Private Money Lender Seeking Advice RE: Deed In Lieu

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Private Money Lender Seeking Advice RE: Deed In Lieu

Sunny Shakhawala
Parsippany, NJ · Member since 2016 · 64 posts · 49 votes

Hey Everyone,

About to originate a new loan for one of my borrowers. I've never used a deed-in-lieu of foreclosure before, but a few friends have told me to include it in my packet. 

Question: If I have the borrower's sign a deed-in-lieu before closing the loan, what would trigger my ability to exercise it? Or am I able to exercise it at any point? That hardly seems fair.. I mostly see the value of a Deed In Lieu if the borrower's sign it in advance (before getting themselves into trouble). I doubt any borrower would sign it after they have my money...

Can someone explain to me the correct way to document it? Does anyone have a template I can use?


Are there any borrowers here that have signed a DIL for a Private / Hard Money Lender at or before closing? If so, would love to see it. 

TIA.

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Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
7y

You can ask a borrower to sign anything you want in advance, @Sunny Shakhawala, but if you try to enforce a pre-signed deed-in-lieu, and your borrower contests it in court, it will likely be thrown out.

A pre-signed deed-in-lieu is essentially unenforceable since it circumvents your borrower’s rights in a foreclosure. As a violation of public policy, no judge will accept that. It could get worse.

Depending upon how far you get, the consequences against you can be severe, including a return of the property, repayment of any equity, and the profits from a resale. There could also be punitive damages. What would you do if your borrower declares bankruptcy? How would you protect from a claw-back? Do you know how to handle title insurance in this case or protect yourself from unrecorded lienholders?

There’s the deed and there’s the agreement, the latter of which is deal specific and not from a template. You also have to be careful how you behave not to show coercion, on which only a lawyer can advise you.

Talking someone else’s property is serious stuff, Sunny. Be very careful with this.

There was a pretty good discussion on the topic here, some years ago:

https://www.biggerpockets.com/forums/49/topics/72874-lenders-do-you-have-borrowers-pre-sign-dil?page=1

Here’s a pretty good legal write-up on the pros and cons of Deeds-in-Lieu from both the lender and borrower’s perspectives.

https://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting

Good luck, Sunny.

Jeff S. -- Private Lender from Los Angeles

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    7y

    You can ask a borrower to sign anything you want in advance, @Sunny Shakhawala, but if you try to enforce a pre-signed deed-in-lieu, and your borrower contests it in court, it will likely be thrown out.

    A pre-signed deed-in-lieu is essentially unenforceable since it circumvents your borrower’s rights in a foreclosure. As a violation of public policy, no judge will accept that. It could get worse.

    Depending upon how far you get, the consequences against you can be severe, including a return of the property, repayment of any equity, and the profits from a resale. There could also be punitive damages. What would you do if your borrower declares bankruptcy? How would you protect from a claw-back? Do you know how to handle title insurance in this case or protect yourself from unrecorded lienholders?

    There’s the deed and there’s the agreement, the latter of which is deal specific and not from a template. You also have to be careful how you behave not to show coercion, on which only a lawyer can advise you.

    Talking someone else’s property is serious stuff, Sunny. Be very careful with this.

    There was a pretty good discussion on the topic here, some years ago:

    https://www.biggerpockets.com/forums/49/topics/72874-lenders-do-you-have-borrowers-pre-sign-dil?page=1

    Here’s a pretty good legal write-up on the pros and cons of Deeds-in-Lieu from both the lender and borrower’s perspectives.

    https://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting

    Good luck, Sunny.

    Jeff S. -- Private Lender from Los Angeles

    3Reply
  • Sunny Shakhawala
    OP
    Parsippany, NJ · Member since 2016 · 64 posts · 49 votes
    7y

    @Jeff S. Thank you!!

    I really appreciate the candid reply. 

    I was on the fence about having the borrower sign a deed-in-lieu. 

    My friends who suggested it made it seem like it was so black and white: They default, I take the property. I knew it couldn't be so easy. 

    The major benefit I see in a DIL is the scare tactic imposed on the Borrower...

    --

    Do you know what a "Confession of Judgment" is? The borrower I'm lending to has signed one of those before and is willing to sign it again. To me, it seems like a DIL. 

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    7y

    I have no idea what a Confession of Judgement is, @Sunny Shakhawala. We don’t use these in California that I’m aware. I’ve read about them here and they seem to be either an east coast or judicial state thing.

    If you’re asking all of this to learn, then that’s great. When you make a sensible loan to a qualified borrower, things can still go wrong so it’s important to understand your options and available limits within the law. The states have already given lenders a lot of power and control over their borrowers.

    There’s no need to play games or impose scare tactics, which always seem to suggest misusing or somehow twisting options that are already legal if used properly. You used good judgement knowing, “… it couldn’t be so easy.” Not to sound like your mom, but because another lender might not know what he or she is doing, and convinced a borrower to sign a document, doesn’t mean you should.

    My best advice is to get the best education you can from the most qualified lending attorney(s) in your area. If you ask some of the larger local hard money lenders who they use, I bet you hear just the same few names. Note, lending attorneys are not the same as real estate attorneys and they can be as rare as hens’ teeth. These tend to specialize in lending and securities, not closings.

    I keep a file on my computer desktop called “Questions for Stephanie.” Every time a lending question pops into my head I open the file and jot it down. Unless there’s something urgent, I wait until I get to maybe 10 or 15 questions and then make an appointment for an hour and we go thru these randomly. Some attorneys will put you on their mailing list and also offer free webinars, so ask about these too.

