Note for sale saying 'Borrower signed A Deed In Lieu'

System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes

Forgive my n00b question, still learning the note business. I'm seeing some 1st notes for sale where the seller says 'Borrow signed A Deed In Lieu'. What exactly does that mean for the note? Doesn't that mean the note seller now owns the property? Would this now be an unsecured note? The note is listed as performing... why would a borrow continue to pay on a note on a property he no longer owns?

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Scott Carson

Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes

If the seller has received a signed DIL from the borrower on the note, then it is more of an REO deal. This happens a lot with note deals as it happens for us around 30% of the time. The borrower may be in the property on their way out. You will still want to run an O&E report to ensure that their are no junior liens tying up title on the property. If there is, you will not want to accept the DIL as those liens will fall into first position if you record the DIL. Feel free to PM me for more info.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
WEll technically if borrower signed a deed in Lui whoever the bene of the Deed I Lieu is owns the property.. if its a pre signed one just sitting in a file.. well those are not legal.. IE its not legal to get a borrower to sign a DIL .. with the thought process you have it if they default you just record it.
I know some say they do it.. but it won't hold up if its challenged... that's why you have a foreclosure process.
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Scott Carson
Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes
9y
If the seller has received a signed DIL from the borrower on the note, then it is more of an REO deal. This happens a lot with note deals as it happens for us around 30% of the time. The borrower may be in the property on their way out. You will still want to run an O&E report to ensure that their are no junior liens tying up title on the property. If there is, you will not want to accept the DIL as those liens will fall into first position if you record the DIL. Feel free to PM me for more info.
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Richard Allen
Specialist · Orlando, FL · Member since 2015 · 117 posts · 89 votes
9y
@Kevin Trumbull Scott Carson is correct. We often times have the borrower sign a DIL and a consent judgment so we can get them signing both while they are willing. If the title report comes back clean, we record the DIL and take the house back. If there is a second we try to negotiate (BTW, you will usually know that there is a second prior to having the paperwork signed, if that is the case, its a good idea to have the borrower sign a permission to negotiate on their behalf with the 2nd while they are signing the other docs) and get to the deed that way.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Richard Allen @Scott Carson Hey guys I know you guys are the experts.
Once the DIL is signed then the transfer has happened as of the date of the signing of the DIL it does not need to be recorded to be valid ( think of all the deeds signed and stuck in vaults somewhere)
whats your thoughts on that? just curious really.
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Scott Carson
Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes
9y
@Jay Hinrichs I'm a big believer that it has to be recorded to be official. Assignment of Mortgages aren't enforceable in a FC case unless they are recorded. Add in all the nuances with county recording offices as far as witnesses and notaries can vary, and just because you have a signed DIL, doesn't make it official until you get it recorded.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Scott Carson thanks Scott makes sense however I think there are cases were folks have deeded properties but did not record and produced deed and it was valid.
probably goes a long way to intent as well.
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
9y
A deed is valid once it is signed by the Grantor and accepted by the Grantee. That creates the conveyance.

There then exists two arguments:

1. The Grantee (the Mortgagee) accepted the deed since they prepared and allowed it to be held as a viable deed in case something happens. So conveyance technically took place.
2. A borrower's right of redemption can not be circumvented. Often times the background story on these types of DIL setups is that the borrower was strong armed into signing the DIL through an initiation from the Mortgagee. This type of setup would likely not hold up to scrutiny if challenged in court. Foreclosure is the termination of the right of redemption and all borrowers have a legal right to that redemption that can not be waived.

Just because there may exist junior liens or interests doesn't mean a DIL wouldn't be viable. However, a Mortgagee must be careful not to merge their interests into the deed if a foreclosure may be required in order to foreclosure out those junior interests. It certainly becomes a bit more complicated than what most perceive a DIL event to be, but it is possible to vest title alternate to the actual Mortgagee in order to both obtain property possession and still have the power to foreclose.

Assignments are required to be recorded in order to give constructive notice of the change of interest in title to the real property through the security instrument. Neither "has" to be recorded for it to be valid, however, in order to legally bring an action the Mortgagee must provide to the public the right to do so by way of recording the assignment letting all interested parties know who the complaining party is.

Deeds are not the same as assignments but recording instruments serves the same purpose.
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Kevin Trumbull
OP
System Administrator / Investor · Eugene, OR · Member since 2015 · 144 posts · 29 votes
9y
This is a great discussion, thank you all for jumping in. Pretty clear this is not the type of note I'm looking for (right now), but I'd like to learn a little more about what this purchase and exit strategy might look like.
So if I purchase the note and have a signed DIL, does that essentially mean I'm purchasing the deed? Of course there could be other liens on the property that might cloud title that would need to be resolved, but what does that exit strategy look like? Why would somebody purchase a note where the borrow has signed a DIL?
I first thought, well maybe they want to simply purchase the property at a discount and fix it up, rent it out, or sell it... however somebody is still [presumably] living there... wouldn't they technically be squaters at this point, assuming the note seller hasn't arranged a lease agreement? Or does a DIL usually have verbiage that requires the person vacate with sufficient notice?
What happens to the note, would I simply purchase the note, take title on the deed, then erase/forgive the note? Maybe the exit would be to work with the borrower on a brand new seller-financed deal if they wanted to stay in the property?
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
9y
@Kevin Trumbull

A deed in lieu of foreclosure is just that, a deed given from the Borrower to the Lender to avoid foreclosure. The borrower can not be forced into to a DIL as every borrower has a right of redemption which can not be circumvented.

Placing a deed in escrow, which is what this situation is, is an attempt to circumvent foreclosure. It won't hold up and could cause a successive mortgagee liability if they attempt to enforce the deed held in escrow if the borrower gets legal counsel. To put it plainly, it is more of a scam to get borrowers to pay or take their property faster than going through the proper foreclosure channels. As I said, every borrower must be given their right of redemption. Foreclosure is the termination of that right (or equity) of redemption.

