Debtors who have defaulted on their obligations under a real estate security agreement typically face foreclosure, either judicial or non-judicial. A deed in lieu of foreclosure is another type of procedure to deal with a distressed property. A deed in lieu is a transfer to a lender of title to real estate that fully or partially satisfies the debt that the property secures. These transactions may have significant benefits for both parties. First, a deed in lieu saves much of the time and cost of a foreclosure and gives the lender more direct and immediate control of the property. A deed in lieu may also be beneficial to the debtor if he or she just wants to convey the property and essentially be done with it.
While deeds in lieu have these advantages there are some potential pitfalls to this procedure. First, if there are junior mortgages or liens on the property the deed in lieu does not serve to extinguish those liens. In the event that there are junior liens, chances are good that unless the senior and junior lienholders negotiate an agreement the junior liens will be advanced against the title in the senior lienholder’s hands. Second, a deed in lieu may be considered to be an equitable mortgage and not a complete conveyance. Only one Washington case has held found a deed in lieu to be an equitable mortgage, but depending on the nature of the transaction it remains a possibility. Finally, a deed in lieu may be set aside on the grounds of fraud or overreaching. Washington courts have failed to do so thus far but other jurisdictions have done so, particularly when the value of the land exceeds the indebtedness or when the lender is desperate or suffers a disability.
With these advantages and possible pitfalls in mind, but before a deed in lieu is actually conveyed, the mortgagor and the lender should enter into an agreement that covers these details.
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