A Deed-in-Lieu of Foreclosure Is a Valuable Tool, But Exercise Caution

The current recession, which real estate professionals might be more inclined to call a depression, likely will continue generating an almost bottomless supply of mortgage defaults for several years to come. Consequently, we can expect to see an increasing number of cases in which mortgage lenders and borrowers may consider a deed-in-lieu of foreclosure as a way out of the foreclosure process.

A deed-in-lieu of foreclosure can have significant benefits for both parties. For lenders, it helps avoid or reduce the delay, expense and possible uncertainty of going through the foreclosure process. For borrowers, it can eliminate or reduce the embarrassment of a public foreclosure sale and provide a resolution of personal liability and guarantee issues with respect to the debt.

On the other hand, deed-in-lieu transactions pose risks to the lender and will have tax consequences for both parties. Therefore it is important that both parties consult experienced legal counsel and tax advisors in connection with the transaction.