Lenders, do you have borrowers pre-sign DIL?
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Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
13yOriginally posted by David Beard:
Thanks. Yes, I've already googled the topic. I'm interested in what is happening in practice with those that are actually involved in private/hard money loans, either as the lender or borrower. J, your attorneys seem to be contradicting the first couple of posters. Any more actual experience with the viability of either pre-executed deeds or cognovit notes? I assume the pre-executed deed would be preferred by the lender. Are these SOP for HMLs?
Note: My post relates only to NC. It may or may not apply elsewhere.
To clarify, the complication is that these are not "pre-executed" deeds in that they are not "executed" or "recorded". The deeds are held "in escrow" and the "trigger" to recording the deed is the borrower's default. The intent of this action is to by-pass the power of sale provision related to Mortgages and Deeds of Trust. When I started lending via SDIRA, I asked my attorney if I should follow this practice of having the closing attorney hold a deed in escrow. The short answer response (after he said (paraphrased) 'if you want to do this, find someone else because I won't do it') was that the practice would be considered "against public policy" and contrary to state statute regarding the "power of sale" provision in a deed of trust. There is probably case law related to this matter, but my take-away was that the case (if contested) would wind up as a judicial foreclosure with a high legal price tag. My mind was made up that the tried-and-true power of sale provision was necessary and sufficient, especially for a $70,000 loan on about 50% ARV.
Note 2: also realize that we are talking about loans that are not a "residential mortgage" and therefore are not subject to SAFE. That's a different beast, and the practices described in this thread would most likely be deemed deceptive trade practices per all the recent legislation....
31 Replies
I’ve asked this exact question to two attorneys Eric Michaels, and received the exact same answer: If challenged, there’s not a judge in the world that would accept a pre-signed DIL, because you’re asking your borrowers to waive their foreclosure rights in advance.
So there, three for three.
This is not to say you can’t try and get away with it. A savvy borrower might understand they could fight you and win, and not care. A new borrower might be reluctant if you asked. We don't bother.
Of course you won’t want to do a DIL if the borrower loads up on debt anyway, but I know you know that.
Jeff
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
My attorneys don't like that for the same reason - if challenged in court, it won't hold up. I do know a lender who uses it, but to my knowledge, has not yet been challenged.
I can see it being a mess if the borrower declares bankruptcy,and the BK trustee claws back the property.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
I could see a buyer signing that if they have no personal guarantee,the loan is non-recourse,and they didn't hardly put any money down.
If they put a bunch of money down I don't see a buyer signing it.Especially where if the buyer does a bunch of work to improve the value of a property and the lender just takes it back.
I think having the foreclosure process protection is critical for buyers and predatory lenders.There are bad buyers and lenders out there so you need a close to level playing field.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
Even if it wouldn't hold up wouldn't it be worth a shot? Odds are that many wouldn't challenge it.
Is there any downside risk to having them sign it and the investor recording it post default? If they challenge you could go through the normal process. If they don't it is all upside. What is the tradeoff if anything?
I hear you Bryan Hancock. I guess the downside is the loss of the deal in the first place (not that there is any shortage of people needing funding) and then the idea Ann Bellamy brought up about a BK trustee clawing back the property I had taken through this process.
Might create a big mess.Still not sure.
Thanks for your responses.- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
Have you spoken to a title company to see what their insurers would think about giving your buyer insurance with a pre-signed DIL? If you can get title insurance it may not really matter a whole lot what the attorneys think about things being challenged.
Thoughts?
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
I'm preparing to begin lending to investors, and was exploring this topic. I was researching the use of cognovit notes, which contain a so-called "Confess Judgment" provision. In the event of default, it allows the lender to obtain judgment against the borrower without having to go through normal foreclosure proceedings. In fact, the borrower is not necessarily even notified before judgment is obtained.
These are apparently legal in many states for commercial transactions (prohibited for consumer transactions). I did find a HML lender operating in MD and GA that notes on their site that "All loans are written with a Confess Judgment provision, such that we can expedite the foreclosure process to obtain the asset for quick disposition."
Sounds like a no-brainer to add this provision as long as it's acceptable to the borrower, your borrower is an investor or entity, and it passes muster in your state. Does anyone have a different viewpoint? Ann Bellamy?
