For a distressed homeowner, going into a foreclosure can be a costly process in terms of money, credit ratings and public image. A deed in lieu of foreclosure is a viable option for these mortgagors, which also gives advantages to the lender as well. This deed instrument is especially useful in states where redemption periods are long and foreclosure costs are high. As a lender, however, there might be a few things to consider if you want to get the best out of these kinds of agreements without running into pesky problems. Chris Seveney acquaints us with these in this episode.
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We are going to talk about the specific exit strategy of a deed in lieu process, and what that consists of and things you need to focus on as part of this process because it can cause a lot of problems down the road if it’s not done correctly.
I’ve seen some investors make the mistake of not doing proper due diligence on the backend of a deed in lieu. Let’s get right into it. First, before we get into that component, I would like to start out by saying a few notes because we get a lot of questions lately in regard to the show and specifically, where has Gail been. Gail has decided to step aside for a little while off the show. She’s pursuing other career aspirations, including one, possibly retirement, which is not a career aspiration. Also, she’s working on her portfolio of buy and holds and some rental properties and some rehabs in certain areas. At this point in time, she’s going to be taking a break from the show. I will be going solo on it. Gail will still pop in now and then to be on some episodes and be our “special guest” and share feedback and other things going on in business and so forth. If you haven’t heard from Gail in a while, feel free to reach out to her and see how she’s doing. With that, let’s roll into what a deed in lieu is first off, and some of the choke points of things you need to be careful of when doing a deed in lieu.
What is a deed in lieu? A deed in lieu is when you have a note where the borrower has not been performing and the long-term terminology is a deed in lieu of foreclosure. What the borrower does is in lieu of you for closing on them and having that go on their credit and everything else, it’s called the deed in lieu, which is when they hand the deed back to you. They sign off saying, “I’m giving you the house back, the collateral that you have, in lieu of foreclosure.” You’re saving money on costs for not having to go through the foreclosure from that perspective. It can be helpful in states such as Pennsylvania, Ohio, Michigan, Alabama. I mentioned Michigan and Alabama because those have redemption periods of three months and up to a year in Alabama.
New Title Report
In Pennsylvania and Ohio, those have high cost foreclosure states. Whenever you can get a workout where the borrower is giving you the deed back in lieu of a foreclosure, it is something you strongly should consider. When you’re considering it, what do you consider? One of the first mistakes I see people make is they don’t get an updated title report. The question comes why do you need an updated title report? You’re taking over the deeds of the property along with all encumbrances that are on it. If there’s a second mortgage on the property, you now are responsible for a second mortgage. If there were other liens on the property from a contractor, something that was subordinate to your lien, then you would have to be responsible for that. That’s something to be careful of.
In a deed in lieu, it is important to remember that by taking over the deeds, you’re also taking over all encumbrances that come with it.
Taxes and nuisance liens, those don’t go away one way or the other. There’s not much you can do with those, but in many instances, there could be another lien. I’ll give you a perfect example of what happened in the situation I had. I had a borrower who want to sign a deed in lieu and actually signed it. We said, “We’re waiting for the confirmed title, but here’s the paperwork and so forth.” In the process, we pulled the title and the borrower, who had been using it as a rental property, wasn’t paying the property manager. This person was collecting the rent, not paying the mortgage, not paying the property manager, not paying anyone. The property manager stuck a $12,000 lien on the property. They got a judgment from the borrower and they attached it to the property because it’s an asset the borrower had, so why not?
My title report shows up and then I see that. I was like, “That wasn’t here when I pulled title 6 to 8 months ago.” It wasn’t that long. It might have been probably about six months is my guess. In that span, they had this lien. The first lesson is when you pull title when you buy an asset, it doesn’t mean that six months on the line, there’s not something else there at that point in time. That throws for a curveball because we could not take the deed in lieu. I wasn’t going to be responsible for this lien that was on the property. I reached out to the property management company and said, “I’m the lender. We’re going to foreclose on this thing. I’ll give you $1,200 because foreclosure’s going to cost me around $2,000.” They came back and winded like $9,000. I said, “Here’s my last offer. I’m filing foreclosure in a week. It’s going to cost me close to what I offered you. After that point, the offer is gone.” They’re like, “We want $9,000.” I said, “Okay.” Maybe they’ll go after her for judgment, but I probably would have taken the money at the point in time, but not my problem. We went ahead and foreclose and then that wiped out that lien. That’s one of the major components in one area where I see a lot of people also not rechecking title is on contract for deeds where your name is on the title.
