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Defaulting borrowers should consider Deeds in Lieu to Foreclosure.

A purpose of a real estate loan workout is to salvage a troubled project. The purpose is to resolve a default so the borrower will not have to file bankruptcy and/or the lender will not have to foreclose.

However, sometimes the property is so distressed that a workout is not feasible, i.e., the loan balance far exceeds the value of the property, and/or rental income is to low to service the debt. In such a case, a defaulting borrower should consider deeding the secured real property to the lender in order to avoid foreclosure. This process is commonly referred to as a deed in lieu of foreclosure or deed in lieu transaction.

To perform the transaction the borrower and lender enter into an agreement for the conveyance that should state that the borrower agrees to convey the real property, improvements, personal property and all rights. The lender should acquire all rights including intangible rights to own and operate the property. The consideration from the lender is their agreement not to sue the borrower for any personal liability on the loan contract, and to look only to the real property as satisfaction. Also, the lender agrees to release the guarantor from the duty to guarantee.

Prior to Closing, the lender should review all title matters, specifically to determine if mechanicís liens, third party claims such as service or maintenance contracts exist. A condition of closing should be the delivery of an appropriate ownerís policy of title insurance or a binder.

At the closing, the borrower should deliver a grant deed, a bill of sale for all personal property, an assignment of leases, contracts, and licenses. The borrower should provide a inventory of all personal property, security deposits, notices to tenants, and all business records relating to the property. As part of the conveyance agreement, the lender should also obtain a general release from the borrower and any guarantors for protection against lender liability claims. The costs associated with a deed in lieu transaction are any preclosing efforts, title insurance premiums, surveys, escrow fees, recording costs, appraisal fees, legal fees, foreclosure and receivership costs previously incurred and any documentary transfer taxes.

It is important to establish if the lender will later file Bankruptcy because a deed in lieu transaction could possibly be set aside if the transfer was a preference or fraudulent transfer under the Bankruptcy Code. A preference is defined in Section 547 (b) of the Bankruptcy Code as a transfer of property of the debtor, to or for the benefit of a creditor, for or on account of an antecedent debt, made while the debtor was insolvent, within 90 days before bankruptcy (or one year if the creditor was an insider), which enables the creditor to receive more than the creditor would receive under a Chapter 7 distribution - or more than the lenderís secured claim. First make sure the lender will not file Bankruptcy, and if so, not within one year.

A deed in lieu transaction is a valuable alternative when a loan workoutís not feasible, and the lender does not desire to foreclose.

© Copyright 1997 - 2009 - Gregory L. Martin, Esq. - All Rights Reserved.

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