Deeds-in-Lieu of Foreclosure
Published in the Daily Journal of Commerce
We have all heard of the foreclosure frenzy in today's troubled economic times. In Oregon alone, 1 of every 435 homeowners received a foreclosure notice in October 2010, according to RealtyTrac, and commercial foreclosures are also on the rise. More lenders are relying on the value of their collateral to get paid and, thus, resorting to foreclosure.
One option to foreclosure in both the residential and in the commercial context is to use a deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure is exactly what the name implies. That is, instead of resorting to a costly and time-consuming foreclosure, an owner simply deeds the property to the lender in exchange for the forgiveness or payment of some or all of the debt owed by the borrower.
If a borrower cannot afford the loan and does want to retain the property, a deed-in-lieu can be a powerful tool that may allow a debtor to walk away in exchange for deeding the property back to the lender. For the borrower (and a guarantor) to not be subject to a potential deficiency, it is important that the settlement documents waive such deficiency.
A deed-in-lieu of foreclosure saves the lender time and money because it no longer has to spend fees on a foreclosure and reduces the risk of the borrower filing bankruptcy and delaying the foreclosure process. It also allows the lender to immediately become the owner of the property and sell it to recover its debt.
A deed-in-lieu of foreclosure does not work for everyone. Some lenders will not accept a deed-in-lieu of foreclosure if the real property is not worth as much as the debt, if the loan has been guaranteed by a third party, or if the lender believes it can recover a deficiency against the borrower (if allowed by law). A deed-in-lieu of foreclosure should not be ruled out completely because there is a third-party guaranty or if the lender can get a deficiency against the borrower. Lenders may still be willing to negotiate with borrowers to offer a partial release of the obligation in exchange for a deed. This in turn can limit a guarantor's or borrower's obligation. It is important to note, however, that a borrower may face negative tax consequences by giving his or her lender a deed-in-lieu of foreclosure. If you are considering giving your lender a deed-in-lieu of foreclosure, you should consult an attorney prior to doing so.
Finally, if a lender is considering accepting a deed-in-lieu of foreclosure, it is advisable that the lender obtain a preliminary title report to determine what encumbrances exist on the property and purchase a title policy insuring the property. By accepting a deed-in-lieu of foreclosure, the lender takes title to the property with all existing encumbrances. In other words, the lender is accepting the property "as is." If there are lien holders junior to a lender's interest, the lender should consult an attorney about how to structure the deed-in-lieu transaction so that the lender can preserve the right to foreclose those junior interests at a later time. Additionally, a lender should also consider obtaining an environmental assessment report for the property to ensure that there are no existing environmental problems that may lead to liability at a later time. Also, the lender may want to take title to the property in a single-purpose limited liability company.
About the Author: Gabriela Sanchez is a member of Sussman Shank LLP's Business Group. You can reach Gabi at (503) 227-1111 or firstname.lastname@example.org .
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