Deed in Lieu of Foreclosure

If foreclosure is looming and you are unable to sell your house, you should consider a “Deed in Lieu of Foreclosure”.  Basically you are giving the house back to the lender, rather than making them go through with the foreclosure.  However, A Deed in Lieu may not be your first, best option. If you have significant equity, you should work diligently to find a way to sell it to a private party or an investor and recover the equity!  If you agree to a Deed in Lieu or the lender completes the foreclosure process, any equity you have is lost.
If you have no equity and are just ready to deed the home, it is always better to deed it to the lender than an investor.  By deeding it back to the lender, you are terminating the loan agreement and walking away.  If you deed it to an investor, the loan is still in force and in your name; if the investor fails to follow through on their promise to make the payments, the foreclosure could proceed, and you would be powerless to stop it. Again, be sure your investor is established and has adequate financial resources to make the payments on your home.
Call the loss mitigation representative at your mortgage company and explain that you would like to give them a deed in lieu of foreclosure. Some mortgage companies will simply agree on the spot, while some will ask you to provide personal and financial information, and ask you questions such as why you can’t afford to live there, etc.  If you tried to sell it but couldn’t, let them know that.  They may ask you the condition of the property also.
In some cases the mortgage company will prepare the deed and send it to you for your signature.  Be sure to get the deed notarized and keep a copy for yourself.  If they require you to prepare the deed, any local attorney should be able to prepare it for you.  A deed is a very simple document, and the attorney should be able to cut and paste your personal information and the property description into a template for you and create a deed in just a few minutes.
A Deed in Lieu SHOULD keep the foreclosure off your credit report, but you must confirm with your lender specifically if that is the case and, if necessary, try to negotiate it as part of the deal. It is considerably less expensive for the lender to simply have you deed them back the house, rather than pay the attorneys to complete all the papers to actually foreclose and go to the Sheriff’s Sale. Tell them you will move out and leave the house clean and in good shape, but you do NOT want the foreclosure on your credit.  Get it in writing if you can, but if they will only tell you verbally then be sure to send THEM a letter, certified mail return receipt requested. Simply write, “Dear John, this letter is to confirm our verbal agreement on xx/yy/zz that if I agree to a deed in lieu of foreclosure, you agree the foreclosure will not appear on my credit report.”

Selling to a Investor

In the event you are unable to sell your house using conventional means in the time you have available, you can always find an investor who will buy it from you. You’ve seen their signs and ads that say “We Buy Houses – Cash!”  If you need to sell a house quick, you have no greater friend than your professional real estate investor.  They specialize in quick sales using creative financing solutions.
Before we go any further, let me warn you that it is extremely important you are working with a professional, experienced investor.  There are thousands of amateur, part-time investors who have read a book or bought a course from a late-night infomercial, but have little or no experience and capital.  Be sure you are working with somebody who does several deals a year and has been in business for some time.  Don’t be afraid to ask how long they have been an investor and how many deals they do a month.
Understand that Investors, like the rest of us, are in business to make money.  What they do is hard work, complicated, and risky.  Good investors earn a tidy profit, but they work hard for it.  You need to understand that a real estate investor can and will solve your problem, but they are going to make a profit for doing so.  And they deserve it – solving problems is one of the highest paid professions.
Depending on how much equity you have or don’t have in the home, the investor may make several offers on various ways to buy your home and prevent the foreclosure. Keep in mind the investor is in a good negotiating position here because they know you are in foreclosure.