As an investor you could purchase this mortgage and note and just shred the deed in escrow as if it never existed. Then there would be no issues. If you purchased this asset and attempted to use that deed by recording and ordering an eviction and if the borrower obtained legal counsel that legal counsel would probably tear you a new behind in court. Of course, some borrowers do still fall victim and simply leave without challenging the validity of the transaction.

If a DIL is given under forceful duress caused by the Mortgagee or with improper criteria it can be overturned and the Mortgagee can be fined. That is the whole purpose of redemption. The borrower's one last chance to remove the claim to the property by satisfying the debt. This goes back to feudal times and is a concept in our common law.

As I said, a DIL must be given by the borrower to the lender not the other way around, which in all of these deed in escrow cases the mortgagee leads the idea which for no clearer way to put it is unlawful and predatory.

A borrower can be allowed to retain possession of the property at the discretion of the Mortgagee post foreclosure auction or DIL. Whole seperate idea. Do not mix these together. They are not the same.

Some things in this industry are done but that doesn't make them right. That is why it can be risky for newbies trying to learn. Make sure you get the proper information on the correct subject.
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Greg H.Pro Member
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Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
9y
Originally posted by @Scott Carson:

@Jay Hinrichs I'm a big believer that it has to be recorded to be official. Assignment of Mortgages aren't enforceable in a FC case unless they are recorded. Add in all the nuances with county recording offices as far as witnesses and notaries can vary, and just because you have a signed DIL, doesn't make it official until you get it recorded.
I can only speak for Texas, a deed is absolutely valid and conveyance has occurred . Recording allows the public notice of ownership
Think of it this way, every deal closed at a title company at least a day if not days before the deed is actually recorded. No lender would allow funding if the deed was not valid at closing
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
.@Greg H. that's what I have read in CE is that a deed does not have to be recorded to be valid.
and its valid at the time of signing and notary date.
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Greg H.Pro Member
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Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
9y
@Jay Hinrichs
If I remember correctly from CE, recording "perfects" ownership by putting it out for all to see.
My understanding though is that there are states are referred to as "Race to the courthouse" states. I do remember when I did a few flips in Las Vegas in 2010-11, deals did not fund until the deed was recorded
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Linda HastingsPro Member
Rental Property Investor · Stockdale, TX · Member since 2017 · 284 posts · 202 votes
9y
@Dion DePaoli Just trying to make sure I understand your last post correctly as I'm new to notes.
Are you saying that if I own a non performing note and I or a third-party on my behalf approach the borrower about doing a DIL, that would be considered unlawful/predatory? That the borrower must be the one to initiate the DIL conversation (and if that is the case, how would your average Joe Borrower even know that is an option)? Or have I missed something here? Is what you were saying regarding DIL specific to this case where the note seller already has a DIL in hand before selling the note?
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
9y
@Linda Hastings

A DIL MUST be voluntary on behalf of the borrower. The borrower cannot suffer from any duress, unconscionable advantage, undue influence or grossly inadequate consideration from the lender.

The regulation states that any type of expressed provision in a mortgage document requiring the borrower to execute a deed in lieu of foreclosure upon the default of a loan is null and void since that type of setup would deprive the borrower of their right of redemption.

If the borrower raises a claim that the DIL was any of the concepts above, such as putting a borrower with sufficient equity into a DIL or influenced into a DIL thinking it was the only way to save their home, they can have the DIL set aside, recover the value of property and seek punitive damages.

A DIL should be approached whereby the Borrower asks the Lender to accept the deed instead of foreclosing. Not the other way around. Customarily the borrower is required to send in a letter asking for a DIL on their own free will. The Mortgagee then has to respond to the request.

If a Mortgagee were to send a letter suggesting a DIL the borrower will have grounds to claim the above issues.

The only one who should be approaching your borrower is you as the Mortgagee or your licensed Mortgage Servicer not a random 3rd party.

Per regulatory servicing guidelines a defaulted borrower is to be made aware of alternatives to foreclosure by a form letter sent by the Mortgage Servicer. That letter also lets them know they may qualify for a short sale, short refinance and have the right to simply pay in full to redeem the property from the mortgage.

DIL are grossly misunderstood by most newbies and I am not too sure the gurus who teach newbies have a good understanding of them either.

A collector implying a borrower can only save their property by DIL would be predatory. A collector who obtains a DIL for a low value LTV would be predatory. A collector who fails to educate the borrower on ALL alternatives to foreclosure would be predatory. A collector who causes a borrower to execute a DIL to be held in escrow to circumvent foreclosure is predatory.

So in this thread's example, while a deed is valid when it is [voluntary with intent] executed by the Grantor and Delivered [and Accepted] to the Grantee - it doesn't mean it will be held as valid. Since a Grantor/Borrower can claim they didn't INTEND to deliver legal title to the property, they simply intended not to be foreclosed and stay in their house. Bring a deed like this out would be a liability for the successive Mortgagee and you could be paying for predatory practices of the Seller who sold you the loan.

As I said, you can buy the loan. Just shred the deed. Maybe let the borrower know too. You will look like a rockstar and earn some points with the borrower.

Hope that helps.
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Linda HastingsPro Member
Rental Property Investor · Stockdale, TX · Member since 2017 · 284 posts · 202 votes
9y
Thanks for the detailed explanation @Dion DePaoli. By "third party on your behalf" I did have a mortgage servicer in mind, not just some random third party.
So it's not that doing a DIL is illegal or predatory, but that doing it the wrong way can be. You just have to make sure to present all other options to the borrower along with DIL and let them decide which choice is best for them.
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