You wouldn’t expect something to be on the lien, but I’ve had people have contractors hired in the past to try and slap some stuff on the property and it can get hairy at that point in time as well because they were authorizing work. They probably didn’t do it without a permit and they weren’t the owner, so that can lead to some challenges. The first thing you want to do is run a new title report. Please, if you’re going to accept the deed in lieu, please run title so you’ll know you’re getting what is on the property from a lien perspective.
Deed In Lieu: If you’re going to accept the deed in lieu, run a new title report so you’ll know you’re getting what is on the property from a lien perspective.
Property Check
What’s the other component of accepting a deed in lieu? That is the condition of the property. In some instances, you don’t have a choice. A lot of times you ask them to keep it empty, broom swept and cleaned. In many instances, that’s not the case. What you could do is offer them what’s called Cash for Keys, which is another way to entice a deed in lieu. What that means is, “You’ll sign a deed in lieu, and when you move out, I’ll give you cash, $500,000,” whatever you find appropriate for them to hand the keys over. If you’re going to go down that path, what you’ll want to do is make sure that there’s language. First off, a Cash for Keys agreement should be written by an attorney that stipulates what the property condition is going to be left at. It’s similar when you buy a house, empty, vacant, broom swept clean. Do not expect them to hire cleaners to get in there.
I’ve had people argue that when we said we want it emptied, what they did is they emptied it and they threw everything in the front yard and said, “The house is empty.” It’s the property, not the house. You can see where people go. They’ll leave personal furniture in there and say, “We thought you wanted it.” “No, I have no use for your personal furniture.” A lot of times, it’s challenging because for them to get all the trash and everything out of there is going to cost a significant amount of money once they realize how much crap they’ve had stored there. It’s something to consider.
One thing that you’ll try and do before you get Cash for Keys is to try getting an inspection on the property. I’m working with a borrower who’s married and got separated and they want to do a deed in lieu. My choice is to foreclose or take it. I don’t have many options. In the same token, I said, “I want to do a property inspection.” A lot of times, people will get nervous like, “What does that mean? I bought this house and it needed a lot of work. It still needs a lot of work.” Typically, my response to them is, “I’m not as much interested in the condition of the house. I know it’s going to be rough, but I want to make sure that there are not twenty other people living in the house. I want to make sure it’s not a meth lab. I want to make sure it doesn’t have 5 feet of water in the basement.” You still want to inspect it. I tell them, “I realize it’s not going to be a great house, but I do expect some level of finish in the property. I wouldn’t expect it to be gutted with water pouring in the house.”
Sometimes it’s challenging because you run into that and it’s like, “What do you do?” You can foreclose on them, spend the money and try and get a judgment against them. The reality of it is in most instances, these people don’t have anything. If it was somebody who was a fix and flipper or a buy and hold guy or gal who was doing it as a strategic default, then you can look at doing alternatives. In most instances, you try and get as much leverage as possible, but you don’t have that leverage that’s there.
The second thing is getting eyes not on the property, but in the property. I recommend either a local agent or appraiser or a contractor to get an idea. The challenge that you’ll find sometimes with realtors is their values are inflated, and this isn’t a knock against realtors but it is. For example, I had one in North Carolina that we gave the guy Cash for Keys of $2,000 because he didn’t want to move. We kept having to up the ante a little bit. We’re in the deal for $20,000 or a little more at the time. The realtors come back and he banned the property and says, “A lot of books, boxes, this and that,” but he goes, “You’ll get $40,000 for this, no problem.” I think I’ve told this story several times and the numbers change, I apologize, but it was somewhere I think in the $40,000 range.
The guy moves out and so forth. It goes to the list. When he comes back, he goes, “I didn’t realize the kitchen was in this bad of shape.” I’m like, “What do you mean you didn’t realize?” He went on and he goes, “I think it’s probably only going to be a $30,000 property.” Needless to say, I wasn’t happy with him, which is a side note. I’m going to do another show on realtors who should specialize in REOs. Don’t find realtors who normally sell homes, but that’s another topic for another day.
Deed In Lieu: You need to try and push the issue and be aggressive, while trying to have as much compassion as possible.
We ended up overpaying the guy because the property condition was worse than the realtor thought. We ended up selling it owner financing to somebody and didn’t make anything on the deal. We ended up breaking even on the deal, which is a positive. From that perspective, that’s why if you’re going to get somebody in there, try and get a true value to the property. If it’s a realtor, be careful and make sure it’s an REO realtor and somebody who can deal with these types of properties. Getting somebody who sells the cookie-cutter three-bedroom, two-bathroom to rate a property, it’s not going to work. You’ve got to get somebody who’s got that experience within it. That’s the second component.