Deed Your House
 The first option is simply to deed your house to the investor. They will bring the loan current, take over the payments, prevent the foreclosure, and keep the dreaded FORECLOSURE black mark from being stamped across the face of your credit report.  The loan actually stays in your name, so the on-time payments by the investor look good on your credit report.  (Naturally this assumes they actually make the payments, but they have tremendous incentive to do so – otherwise they lose their investment of bringing your loan current by paying all the back payments, and the opportunity for profit on your home.  As discussed in the earlier chapter about scams, you should always make sure you are working with a professional, experienced investor, as covered above.) 
 If you have little or no equity in your home, or it needs lots of work to get it into a sellable condition, this will be the option most investors recommend. This may not be the most desirable arrangement, but if you have little or no equity in the house, foreclosure is looming, and you just want to walk away without a foreclosure on your credit, this may be your only option. On the other hand, if you are going to try to buy another house and you still have this one in your name, you will most likely be unsuccessful. Ask the investor – “When will you have the loan out of my name?”  It is reasonable to expect them to find another buyer or get a loan themselves within 12-18 months. Also, note that this sale will take place outside of a title company, because the title company would require the note to be paid off to your lender. This is because of a clause in your mortgage called the “Due on Sale” clause.  In theory, if your lender finds out you have sold the house, they COULD call the note due.  If the investor then didn’t get a loan and buy it, or manage to sell it to someone else, the lender could start foreclosure proceedings again. Even though you deeded the house, the loan is still in your name, and you still could end up with the foreclosure on your credit. In reality, if the investor keeps up the payments, they never will even know about the sale, or care.  All they want is their monthly payment. I have never heard of a case were a lender actually called a note due, so long as the payments were being made.

Lease Option
If your house is in a nice neighborhood and in good condition, and you are unwilling to simply deed your house to the investor, they may offer to “Lease/Option” or “Lease/Purchase” it from you. This is similar to the arrangement that I mentioned in the FSBO chapter, but you are leasing it to an investor, who will in turn sublease it to a new tenant-buyer. In this scenario, the investor would lease your house for an agreed upon period of time with an option (but not the obligation) to buy it within that period of time.  The investor would rather not have to put down any down-payment, which is known as an “option-fee” in this case, as it cuts into their profit. But in reality, for you to bring the loan current, they are going to have to. However, if the investor is willing to do this, it will save you from losing your house.  Because you are maintaining ownership, you still get all the tax benefits etc. Meanwhile the investor will try to find a new tenant-buyer who can put down even a larger down-payment. They will use the tenant-buyer’s down-payment to cover what they paid you and pocket the rest. The house is sub-leased to the new tenant-buyer, with an option for the tenant-buyer to buy it at a price (higher than what you sold it for) that allows the investor to make a tidy profit. 
As you can see, this is a complicated scenario, and I can tell you from personal experience, putting two deals together back-to-back and getting out of it with a profit is not easy. It is possible however, and you are likely going to find some investors who will offer.  Just be aware that they are probably going to ask for at least a two-three year lease so they can have the time complete the sale successfully.  Be sure you are working with an established investor who will be able to make their lease payments to you, even if the house is vacant.  Otherwise, you’ll be stuck looking at foreclosure yet again.

Short Sale
 Another technique often used by investors is the short sale.  Essentially, they work with you and the lender to negotiate a discount off the amount due to the lender. The lender may agree to this if they determine that they would lose even more money by going through with the foreclosure.  For example, if the house is in disrepair, or the loan to value amount is extremely high, the lender may just want to take their loss, write it off, and move on. If the lender agrees to the sale, a contract for the lower price would be approved by the lender, and they would simply reduce the payoff due to them at closing. 
This seems like a good option for you as there will not be a foreclosure on your credit!  However, there is a big gotcha here – ask the investor to try to negotiate as part of the deal that there will be no deficiency – that is, the lender cannot subsequently sue you for the amount they lost, leading to a judgment against you. Otherwise, you might end up owing the lender for that “reduction in price” after all. In my state of Texas, the amount is limited to difference between the fair market value on the home and the amount of the short sale. If the amount is small enough the lender might choose not pursue a deficiency judgment – but don’t take any chances.  Ask the investor to get the lender to agree in writing to forego a deficiency judgment, otherwise you could be liable for that amount.

A good real estate investor can be your best friend when you’re being foreclosed upon.  Just remember, they are taking a risk and are in business to make a profit. Negotiate a good and fair deal that is a win-win for both parties.

Selling with a Realtor

The first option most people consider when selling a home is to enlist the help of a real estate agent, or a Realtor®. I’ll use the term “agent” to refer to all real estate agents, but most agents these days are Realtors®, meaning they are members of the National Association of Realtors®.  Membership in the NAR is a good thing, and means your agent has been well-trained and maintains certain standards of ethics. Using an agent may be a good choice for you, but because you have must sell quickly, there are some pre-requisites to a successful sale with an agent.

