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Helene Moore, Real Estate Pro in ,

Agents can anyone expalin what Deed In leiu of foreclosure is and if a client agrees to this what are the

Asked by Helene Moore, , Wed May 21, 2008

pros and cons for the client as a seller.

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I think the bigger question might be "Can the lender report a Deed in Leiu AS a foreclosure?" Then what of the debt foregiveness between the loan and the amount the lender eventually sells the property? Is this then a 1099 which does NOT fall within the legislation forgiving debt up to $2,000,000? I think Duncan is very wise--don't have this discussion with your Seller--get the attorney's to be the messenger!! Let them get shot!
0 votes Thank Flag Link Wed May 21, 2008
In California, if the loan(s) are purchase money loans, then its a "single action" state. The lender can make no further claim on the borrower.
If the borrower has taken out home equity, either by refinancing or by a home equity loan, there is the possibility the lender can start a collections action against the borrower for the "cash out" money.
In addition, there are potentially very serious tax consequences, depending on the nature of the loans, if its principal residence or not, and if the borrower has take cash out.
We have an accountant and lawyer available for consultations.

We take our clients to see the accountant & lawyer. This mitigates our potential liability if there are tax consequences, and we missed them.

This has become a very nasty and complex area, with potentially horrific consequences for investors (having losses on foreclosures taxed as income), and the clients need to obtain professional advice about situation, including a possible bankruptcy.

Please protect yourself. Take your client to an accountant and a lawyer.
1 vote Thank Flag Link Wed May 21, 2008
A deed in leiu is an alternative to a short sale or foreclosure. The bank gets title without having to forclose and the owner walks away with ususllay nothing except a blemished credit history.
On the pro side for the seller the blemish is not as bad as a foreclosure nor as time consuminig as working out a short sale. On the con side if there is equity it will be gone.
If a sale can be made that exceeds the value of the loan the seller will not be "short" and can walk away without the blemish and with some of equity.
1 vote Thank Flag Link Wed May 21, 2008
Jed Lane, Real Estate Pro in San Francisco, CA
Mary Smith and Duncan are speaking about recourse and non-recourse loans. In California the purchase money loan ( the initial loan to buy the property) is a non-recourse loan. In other words the lender will not come after you for any money that the property doesn't generate at sale. When you refinance the next loan will not be non-recourse unless you pay to have that stipulation added to the loan contract. Many investors use this to prevent a lender coming after other assets if the building is damaged or lost due to some disaster.
To Duncan's assertion from Countrywide that a deed in liu is as bad as a foreclosure, my information came from the California Credit Counselling Service not from a lender.
0 votes Thank Flag Link Wed May 21, 2008
Jed Lane, Real Estate Pro in San Francisco, CA
I had to do a deed in lieu. The lender still held me responsible for the difference between what I owed them and what they sold the home for.. So beware, it sounds to good to be true and we all know what that means.
0 votes Thank Flag Link Wed May 21, 2008
The Bank accepts a deed, is given the house, in Lieu of foreclosure.
Pros: The problem (the house, and the loans) goes away.
Cons: It's not a quick as one might like. Be very careful. In California, the Bank MUST agree to be "given " the house. If the lender has to agree, it can take some months. Call the lender. Countrywide state that deed in lieu will have the same effect on your credit as the compelet foreclosures. Countrywide also insists that the house be lsited as a short sale of 60 days before considering deed in lieu. If the house has a first and second loan, lenders may not agree to a "deed in lieu; we've tried with no success".
0 votes Thank Flag Link Wed May 21, 2008
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