There are benefits to both the lender and the borrower in a deed in lieu transaction. When exercising a deed in lieu cash for keys can be a great way to ensure the home isn’t destroyed when the borrower vacates.
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