Is There Time?
 First, you must have TIME before the Sheriff’s sale to complete the transaction.  A conventional home sale takes a minimum of 2-3 weeks for inspections, appraisals, title work, insurance policies, payoff orders etc. to be processed, and if your house is scheduled to sell next Tuesday, you might not be able to stop it.  Your lender MAY postpone the sale if you can prove to them you have a signed contract and a closing date scheduled with a title company, but you must communicate with your lender or they might sell it right out from under you. Your agent may be able to help you here; if the lender sees a legitimate contract in the works, they will likely work with you.  Remember, they don’t want the foreclosure to go through; they would rather be paid off.

Can You Afford To Sell?
Second, you must have enough EQUITY in the home to go to closing without having to bring money with you.  Yes, that’s right…bring money to closing even though you are selling your house.  Specifically, you must be sure that the proceeds of the sale will cover.
1. Payoff the note to the lender(s), which is probably more than you think it is when you include back payments, interest, legal fees, and penalties,
2. Pay any Realtor commissions, typically 6% of the sale price but more in some areas,
3. Pay title insurance, escrow fees, and any additional closing costs.

Pick a Good, Experienced Agent!
If you think you qualify based on the above, contact a reputable agent and immediately explain your situation.  Ask them to keep your situation confidential, but it is important to let them in on it. You do not want any surprises, and neither does your agent.  By fully disclosing your situation, your agent can do their best to help you sell the house, while also making sure all your obligations are taken care of.
An agent’s commission is a minimum of 6%, but you can try to negotiate. I would not recommend doing this unless the commission is such that it will prevent you from making the sale.  If the agent you have contacted won’t negotiate, ask them if they know any other agents who might be willing to. Many times they will know of a younger, or more aggressive agent that will be willing to help you out.
 There are definitely advantages to using a good, reputable agent — namely they are going to work hard for that commission.  They will put signs in your yard, pay for ads in the paper, and list your home with the MLS, or Multiple Listing Service.  Then they will pre-qualify buyers and show your home – all at their cost. If you have the time and enough equity in your home, this is a good option to try first.  In most cases, if house doesn’t sell, you don’t owe the agent a penny.

The Catch
But there is one BIG catch to working with an agent when you’re approaching foreclosure or are on any other time deadline to sell your house – they are going to want an exclusive contract for a fixed period of time.  You don’t want to be in a situation where the agent can’t get your house sold, but you can’t sell it to an investor to save it from foreclosure either, due to the exclusive contract.  Therefore, be very honest with the Realtor, and tell them “you’ve got until xx/xx/xx date to sell this house, otherwise I reserve the right to terminate our contract.”  This is very important! There have been cases where an agent had a house under contract, the homeowner subsequently sold it themselves to a private individual, and the agent then sued for their commissions.  You can avoid this by proper negotiation up front.

Seller Lease Backs

Over the years I have often been asked this question when trying to help people in foreclosure.  “Can’t you buy my house from me, then we’ll just rent it back from you?”  I have always answered no, as this arrangement, known as a “seller leaseback”, is a bad deal for all parties.
At first it seems like a good deal for the buyer, because the property can be obtained for well below market value, and you already have a tenant that appears willing and eager to pay their rent.  However, relief often turns to resentment in these situations and the sellers soon stop paying their rent and taking care of the property, once they realize it no longer belongs to them.
Furthermore, the IRS casts a suspicious eye on these transactions, and both parties are likely to be audited.  These transactions have been used to hide assets and change the appearance of ownership, so the IRS will likely take a close look at your finances and tax returns if you enter into this type of arrangement.  The IRS may choose to “reclassify” the sale and leaseback, which could result in the buyer losing a great deal of money and being immediately foreclosed upon by their new lender.
Finally, if the seller subsequently files bankruptcy, the bankruptcy could decide the seller leaseback was an attempt to hide assets.  The court could confiscate the property to satisfy secured debt and tax liens.
From your standpoint, you may be thinking you’ll get to stay in the house and that’s all that matters.  But once you realize the house isn’t yours anymore, how will you feel? 
The bottom line is this: Seller leasebacks are a bad deal for both parties.  You may decide to accept an investor’s offer to do this, but think carefully, read the fine print, and do so only as a last resort. The reality is, very few people end up buying their houses in these deals, and believe me, the investors know it.