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes13y
I was just going to bring up what David Beard mentioned - "confession of judgment". See link:
http://legal-dictionary.thefreedictionary.com/Confession+of+Judgment
Of course, that link has this statement, along the lines of what the OP says about pre-signed DIL: "The unfairness of the procedure has prompted most states to enact laws making agreements for the confession of judgment void."
We do some borrowing in two judicial foreclosure states, and when we do, we always sign a quit claim deed that is held in escrow, with escrow instructions that state the title company is to file should we ever be 60 days late on payments.
My attorney thinks it would hold up in court (as does our lender's attorney), though hopefully we'll never have to find out... :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
David, a cognotiv recital may be used in Ohio for commercial transactions. While you may waive notice, it doesn't mean that the amount can not be challanged as to the amount claimed, even if the acknomledgement states that the amount claimed is accepted. That can arise out of the lender's actions in attempting to dispose of collateral at the highest price, accounting issues, claims of fraud, etc. So, while it cuts throgh alot of mustard in commercial financing, it's not fool proof, but I have used them and never needed them.
As to the DIL, this was acceptable long ago, it was usually used in thin seller fianced deals along the lines of the contract for deed. Then, in the 90s, at least in the midwest, the Quit Claim Deed was seen as circumventing the FC process in any real estate financing arrangement, including the old CFD. I'm sure it's still being done.
In the late 90s it was difficult to get the recorder of deeds to accept any deed that didn't have a recent date. If a title search shows a recorded DOT or CFD, say on 4/22/2010 as a transaction and then sees a filing date of a DIL on 3/01/2013 with that deed dated 4/22/2010, it's obvious it was a predated DIL. Since the rights of redemption were not available there could be a claim as well as for any wrongful foreclosure, so the title company won't have to insure the issue and it could be excepted and insured. Today, I doubt they'd go there at all as over the years there have been so many issues with wrongful foreclosures, I can see where they would want a new deed.
Another tactic was having a special power of attoreny made with the power to deliver any deed and with the power of sale. The POA could be the individual lender. This worked for short terms as a POA may be limited. While there are certain events where the POA becomes inoperable, a default was cured by the POA making a new DIL with the current date. It could also be structured as a sale allowing a normal payoff. I did not employ this tactic but it could be an option but I'd suggest the lender not be the agent, it would be better if it were someone else, like an attorney, if they would do it.Any of these will not float if the borrower objects and seeks a judicial route. In BK, any excess equity in property can be taken to sale to cure debts outstanding, even with installment contracts and any DIL filed just prior to BK would certainly be nullified as disposing of property will have issues, not only for the debtor but the creditor as well, that's not a good course of action.
The states that we had notes or obligations all had non-judicial FC available. I'd suggest you follow good underwriting practices along with prudent LTVs and simply follow the N/J FC process, following the acceptable way to secure collateral is always best. PS> I understand that the FC process can eat up alot of time in some places, to me, that just means looking at the LTV issues a little closer. :)
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
Thanks. Yes, I've already googled the topic. I'm interested in what is happening in practice with those that are actually involved in private/hard money loans, either as the lender or borrower. J, your attorneys seem to be contradicting the first couple of posters. Any more actual experience with the viability of either pre-executed deeds or cognovit notes? I assume the pre-executed deed would be preferred by the lender. Are these SOP for HMLs?
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes13y
David Beard - the reason that J Scott's attorney seems contradictory is that JScott is borrower, while OP is lender; the attorneys are "playing it safe" :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
LOL, try it, take it to court to enforce it and see how it works for you.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes13y
Originally posted by David Beard:
Thanks. Yes, I've already googled the topic. I'm interested in what is happening in practice with those that are actually involved in private/hard money loans, either as the lender or borrower. J, your attorneys seem to be contradicting the first couple of posters. Any more actual experience with the viability of either pre-executed deeds or cognovit notes? I assume the pre-executed deed would be preferred by the lender. Are these SOP for HMLs?Note: My post relates only to NC. It may or may not apply elsewhere.
