Seeking advice on deed in lieu of foreclosure
Hanford, CA · Member since 2019 · 17 posts · 4 votes
Aloha,
I'm raising private money for an Oklahoma SFR investor. The one thing my lenders want to know is, how will I get my money back if the borrower defaults? I just read Matt Faircloth's book on raising private capital. In it he stated that a deed in lieu of foreclosure enables the lender to immediately take ownership of the collateral property upon default. However, he warned that a deed in lieu isn't enforceable in every state. I've turned to google for an answer on whether or not a deed in lieu is enforceable in Oklahoma, but couldn't find a definitive answer.
My question to everyone is this, is a deed in lieu enforceable in your state (particularly Oklahoma), and have you used it before on a defaulted loan? What is your take on using deeds in lieu to strengthen your ability to raise capital? Is it overkill, or absolutely necessary?
-Mahalo
If you are raising capital to loan to someone else, it sounds like you are forming a mortgage pool, @Lawrence Chun. Or, you are an Oklahoma broker forming a fractionalized note (if legal in OK). The option to use a deed-in-lieu will not strengthen your position to find investors. More important would be your experience, background, and success rate making loans to qualified borrowers out-of-state. The lending and securities attorney you are using to set up your fund and/or your loan documents should easily be able to answer your question about DIL’s in Oklahoma. This should be irrelevant, however.
No lender I know will use a deed-in-lieu. DILs generally prepared by an attorney along with an associated contract, title search, etc. Then, you have to convince your borrower in default to sign these. Contrary to what some want, deeds-in-lieu cannot be pre-signed at closing. If contested, pre-signed DIL’s are generally unenforceable in court since they circumvent a borrower’s right to foreclosure. This has been discussed here many times.
Understand too that when accept a DIL, you are getting the property subject to all other liens the borrower might have accumulated. Assuming you only loan in first position, this could be an additional second trust deed or mortgage (or third, etc.), unpaid taxes, and mechanics liens, to name just a few. If someone is in default, what are the chances they owe others money in addition to you? Congratulations, you now owe those debts as well as an out-of-state property in dubious shape.
There are other options such as a membership pledge, Lawrence, but it's best to simply foreclose and wipe as many of those liens out as possible. Loan at a low enough LTV that you won't get the house from a foreclosure. Lenders are not in the business of wanting the property and a successful deed-in-lieu all but guarantees that.
If you are raising capital to loan to someone else, it sounds like you are forming a mortgage pool, @Lawrence Chun. Or, you are an Oklahoma broker forming a fractionalized note (if legal in OK). The option to use a deed-in-lieu will not strengthen your position to find investors. More important would be your experience, background, and success rate making loans to qualified borrowers out-of-state. The lending and securities attorney you are using to set up your fund and/or your loan documents should easily be able to answer your question about DIL’s in Oklahoma. This should be irrelevant, however.
No lender I know will use a deed-in-lieu. DILs generally prepared by an attorney along with an associated contract, title search, etc. Then, you have to convince your borrower in default to sign these. Contrary to what some want, deeds-in-lieu cannot be pre-signed at closing. If contested, pre-signed DIL’s are generally unenforceable in court since they circumvent a borrower’s right to foreclosure. This has been discussed here many times.
Understand too that when accept a DIL, you are getting the property subject to all other liens the borrower might have accumulated. Assuming you only loan in first position, this could be an additional second trust deed or mortgage (or third, etc.), unpaid taxes, and mechanics liens, to name just a few. If someone is in default, what are the chances they owe others money in addition to you? Congratulations, you now owe those debts as well as an out-of-state property in dubious shape.
There are other options such as a membership pledge, Lawrence, but it's best to simply foreclose and wipe as many of those liens out as possible. Loan at a low enough LTV that you won't get the house from a foreclosure. Lenders are not in the business of wanting the property and a successful deed-in-lieu all but guarantees that.
Highly recommend you consult a knowledgeable attorney. States vary greatly and a little investment up front may save a large loss downstream.
If you are raising capital to loan to someone else, it sounds like you are forming a mortgage pool, @Lawrence Chun. Or, you are an Oklahoma broker forming a fractionalized note (if legal in OK). The option to use a deed-in-lieu will not strengthen your position to find investors. More important would be your experience, background, and success rate making loans to qualified borrowers out-of-state. The lending and securities attorney you are using to set up your fund and/or your loan documents should easily be able to answer your question about DIL’s in Oklahoma. This should be irrelevant, however.
No lender I know will use a deed-in-lieu. DILs generally prepared by an attorney along with an associated contract, title search, etc. Then, you have to convince your borrower in default to sign these. Contrary to what some want, deeds-in-lieu cannot be pre-signed at closing. If contested, pre-signed DIL’s are generally unenforceable in court since they circumvent a borrower’s right to foreclosure. This has been discussed here many times.
