Robert R. Rowley PS

Attorney at Law

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Deeds In Lieu Of Foreclosure


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:

  1. 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.
  1. 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.
  2. Identify and evaluate any liens that are subordinate to your mortgage, e.g., mortgages, mechanic’s liens, judgments, tax liens, and UCC filings.
  3. Never try to coerce the borrower into giving the deed. Be sure all documentation identifies the borrower’s actions as voluntary.
  4. Check for environmental problems. At a minimum, obtain a Phase I analysis.
  5. Investigate sale opportunities. Has the borrower signed a purchase agreement to sell the property? Are there additional parties who should also provide a deed?
  6. 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.
  7. Consider the tax aspects – state deed tax and federal income tax.
  8. 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.
  9. Obtain adequate supporting affidavits from the borrower to establish the voluntary nature of the transaction and confirm that the conveyance is an absolute conveyance.