To clarify, the complication is that these are not "pre-executed" deeds in that they are not "executed" or "recorded". The deeds are held "in escrow" and the "trigger" to recording the deed is the borrower's default. The intent of this action is to by-pass the power of sale provision related to Mortgages and Deeds of Trust. When I started lending via SDIRA, I asked my attorney if I should follow this practice of having the closing attorney hold a deed in escrow. The short answer response (after he said (paraphrased) 'if you want to do this, find someone else because I won't do it') was that the practice would be considered "against public policy" and contrary to state statute regarding the "power of sale" provision in a deed of trust. There is probably case law related to this matter, but my take-away was that the case (if contested) would wind up as a judicial foreclosure with a high legal price tag. My mind was made up that the tried-and-true power of sale provision was necessary and sufficient, especially for a $70,000 loan on about 50% ARV.
Note 2: also realize that we are talking about loans that are not a "residential mortgage" and therefore are not subject to SAFE. That's a different beast, and the practices described in this thread would most likely be deemed deceptive trade practices per all the recent legislation....
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Originally posted by Steve Babiak:
David Beard - the reason that J Scott's attorney seems contradictory is that JScott is borrower, while OP is lender; the attorneys are "playing it safe" :)The pre executed quit claim may or may not transfer insurable title to the lenders if J Scott ever defaulted. Pre-executed deeds combined with mortgages and contracts is messy. If the loan is secured by a security instrument, the power of sale clauses would be in conflict with the deeds. The POS terms could probably be removed or amended from DOTs and mortgages but then what purpose does the security instrument serve? Why not just use a promissory note (or IOU). Additionally, deeds are subject to state specific "delivery" requirements, which is a separate issue from recording. Executing deeds in advance is just a bad idea of you ask me.
Bryan Hancock has the best point IMO. Forget court, let's talk title insurance. Where I am, a title company 1) wouldn't accept a quit claim from a borrower to a lender and 2) would require that they had supervised the notary on the deed or supervised the notary of an affidavit from the grantors in order to accept a deed for insurance purposes. So you'd need new signatures from the defaulting borrower regardless of the quit claims.
I'm pretty sure J Scott's lender's attorneys would say the quit claims would "hold up" in court even if they wouldn't successfully transfer title. Indeed the quit claims cloud title and could be admitted as evidence in a judicial foreclosure. The attorneys have nothing to lose by saying this. And possibly some billable court hours to gain.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Correction. Quit Claim Deeds are used in all states as DILs, when executed properly from a borrower to a lender and are insurable. To say properly, I mean granted after the time of default, not as a prearranged agreement. :)
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
I don't know what CA law governs deeds-in-lieu. However, Chicago Title and Fidelity Title here require a Deed-in-Lieu-of-Foreclosure, which is not a quit claim, but rather a grant deed with a deed-in-lieu recital.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Eric Michaels Since you are in IL, you may want to check out the following article on the Attorneys Title site: http://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting
It includes some case law citations about the invalidity of pre executed deeds in lieu. You could arm up with case law questions and ask your attorney their take on it.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Thanks for the clarification, as to pre-arranged and those properly granted. :)
BTW having a problem clicking on the address K. gave....
But I understand the issue... :)
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
I come at this question from a title perspective. Since I re-sell most of what I buy, and a lot of what I buy is hot mess of title problems, title insurance is high priority to me. I find it interesting that many of responses here focus on what will "hold up" in court. The whole point of a loan agreement that includes a pre-executed DIL would be to avoid court. Especially if you're in a non-judicial state. No foreclosure and no law suit equals quick and easy (and cheap!) repossession. If there is a chance of being challenged by the borrower in a court of law, aren't you better off with the power of sale already in the mortgage or DOT?
As an investor borrower I would have no problem signing a deed in advance of default, and would be happy to honor such an agreement. If a title company would be ok with it, it really is a cheap and fast solution for the lender to recover the collateral.
IF you have a borrower you trust in this scenario and IF your title company says: sure, let us prepare the deed for the borrower to sign in advance of default; and sure, we'll hold it in escrow for you; and sure, we'll insure it when you re-sell, then I say go for it. And if it's a CA title company, please call me and tell me who it is.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes13y
Clickable link for K. Marie's previous post, to help Bill Gulley:
http://www.atgf.com/tools-publications/pubs/deeds-lieu-foreclosure-advantages-disadvantages-and-drafting - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Steve Babiak, thanks, I read it and it's a good overview to the DIL issues. I failed to mention junior liens in my previous post, you may get stuck paying them! :)
As to K. Marie's suggestion, try and see, and as I said that to see how it works for you, I really suggest you not.
