What is a Deed in Lieu of Foreclosure?
A Deed in Lieu of Foreclosure is more fully written as a "Deed taken in lieu of Foreclosure" or "Deed taken instead of foreclosure." It's occasionally misspelled (but phonetically correct) as "Deed in Lou of foreclosure" Basically,
Foreclosure cost each bank a certain amount of money - typically thousands. For most banks, there comes a point where they realize that foreclosure is inevitable, but it may make more financial sense for the bank to cut a deal with the homeowner and take possession of the home - by getting the deed - rather than pursuing the foreclosure process the entire way through the courts or other systems. This can be an effective way for the bank to cut their losses, and for the homeowner to save a lot of time and effort fighting the foreclosure, and just moving on.
Ways a Property Becomes REO
REO is short hand for a property that is owned by a financial institution. Usually, these properties are taken through the foreclosure process when the owner of the home stops making full payments, or becomes "in arrears" on their loan payments. But there are other ways, and taking the Deed in Lieu of Foreclosure is one of them. Many of these properties have multiple loans on them - first and second mortgages. Both financial institutions need to go through the foreclosure process for compensation, and then they have to fight each other for compensation after the home is sold (although typically they resolve the arrangement before sale). HUD properties, Fannie Mae properties, these are just other ways of saying the property is an REO property, and the financial institutions now hold the Deed.
Why a Bank would Offer to Take a Deed in Lieu of Foreclosure
As noted earilier, a Bank would offer to take the Deed from the homeowner to save the bank money. In a state like Massachusetts, where currently the foreclosure process can take over 500 days from start to finish - on AVERAGE! - that's a long time to wait between checks. Simply put, taking the Deed before Foreclosure can save the bank thousands! So clearly, there's financial incentive for the bank to make an offer to the homeowner. On the homeowners side, well, getting foreclosed on is no fun, and the bank can offer an end to the court dates and wipe the homeowners obligations clean - as long as they get the house.
Special Concerns about Foreclosure Deeds
Anytime you are thinking about purchasing a home that has been taken in Foreclosure, you should, especially now, be at least AWARE that the Foreclosure could be challenged. If the Foreclosure was not done properly, (Hello, Robo-signers), there is the risk that you could get tied up in a legal battle for the home. Now, I'm not much of a rabble-rouser, so before you read on recognize that the chance of that is really, really, small. But that doesn't mean no chance. In situations where the Deeds were taken Lieu of Foreclosure, the chance that it can be challenged goes down, as the number of statutory situations that can be challenged is far lower (the process is simpler) and ultimately you have two parties AGREEING on a solution. There's no agreement in Foreclosure, where the Foreclosure Process is one person saying NO, and the bank saying Yes, and Judge making a determination. At any rate, protect your self with Title Insurance for these properties, that's a really good use for it.
Do Good Things Today! Matt Heisler