For Sale by Owner – FSBO

If, for whatever reason, selling with the help of an agent is not an option, you can attempt to sell your house yourself.  You’ll save the 6% commission, but you’re going to have more work to do on your own. On the other hand, if you don’t have enough equity in your home to pay the commission, most agents won’t help you anyway.

Make It Look Good!
 Make sure you clean up your home and make it attractive and welcoming to prospective buyers.  Get on the web and search for “how to sell my home” and you’ll quickly find articles on how to make your home more attractive to prospective buyers.  Be sure to keep it neat and tidy, the lawn well-trimmed and picked up, etc.  Make your home look like a place your prospects would want to live! 

Get The Phone Ringing
Now that your house is looking good, here’s how to get plenty of calls in a hurry!
1) Buy a big “For Sale by Owner” sign at Home Depot or Lowes and stick it in your front yard.  Put your cell phone number (if possible) on it in BIG numbers.  Buy a couple of the smaller, arrow signs to put on major cross streets to direct people to your home.

2) Set a reasonable price for a quick sale.  Put an ad in the paper that says “By Owner: (brief description), must sell fast, serious inquiries only, 555-1234″.  Your phone will ring, mostly from investors.  Depending on your time constraints, you may want to talk to anyone who calls right away because you are desperate to get a deal done before the lender sells your house.  If you have some time, I’d advise asking flat out “are you interested in this house for yourself, or are you an investor?”  If they are an investor, you can either politely tell them you’re not taking offers from investors just yet and get their name and number in case you decide to.

3) Consider using a service like ForSaleByOwner.com.  For a very reasonable amount, they will help you come up with an ad for your house, which then prints into a full-color flyer you can leave in a box on your front yard sign for prospects to take with them.  Additionally, you can place an ad in the paper with a link to your flyer on the ForSaleByOwner website.  This will make your house stand out from all the others for sure!

At this point, don’t tell any potential buyers that you are close to foreclosure, as they might use your situation to drive down the price.  On the other hand, if you set your price too high you may not attract a buyer in time.

Doing the Paperwork
Find a local title company with a good reputation.  You may want to ask friends or neighbors who have recently bought or sold property who they used and if they recommend them.  Once you’ve identified a title company, call or drop by and ask for a “single family resale packet”.  This will contain the necessary forms that you and the buyer will need to fill out and turn in to the title company. The title company will not be able to give you any legal advice, but they can instruct you on the normal way things are done.
 Once you and a buyer agree on a price, you should sit down and fill out the forms in the packet.  Ask the buyer for an earnest money check.  Usually this will be an amount between $500 – 1% of the sale. The check should be made out to the title company, not you. The title company holds the money in escrow, and credits it to you when the sale goes through. Most contracts allow the buyer to back out and get their interest money refunded, but at least you know they were serious enough to write the check to begin with. Or, if you really want to see if they are serious, you can modify the contract by putting the special provisions section “Earnest money is non-refundable, and will go to seller if buyer terminates this contract.” This is a delicate balancing act – you don’t want to run off a buyer, but you don’t want to waste your time with tire-kickers either.  Your buyer or their lender may request a survey, appraisal or inspection.  If they do you should agree, but those are expenses that should be paid by the buyer.

Lease-Option
Something else you might consider is a “Lease/Option”.  In this scenario, you offer to lease your house to a new tenant-buyer, with an option, but not the obligation, to buy.  Perhaps you can find someone who wants your house and has a down-payment that would cover what you need to stop your foreclosure. But, for whatever reason they are unable or unwilling to get a loan and buy it at the moment. By utilizing a lease/option, you can stop the foreclosure by using the option fee paid to you, to pay your lender. You then have a tenant in your house that will cover the loan payment every month, and hopefully they will eventually buy your house.  Two tips: First, be sure to negotiate a sale price so that you make a profit when the sale goes through. Second, be sure to collect their rent and then make your mortgage payment – don’t let them send it directly to the mortgage company.  You want to make sure the payments are getting made!
All in all, hoping your house will sell in time to avoid it being foreclosed upon can be a very nerve-wracking experience — but never fear, there is always one other option to keep your house from being sold on the steps of the Courthouse – which we’ll cover in the next chapter.