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kareaneissler · Joined: 06 Oct 2009 Posts: 2 1.69 Dollars($)

I'm doing a private lending (first position mortgage) for a project. The borrower has offered that he would give me a deed in lieu (DIL) at closing to execute later if he would fail to pay (to make it easier on me).

Does this really benefit me to have the DIL entering the deal? If there are subsequent liens (e.g. junior mortgages), would I be responsible for those?

Just wondering if it's better to get this up front or wait until back-end.

If it is up front, do I need a non-merger clause and would that be as part of the deed in lieu document or a separate document in itself?

What other risks should I consider?

gmakerley · Posted: Tue Oct 06, 2009 7:51 am Post subject:

i think i would back away from this deal really quickly. if a borrower is offering to provide a deed in lieu of foreclosure before actually making the purchase.

do you have some sort of confidence in this borrower that makes you think that you'll actually get payments? i don't know what the "non-merger" clause is all about.

you ask if there are other risks you ought to consider: to be perfectly frank about it, i think you've already avoided considering the biggest risk, and that's your borrower's seeming inability to even guarantee payments on this loan. in my opinion, you are welcoming trouble before you even make the deal.

i'd be out of there already if it were me.

leeelliot61 · Joined: 13 Sep 2009 Posts: 188 0.01 Dollars($)

it seems that borrower is not confident about deal.

secondly now you need to get proper appraisal done otherwise you will be at a bigger risk.

kareaneissler · Joined: 06 Oct 2009 Posts: 2 1.69 Dollars($)

Actually, I feel good about the borrower. I've done other deals with him and he's always paid in time. He also knows that I'm well connected with others he does business with. I also know that I'm in for under 60% FMV.

His mode of thinking was that it would make it easier on me if I ever needed to foreclose that I could bypass the headaches of foreclosure. It's a "courtesy" he extends to everyone who does a first position mortage with him.

Neither one of us expects him not to pay. But you never know....

I first heard about the non-merger clause thru this forum and had never used it before. My lawyer had done my DIL's before and never mentioned the non-merger. I was trying to get some other perspectives from the community that first raised the question in my mind.

leeelliot61 · Joined: 13 Sep 2009 Posts: 188 0.01 Dollars($)

you can goahead. but ensure to do proper valuation of property. Further to add, give him max 80% of present valuaton as mortgage.

Posted: Tue Oct 06, 2009 1:06 pm Post subject:

Thanks for all the comments so far. Good feedback, especially on the deal. Very much appreciated!

Would love to hear more comments if anyone has experience with using a Deed in Lieu as a lender, especially on when you would draw it up (e.g. being proactive in begining or reactive if there is a problem).

jenkin7 · Posted: Thu Oct 08, 2009 3:10 am Post subject:

Hi kareaneissler,

It is strange that the borrower has offered a deed in lieu even before closing on the loan. It sounds like the borrower himself does not have the confidence of paying off the loan in full. You need to be very sure of the creditworthiness of the borrower before offering him the loan. If he does offer you the option of deed in lieu at the beginning, it could save you some money, given the fact that you do not have to foreclose on the house. But even if you do a deed in lieu, you will still have to incur quite an amount of expenses. Thus, it is better to lend money to people who has good payment history and can afford to pay off the loan debt in full.

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