Deed in Lieu of Foreclosure
A deed in lieu of foreclosure (also known as a deed in lieu) is a deed instrument that conveys title of a property encumbered by a mortgage, to the mortgagee, usually in full satisfaction of the obligation secured by the mortgage. Borrowers who are in default may choose this arrangement as an alternative to a foreclosure or a short sale.
Compared to the foreclosure process, which could take months or years, involve the judicial system and entail the risk of negative publicity, a deed in lieu might be less disruptive to the property, allowing the lender to quickly take control and stabilize operations, thus protecting the condition of the real estate and preserving tenants and income. A deed in lieu is generally a less expensive procedure for both the borrower and the lender and it is likely to have less impact on a borrower’s credit score.
A borrower contemplating a deed in lieu agreement should consult with counsel and take into consideration such factors as the allocation of transaction costs (including transfer taxes), the effect on income taxes, the rights of any mezzanine/subordinated lenders that may be present, and how the deed in lieu could be viewed and treated in a potential future bankruptcy proceeding.
Last Updated on August 20, 2023 by Ramin Seddiq