Understand too that when accept a DIL, you are getting the property subject to all other liens the borrower might have accumulated. Assuming you only loan in first position, this could be an additional second trust deed or mortgage (or third, etc.), unpaid taxes, and mechanics liens, to name just a few. If someone is in default, what are the chances they owe others money in addition to you? Congratulations, you now owe those debts as well as an out-of-state property in dubious shape.
There are other options such as a membership pledge, Lawrence, but it's best to simply foreclose and wipe as many of those liens out as possible. Loan at a low enough LTV that you won't get the house from a foreclosure. Lenders are not in the business of wanting the property and a successful deed-in-lieu all but guarantees that.
Couldn't have said it better myself.
If you are raising capital to loan to someone else, it sounds like you are forming a mortgage pool, @Lawrence Chun. Or, you are an Oklahoma broker forming a fractionalized note (if legal in OK). The option to use a deed-in-lieu will not strengthen your position to find investors. More important would be your experience, background, and success rate making loans to qualified borrowers out-of-state. The lending and securities attorney you are using to set up your fund and/or your loan documents should easily be able to answer your question about DIL’s in Oklahoma. This should be irrelevant, however.
No lender I know will use a deed-in-lieu. DILs generally prepared by an attorney along with an associated contract, title search, etc. Then, you have to convince your borrower in default to sign these. Contrary to what some want, deeds-in-lieu cannot be pre-signed at closing. If contested, pre-signed DIL’s are generally unenforceable in court since they circumvent a borrower’s right to foreclosure. This has been discussed here many times.
Understand too that when accept a DIL, you are getting the property subject to all other liens the borrower might have accumulated. Assuming you only loan in first position, this could be an additional second trust deed or mortgage (or third, etc.), unpaid taxes, and mechanics liens, to name just a few. If someone is in default, what are the chances they owe others money in addition to you? Congratulations, you now owe those debts as well as an out-of-state property in dubious shape.
There are other options such as a membership pledge, Lawrence, but it's best to simply foreclose and wipe as many of those liens out as possible. Loan at a low enough LTV that you won't get the house from a foreclosure. Lenders are not in the business of wanting the property and a successful deed-in-lieu all but guarantees that.
Jeff S.,
Mele Kalikimaka (Merry Christmas)!
Thank you for your detailed reply! You made me truly glad that I made the post!! I shall search BP for more information concerning DILs. To make things clear, I'm not forming a mortgage pool, nor am I an Oklahoma broker forming a fractionalized note - at least not intentionally. My intent is to help my mentor raise money while giving close friends/relatives a chance to earn a higher ROI than what the banks offer. I see this as an opportunity to bring value to others, for I myself don't have funds or deals - yet.
I know you recommended a membership pledge, and from what I pulled up through google, a pledge is similar to a personal guarantee. Is that correct?
This is my situation. My mentor is motivated to give my friends/relatives a peace-of-mind. He has agreed to use his attorney and title company to handle the process. Additionally, my mentor has agreed to the following: 1) 1st lien, promissory note, personal guarantee, and/or a DIL; 2) the terms of my relatives; 3) to fly out for a face-to-face meeting. My friends/family have agreed to meet face-to-face, and I want to ensure that the meeting will be as smooth as possible. Thus, I want to ensure all possible options are discussed and my friends/family are protected.
If I may ask you a follow-up question, am I on track for a successful connection between a borrower and lender? If not, could you please extend your professional advice so I could be?
Mahalo
Highly recommend you consult a knowledgeable attorney. States vary greatly and a little investment up front may save a large loss downstream.
Thank you Deborah. Merry Christmas!
A SIL has to be Agreed to by the Borrower, at/after the time of default....it can’t be forced by the lender and as mentioned, any other liens will remain attached to the property.
We have just a few simple rules we never violate, @Lawrence Chun. One of these is that we look at every property we loan on. This means we never loan far from home. There is no reason for your friends or relatives to either.
Attend some local real estate clubs and find a local broker who fractionalizes notes on local properties or originates and sells whole notes. Introduce your friends and relatives and get out from mixing business with these relationships – never a good idea.
Aside from the legalities of brokering, licensing, and pooling your friends and relative’s money, or exactly how you are doing it, I think you’re playing with fire, Lawrence. One screw-up and your friends and relatives will be looking at you, not your mentor.
A few questions, and some comments that are fully intended to scare you:
Do you or your relatives know how to evaluate a borrower and his properties? Do you even know what to ask?
You borrower’s lawyer has an obligation to look after him, not you. Never use a borrower’s lawyer or their loan documents. Whose interest do you think they represent?
You must be holding an extraordinary amount of money in front of this individual for him to get on a plane. Not to be cynical, but did you ask why he can’t find his money locally?
My questions are rhetorical, Lawrence. If you want to lend out-of-state, first learn to loan in-state.
(Also, I did not recommend a membership pledge. I mentioned it as an alternative to a deed in lieu. It allows you to quickly take ownership of the borrower’s entity via a UCC filing. Still subject to all liens of course, which means you still have to foreclose. Well beyond anything you should attempt, Lawrence.)
Best of luck to you. Please be careful.