Real estate lenders, attorneys and owners often use the phrase “Deed in Lieu” to stand for the legal process of the borrower giving a deed to their property instead of forcing the lender to go through the more formal foreclosure process.  Understanding “What is a Deed in Lieu” is crucial for any borrower. Furthermore, there are several reasons why this method of avoiding foreclosure makes sense for both parties.

•  The lender can get title to a property in a shorter time frame than having to go through the full foreclosure process.  In Colorado this process takes approximately five months and frequently longer.
• The property owner can avoid having a foreclosure appear on their credit history.  This is important since a foreclosure will have a very detrimental impact on a credit rating agency’s credit score for up to seven years.
• In many instances the borrower can negotiate with the lender to avoid having the lender collect a deficiency claim under the borrower’s personal guarantee of the loan.  Lenders sometimes will agree to reduce the amount they will claim under a personal guarantee and sometimes may eliminate it altogether.  This is subject to negotiation between the lender and borrower.

It is advisable for a borrower to retain a competent real estate attorney to assist in the negotiation for a Deed in Lieu.  These are complex legal documents and need to be done correctly for them to protect both sides in the transaction.  There are also important tax implications to a Deed in Lieu and consultation with a CPA may be appropriate.

Borrowers should not hesitate to open lines of communication with their real estate lender when default is on the horizon.  Discussion of alternatives to foreclosure can be productive.  Lack of communication can only make a bad situation worse.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.