FAQ - Advantages and Disadvantages of a Real Property Deed In Lieu of Foreclosure
This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ). While I've covered this subject before [link], here's another overview of the advantages and disadvantages of taking title (to real property collateral) back from a borrower "in lieu of" doing a foreclosure.
FAQ# 16 - What are the advantages of a Deed in lieu of foreclosure (DIL)?
- A DIL should be used if it can be accomplished quickly (i.e., without extensive negotiation). It allows the lender to obtain ownership of the property without the cost and time delay associated with judicial or non-judicial foreclosure. This is very important in states where the foreclosure process is very lengthy (such as Florida [up to 2 years] and Ohio)
- Since a DIL is voluntary, the parties can agree upon the amount and related terms of any deficiency (and thereby avoid a dispute as to valuation), together with a release of any claims against the lender
- Since a DIL is voluntary, the lender can condition its acceptance of the DIL agreement upon receipt of such things as complete and accurate copies of the borrower's financial statements, tax records, leases, service contracts, construction plans, sale contracts, vendor payables, etc., which may result in a better "turn over" of the property to the lender (although a "friendly" non-judicial foreclosure can achieve the same result if the borrower cooperates with the lender and furnishes the information)
- The lender can condition its acceptance of the DIL agreement upon not being placed in a worse position than if it foreclosed (i.e., there is no reason to relinquish lender's rights to surviving indemnities under the loan documents, involving things such as keeping a continuing right to indemnity for environmental conditions or prior misrepresentations, and/or collections costs as set forth within the loan documents); and a DIL does NOT include the concept of a "right of redemption" (which is a right in some states giving the borrower the ability to pay the debt and "redeem" or get back title to the property after foreclosure) (In Texas, there is no right of redemption after a foreclosure - but this rule of law varies state to state)
- A DIL is a private transaction and avoids adverse publicity for the borrower (i.e., there is no publication or court filings like in a foreclosure), which may also minimize the impact upon property valuation
- A DIL avoids the problems with the foreclosure process, including the possibility of post-foreclosure attacks on the sale as a 'wrongful foreclosure'
- A DIL does not automatically release the lender's lien or space leases—these can be preserved by expressly making the deed in lieu subject to those interests, and permit the lender to foreclosure at a later date if necessary to extinguish a subordinate mechanic's lien
FAQ# - 17 What are the disadvantages of a DIL?
- The transferee takes the property subject to all existing liens (unlike a foreclosure sale which extinguishes junior or subordinate liens)
- Neither a deficiency amount nor property value is established unless expressly set forth in the DIL agreement (unlike a foreclosure sale which establishes any deficiency as the difference between the foreclosure sale price and balance due on the loan)
To read the entire Tough Times FAQ series, please click here.
Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.
If you have thoughts, suggestions or questions on this topic, please post a comment below.
