Seeking advice on deed in lieu of foreclosure

[Lawrence Chun]

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

[Jeff S.]

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.