A DIL that is improperly transacted or conveyed seems to present title issues, but let's get @Keith Barton (which did not pull up his name, BTW) and get his opinion as a title attorney. :)
While I have not had any issue that was not overcome with the DIL, I also see that other events, such as BK or divorce shortly after a DIL could cause issues to arise, if equity existed.
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
Thanks. My plan was to make 3 to 5 yr amortizing loans from my 401K, on fairly inexpensive rental property (having 30-35% gross rent yields), loan amounts that would be below the minimums for almost all banks and HMLs. I'm only lending to full-time and experienced property managers and landlords at this point, folks that can run the properties efficiently with in-house resources, but want to build their holdings and don't have a ton of ready cash. Believe it or not, with a 3 to 5 yr amortizing note they can break even on cash flow during the loan period, then own it free & clear. Most own several F&C properties currently, but would like to own many more.
The title agent said they wouldn't hold a pre-signed QCD, but that I can certainly hold it if I like, nice of them. So I guess at this point I'll just stay with note+mortgage+assignment of rents rider. In any event, I'd be happy to own any of these properties, and with the assignment of rents providing cash flow for servicing the note during the foreclosure period, I don't think there would be that much concern.
The title company shared a copy of a note that they've used for this type of loan many times, they say. It has no stated interest rate, merely a schedule of payments. It also specifies that while there is no prepayment penalty, all of the interest for the term of the note is to be collected from the initial payments, and then all of the principal is collected on the back end. Should I have concerns with a note so-written? Does the implied interest rate need to be compared to state usury ceilings and such things, or is this type of commercial transaction between two entities generally exempt? The sample I was provided of an actual recent loan (an 18 mth loan) handled by this title company resulted in an interest rate exceeding 35%, for example. My loans will be longer and have a lower rate, but still very strong.
I've looked at these 3 to 5 yr loans from the standpoint of both borrower and lender, and over the first 10 years of ownership, even with the loan payments, the borrower will enjoy a very high IRR (40%+), even as the lender enjoys a very generous return as well (20%+) on a secured investment with max LTV of 75%. So it seems like a win-win, and permits borrowers to obtain properties that they otherwise couldn't in what is entirely a cash buyers market at this lower price range (average loan $20K).
I have first hand experience with a number of property managers that do a very good job managing these types of homes, and I liked the idea of helping them build their portfolios even as I enjoyed a very good return as well in my 401K.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
David, your note is really getting off topic and hijacking the DIL issue, but is a good question and something to avoid doing, not a good idea. I have never seen or even heard of a finance expert being in a title company. While they may see all kinds of junk saying that they see some "lender" doing something certainly isn't an opinion to be relied upon, most don't know squat ecept how to close a loan.
Let's start another thread on that.... :)
- Newark, NJ · Member since 2014 · 2 posts · 0 votes12y
I borrowed money from a Hardmoney lender over a year ago the ballon is coming due after I had 1 six month extension. I am current on my loans have about a 40% LTV. My properties are worth $250k I owe $100k each on these 4 unit properties that are in good shape and completely rented out. I asked the lender for an extension so my permanent loan can be completed and he says he will not give me an extension. He had me sign a bunch of papers at the closing and also a deed in lieu of foreclosure on my properties. I own my properties in land trust. I'm worried that these guys are crooks and will try to steal my equity because I'm in a bind with the ballon. I'm reading the dialogue from the lenders here and it scares me because you guys sound like sharks. I've pId 14% interest on time for the last year and a half and these guys want to steal the little wealth I've accumulated and just say tough luck. I spent $80k fixing one property and $60k fixing the other and that's not to mention maintenance and management of my properties and these guys are trying to steal my equity which is substantial because of some DILF that was signed over a year ago. I'm taking it to an attorney soon but want advise case law anything to help save my properties from these crooks. I also don't want them contacting my tenants and messing up my rent to cause tenants to stop paying me and cause a default. I just think the predated deed in lieu is fraud and done cause guys like me are respirate to do our business and have no where else to turn for a loan. I can't even sleep at night thinking about this makes me sick. Help please!
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