Timing
Let’s roll back again. We talked about rechecking title reports on the property. That’s the first component. The second component is getting inside the property. The third component I want to talk about is timing. This is the one that everybody forgets about. It’s something that when I started out was challenging for me because what happens is in these situations is a stall. They lose the paperwork, the dog ate the paperwork, they didn’t get the mail. We said, “You signed for it.” “That paperwork? I got that.” A perfect example is I’m going through something to avoid legal with somebody and they need to sign documents. They signed them and took a picture of it and said, “Here you go.” I said, “It’s great you sent me a picture. I need the original.” “It’s mailed.”
A week later, nothing, “I’m mailing it today.” On a Monday I sent an email saying, “If I don’t have it by Wednesday, my attorney has to file something with the court, which we are going to file. If I have to file, it’s going to cost an extra $1,000, which gets added to the loan.” Lo and behold, I get a picture of that day of the tracking number dated that day. Make sure you understand and put timelines to these tasks. If you’re not doing Cash for Keys, it’s a little more challenging putting a timeframe on it because what’s in their best interest from that perspective. If you’re doing Cash for Keys, definitely put a date that is valid. You need to be out by this date. I still want to tell people, “I need this back by this time.”
Another little tip, especially during these COVID times, that I’ve done is either a virtual notary or a mobile notary. I find that to be much more beneficial and it’s able to expedite the process because people are trying to find a notary nowadays. People aren’t used to going to find a notary and a lot of borrowers aren’t used to going to notaries in many instances. They’re not in a rush. They’re not paying you. What does it matter to them if it takes an extra week? It doesn’t. They don’t care. You need to try and push the issue, be aggressive, but also understand what they may be going through because borrowers who may be separating, that’s not something easy to deal with having been through it. They may have lost somebody in their life. You need to also have some compassion, but push the issue like, “I’d like to get this done by this date.”
That’s the third component I would say to a deed in lieu. If you’ve got other ideas, other things that you’ve done that you’ve seen work, I’m all ears. I’d love to hear what others have attempted to do. Once you get the borrower in that process of a deed in lieu, getting there is a whole other story. It’s challenging to convince somebody. The best way to convince them is money talks. I tell borrowers, “I’m going to spend $1,500 on an attorney. You want the money to go to your attorney or do you want it in your pocket?” I know you’re going to feel that sense of, “I can’t believe I’m paying this person money who has been living in his property potentially free for a long period of time,” or you’ve been paying the taxes and you’ve been doing everything while they let it go into a poor state of habitability.
You’re torn because like, “I can’t believe I’m going to give this person money,” but at the end of the day, unfortunately, does it go to the attorney or does it go to them? If I get a clean title and I can get them out by a certain day with throwing them some cash, even your attorney will tell you it’s much easier to go that path. It’s unfortunate. That’s the way it works in those instances. If you’ve got other ideas and some of the tips and tricks you’ve done on the deed in lieu, feel free to put them in the comments and I’ll be happy to share them.
The last little Note and Bolt I’ll throw in before we wrap up this episode is if you’ve got cold borrowers, you will need both to sign. Sometimes that is challenging. I’ve run into instances where when you’re doing Cash for Keys, be careful who the money is going to. Make sure it’s stipulated in the agreement if the parties are separated. Nothing is worse than saying it’s going to John and Jane, they both sign and it’s $1,000 Cash for Keys. You’re saying, “Send it to Jane.” John says, “I didn’t get it.” Make sure that the agreement stipulates where the check and the money are going to, because if they are separating, you never know. The other component is you do need both of them to sign if they’re both on record of title as well. I’ve seen instances where some people have only been able to get one person to sign and think that it’s good, or they could maybe get away with a quiet title but unfortunately, that’s not the case.
I want to thank you all for reading this episode. If you have any comments or feedback, feel free to email me at Chris@7EInvestments.com. Also, follow us on YouTube at YouTube.com/7EInvestments. If you want to learn more about note investing, I highly recommend you join our Facebook Group called the Notes and Bolts from The Good Deeds Investment Podcast. We have approximately 1,000 members in the group who share a lot of the lessons learned. There are also questions from our other note investors of issues and concerns that come up, as well as referrals. If you’re looking for an attorney, a realtor, a title company, we share a lot of that information online in the group. It’s a great conversation piece. You can sit back and watch comments and learn from others. Thank you.
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