USING THE “DEED IN LIEU OF FORECLOSURE” ALTERNATIVE
REAL ESTATE PRACTICE, TIPS FOR SELLERS
August 7th, 2008
Our real estate market is seeing an ever increasing number of foreclosure and preforeclosure property listings. An alternative to a short sale or foreclosure is deeding the property back to the lender to stop or prevent the foreclosure process. The trustor (the borrower) gives a deed to the beneficiary (the lender) in order to give the encumbered property back avoiding lengthy delays and costs the lender must incur to pursue the foreclosure process. However, the lender needs to be aware accepting a deed in lieu of foreclosure will not extinguish any junior liens, leaves open the possibility the borrower may later try to have the conveyance set aside and the borrower’s creditors may argue the conveyance was a “fraudulent conveyance” which jeopardizes their ability to collect their claims against the borrower. Lenders can protect themselves from junior liens by obtaining a special endorsement from a title insurance company.
The borrower avoids further damage to their credit if the lender is willing to accept the deed in lieu of foreclosure as well as insulating themselves from possible exposure to a deficiency judgment. If the lender and borrower agree to this arrangement early on the borrower can avoid the embarrassment of having a Notice of Default recorded and published in a local newspaper. One drawback for the borrower is they forfeit any potential proceeds they might otherwise pocket if the property went through foreclosure. If the borrower elects to pursue this alternative, a clear written agreement canceling the note and deed of trust should be executed between the lender and borrower.
Finally, a borrower should never execute and record a Deed in Lieu of Foreclosure without the lenders knowledge and written permission. Doing so will not extinguish the debt and doing so creates a rebuttable presumption of delivery and acceptance of the deed thus making the transfer voidable at the lenders discretion (Perry vs. Wallner, 206 Cal. App. 2d 218 (1962)). If the lender wants to reject this attempted transfer of title, the lender can record a Notice of Nonacceptance under Civil Code Section 1058.5.
A borrower contemplating such a remedy should seek the advice of an attorney and/or accountant before deciding whether or not to utilize a Deed in Lieu of Foreclosure. For further information on this topic or any real estate matte, please don’t hesitate to contact me at:
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER
REAL ESTATE PROFESSIONALS GMAC
TWENTY FIVE YEARS LOCAL REAL ESTATE EXPERIENCE
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