    Hope I didn’t lecture too much, but I tried to give you some actionable advice, Sunny.

    Jeff S. – Private Lender from Los Angeles

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    @Jeff S.  in our market IE west coast for sure pre signed Deed in Lui is not enforceable..

    lets ask an east coast expert  @Tom Gimer  Tom is an owner of a title company in MD PA and a real estate attorney.. I would love his take on this.

    what we find on the west coast is simply a deed signed even though not recorded is a valid instrument.

    so you make a loan have someone sign a deed in Lui same day and reality is they dont own the property since they deeded it back to the lender same day.. 

    Plus in our area judge no go for that one.. you lose hands down.. as Jeff stated precludes borrower their rights to cure etc.

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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    7y

    DIL signed before a default... almost certainly un-insurable. Not voluntary and not for value. 

    This is just asking to get caught up in litigation, BK set aside, etc. DIL has to be initiated by the borrower after default, not the lender beforehand.

    Proper DIL file requires supporting paperwork -- request from borrower, written agreement, title search, assignment/assumption/etc, release, etc. Not just a deed.

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  • Sunny Shakhawala
    OP
    Parsippany, NJ · Member since 2016 · 64 posts · 49 votes
    7y

    Appreciate all the feedback, @Jeff S. - I've been using a real estate attorney for the most part. I think I'll take your advice and try to figure out who the HML's are using for legal represenation.

    Thanks @Jay Hinrichs & @Tom Gimer for chiming in.  Appreciate the thoughtful replies. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Tom Gimer:

    DIL signed before a default... almost certainly un-insurable. Not voluntary and not for value. 

    This is just asking to get caught up in litigation, BK set aside, etc. DIL has to be initiated by the borrower after default, not the lender beforehand.

    Proper DIL file requires supporting paperwork -- request from borrower, written agreement, title search, assignment/assumption/etc, release, etc. Not just a deed.

    On top of that if they just go record the thing and there are junior leins they take title to those liens. I know HML who do this routinely though.. it defiantly happens I would never do it for all the reasons you mention above its JUST NOT RIGHT

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  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    7y

    @Sunny Shakhawala

    If you're worried about default before you lend the money, you may want to rethink the deal entirely.  

    If you still decide to lend to them, maybe create an LLC where you and the borrower are both members with the stipulation that if the borrower defaults, they lose all rights and are removed from the LLC making you the sole member and consequently owner of any properties owned by the LLC. That may work.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Stephanie P.:

    @Sunny Shakhawala

    If you're worried about default before you lend the money, you may want to rethink the deal entirely.  

    If you still decide to lend to them, maybe create an LLC where you and the borrower are both members with the stipulation that if the borrower defaults, they lose all rights and are removed from the LLC making you the sole member and consequently owner of any properties owned by the LLC. That may work.

    this is how some say Do Hard Money does their deals.. I have not done a deep dive into this.. but I would think a borrower could make a stink .. if your really just using it as a scheme to preclude foreclosure.. I can see if they buy the property in a co owned LLC with no debt instrument then in the operating agreement you just spell out the deal..

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  • Sunny Shakhawala
    OP
    Parsippany, NJ · Member since 2016 · 64 posts · 49 votes
    7y

    @Stephanie P. I am not worried about Default. Like you said, If I was, I definitely wouldn't take the deal. 

    I'm just wondering if I should add a DIL to my closing doc packet as an added layer of protection. Based on the feedback from others with more knowledge than me, not going to add it. 

    Thanks for your input! 

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  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    7y
    Originally posted by @Sunny Shakhawala:

    @Stephanie P. I am not worried about Default. Like you said, If I was, I definitely wouldn't take the deal. 

    I'm just wondering if I should add a DIL to my closing doc packet as an added layer of protection. Based on the feedback from others with more knowledge than me, not going to add it. 

    Thanks for your input! 

     Smart to not add it then.  Well done.

    0Reply
  • Chris K.
    Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Sunny Shakhawala

    When asking these questions, you should always provide the jurisdiction. These questions are so incredibly specific to each state that it's impossible to answer without it. 

    For example, misusing DILs can be disastrous in Pennsylvania since we recognize something called the merger doctrine. While DILs are used, traditional lenders do a careful review of the title before doing so. It can be a timesaver for both sides, but lenders sometimes just need to foreclose instead of using a DIL for various reasons. 

    If you intend to do a lot of private lending, work with an attorney who has experience working with private lenders. Note that this may end up being a different lawyer than your current real estate attorney. You'll also most likely need one for each state. It's unbelievable how loyally you could get screwed if you don't do it correctly. My favorite example of this was a lender that made a loan to a husband and wife in Pennsylvania. The lender failed to do the paperwork properly and didn't get the documents done as tenants by the entireties. Long story short, ended up with a useless note and mortgage. 

    Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

    1Reply
  • Dorothy ButalaPro Member
    Rental Property Investor · Erie, PA · Member since 2016 · 168 posts · 124 votes
    7y

    I use confession of judgement not DIL. I am in PA.  

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y

    Here is what I don't like about DIL: the property is transferred back to you with any new outstanding liens. They are not wiped out (at least in FL). Maybe @Tom Gimer can address this issue. I just had one offer me a DIL but because he owes more than it is worth I am going after a deficiency judgement instead. The debtor is already playing games and has transferred all assets except the subject property to his children. We will see what a court has to say about that:)

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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    7y

    @John Thedford As far as I know, existing liens would not be affected by a DIL in any jurisdiction. That's why the lender must absolutely conduct a current and thorough search .

    You would be surprised at how long our checklist is on the title side when asked to insure a DIL.

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