I have heard of the technique of avoiding potential FC problems by having a borrower essential pre-sign a Deed in Lieu which basically says, if the loan defaults this Deed in Lieu becomes enforceable.
Sounds too good to be true and my attorney doesn't like this approach. He feels it would not hold up if challenged because it circumvents the FC process.
Wondered if anyone does this and how it actually works in reality.
Don't borrowers freak out that you are setting them up to take the property?
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....
I think through your attorney you will find a pre-dated DIL isn't legal. In the mean time, I'd be looking for another lender just in case. With the improvements you've made and the low ltv it shouldn't be hard to find a hml or pml.
Take your documents (all of them) to your attorney. I didn't read through the whole thread and all the responses but I am pretty sure Bill touch on the major issue.
A pre-signed DIL will not fly. That tactic circumvents the foreclosure process which is illegal. If the Mortgagee interferes with your tenant, outside of what is allowed in your state and per the loan documents, they will find themselves liable to you.
In the event your maturity comes and they record that deed, you have a very strong case against your lender and your lender has no place to stand.
Fundamentally, the ONLY resolve a Mortgagee has to a default or breach of contract (such as maturity) is Foreclosure. The foreclosure MUST run its course per state law otherwise it is being circumvented. A borrower ALWAYS has a right of redemption and that is what can not legally be circumvented.
Hope that gives you a better piece of mind.
@Elvin Ames while its unlikely that pre-signed deed in lieu will stand up that doesn't change the fact that the lender can still foreclose. However, they cannot "steal" the property or your equity. They will have to go through the foreclosure process, which includes a sheriff sale (trustee sale, or whatever its called in your state.) If there is as much equity as you describe there should be bidders. Any overage will come back to you. Overage is the amount of the winning bid over and above what the lender is owed.
Unfortunately, the winning bid will likely be less than the true market value. And the lender will be able to tack on all their costs to what they owed. So you will net much less than if you were to just sell the property.
If you absolutely cannot find a new lender quickly enough to refi these loans before they balloon you should get them on the market and sell them ASAP. Even if you have to take a fire sale price to get a deal quickly you will still be better off than letting them go to the sheriff sale. You will have more money in your pocket and you will avoid having the foreclosures on your credit report.
There is, however, a process to a foreclosure. IDK the timeline in NJ, but this is typically many months. They have to file notices with the county and work through process. So, even if they start the process there will be some time to complete a sale. However, that process typically involves posting notices on the property. So if they do start it there will be a day sometime soon when the tenants come home to foreclosure notices on their doors.
Not sure why you've decided these guys are crooks. They lent you money with specific terms and you're about to default on those terms. The lender is under NO obligation to change their terms if you can't meet them. A year and a half is a LOOOONG time for a hard money loan. In your lenders shoes, and I have been in them, I'd not give you a second extension either. If you haven't been able to complete the refi in a year and a half it seems unlikely it will get done in the next six months.
I won't defend your lender @Elvin Ames , but your rhetoric is a bit strong. You made a deal with your lender that you would pay them back in six months. You didn't. They gave you an extension on your loan, that I imagine they didn't have to do, and you agreed to pay them back in another six months. You didn't.
With your equity and consistent payment history, I don't know why a lender wouldn't give you yet another extension but they are under no obligation to do so. This doesn't make them a shark or a crook. There are also two sides to every story and for this reason I know private lenders here who won't refinance a borrower out of a prior HML.
I reread this thread and I see no indication of anyone speaking like a shark or with crooked intentions. The majority of the discussion here is on the enforceability of a pre-signed DIL and also on title insurance -- fairly mundane. Most lenders don't want the property. They just want the points and interest income and eventually want to be paid back. Your lender seems very consistent here. It also appears they had a chance to try to take advantage of you six months ago but didn't.
I don't know New Jersey but I know in California, from my lending attorney, a pre-signed DIL would not be enforceable. How long do you have until your conventional financing goes through? Who is holding the DIL? @Account Closed is correct. You really ought to be speaking to another lender for a short term refinance, if you can, until your long term loan goes through. None of us are lawyers or could provide the state specific NJ case law you requested. Here, you should speak to a local lending attorney to see if you can void/delay recording the DIL.
Jeff
@Elvin Ames, I have to agree with @Jeff S on this one. When I read your post my first thought was "Wow! I'm glad this fellow has the opportunity to vent here on BiggerPockets.com rather than grabbing a AK and heading off to the local middle school." Don't go postal, please.
The advice I give to my fellow investors who get jittery is to take a deeeeeep breathe and hold it, then let it out sssllllooooooowwwly, sssssssssssssssssssssss. Now do that again.
Now that we're calm, let's take stock. You took out a HML for six months because that was the only way you were going to get financing. You seem to have understood that this was a very short term loan and that your lender was serious about getting his money back or the collateral in the most expeditious manner. You made a deal with your eyes open, now comes the hard part and the lender is a crook. (Another deep breathe here.)
Your lender may seem like a shark. He may even be a shark, but you're in open waters. Sharks are to be expected and coped with. They can't help being sharks. They do what they do. Hard money lender do not lend for the long term. Did you do what you promised to do? Did you get refinanced into a long term loan before your note came due?
(Another deep breathe here and apologies from me to you for being harsh.)
Perhaps your lender seems like a crook to you. What do you think you're tenants are saying behind their landlord's back? We're all crooks in somebody else's mind sometimes. (You should see the rap sheet on Mother Teresa sometime!) Now the dirty cloud of name calling is dissipating into the atmosphere let's see what we can do.
You seem to need a bit of gap funding, provided that you can be certain that your permanent funding is on the way. Still it would be a pretty tough sell.
You have some equity and apparently you can keep up a 14% note, so you there is some value. Have you any interest in taking an equity partner?
Whatever else you do, get a good RE attorney to deal with the DIL. Buy some time pushing this back through the regular foreclosure process, then USE that time. Don't wait until tomorrow to get started. If there's anyway you can close that note without your HML needing to file, you should consider it. Your reputation in this business is more valuable than your credit report. Never let it be said that Elvin doesn't do what he says he going to do.
I wish you the best.