Re: CONSEQUENCES OF DEEDING A TITLE - Posted by JPiper
Posted by JPiper on November 27, 1998 at 15:39:22:
Here’s your situation as I see it.
You’re in the foreclosure process and it sounds as if you don’t have the ability to bring the loan current. Therefore you will lose the house at the foreclosure sale.
Your options, assuming no payoff, are first to find a buyer who will formally assume your loan, which means they will have to qualify with the lender. If you can find such a buyer who will a)formally assume the loan and b) bring your delinquent payments current together with all fees, then the lender will provide you with a release of liability which will let you off the hook.
Virtually any other possibility that you have for transferring the property or otherwise getting a new buyer will in all probability violate the lenders due on sale clause (depending on exactly how the clause reads). This includes subject to assumptions, lease/options, land contracts, deeding into a trust and later assigning the beneficial interest, AITD’s, etc.
What happens when you violate the due on sale clause is that 1) the lender has to realize that this event has occurred and 2) decide to take action based on this violation. If both of these factors are present, then the action open to the lender is to accelerate the loan (declare it due and payable) and providing the loan is not paid off, to initiate a foreclosure action. This is exactly the position you are in right now…so the consequences to you are identical.
You will notice that I said that one of the factors that needs to be present is that the lender is able to detect the violation of the due on sale clause. So for the purposes of argument, let’s assume that you did a lease/option with a new tenant/buyer. Let’s say that you used separate documents for the lease and the option, and that neither document is recorded in the county records. Let’s further assume that the tenant/buyer gives you enough upfront option consideration to bring your loan current…and that the tenant/buyer’s payments are enough to pay your loan payment plus a little extra, and that this payment is sent to you directly, and that you pay the lender directly from these proceeds each month, and that you do so on a timely basis. Given these assumptions, the question I would pose is how will the lender realize any possible due on sale violation?? My answer would be next to zilch…and further, if they did realize it I know of no cases where a loan was accelerated when the payments were current.
Here’s where your risk lies in this scenario. Perhaps the new tenant/buyer at some point through the course of this transaction decides not to make the payment to you. If you in turn DON’T make the payment to the lender, eventually they will initiate foreclosure proceedings again…so you’re right back in your current position. You will need to initiate eviction proceedings to remove the tenant, correct any damage that may have been done to the property, and find a new tenant/buyer. No different than where you are right now. Other possible risks are that the lender discovers your violation, accelerates the note, neither you nor the tenant/buyer are able to payoff or refinance the note, you DIDN’T disclose the existence of this note to the buyer, and now the buyer initiates a legal action against you perhaps based on fraud. I would highly recommend that this particular issue be addressed by fully disclosing the existence of this loan and the possible consequences to a new buyer…IN WRITING.
There are other possibilities for handling your existing situation that I’m not going to go into. A thorough reading of the “How To Articles” may give you some further ideas. The one cautionary note I would offer though is that I would NOT do any type of transaction where I relinquished a deed to my property, and yet remained fully responsible for the loan, without having a means to regain control of the property if the buyer were to default in their payments. The lease/option suggestion will give you this means of control. If you are going to entertain other types of transactions and if you are not familiar with methods to regain control, then I would recommend that you seek out some expert advice on how to do so.