Deeds in lieu of foreclosure can offer a reasonable alternative to costly foreclosure. There are, however, traps for the unwary. To accept a “deed in lieu,” you should:
- Make sure the borrower isn’t using the negotiation for the deed in lieu as a delay tactic. Consider commencing a foreclosure action while negotiating to reduce this risk.
- Verify at the outset that the borrower has the authority to transfer the property. Obtain a current update to your existing lender’s title insurance policy. If the borrower is an entity, verify its status with the appropriate jurisdictions.
- Identify and evaluate any liens that are subordinate to your mortgage, e.g., mortgages, mechanic’s liens, judgments, tax liens, and UCC filings.
- Never try to coerce the borrower into giving the deed. Be sure all documentation identifies the borrower’s actions as voluntary.
- Check for environmental problems. At a minimum, obtain a Phase I analysis.
- Investigate sale opportunities. Has the borrower signed a purchase agreement to sell the property? Are there additional parties who should also provide a deed?
- Evaluate whether a bankruptcy court would view the transaction as a preference or a fraudulent transfer. Obtain an appraisal or other evidence of value. Obtain an affidavit from the borrower regarding the value of the property.
- Consider the tax aspects – state deed tax and federal income tax.
- Make sure the proposed deed states that the conveyance is subject to the mortgage and contains appropriate non-merger language. This preserves the lender’s right to foreclose the mortgage. Obtain an anti-merger affidavit from the parties.
- Obtain adequate supporting affidavits from the borrower to establish the voluntary nature of the transaction and confirm that the conveyance is an absolute conveyance.