Retaining property from a borrower with financial troubles

| Dec 16, 2020 | Commercial Collections |

Creditors have a legal right to consider proactive measures to protect assets when a borrower begins running into financial problems. Rather than wait for a borrower to default on a mortgage and file a bankruptcy petition to avoid foreclosure, a lender may seek to recover its property.

By creating a deed-in-lieu agreement, a creditor may take back property in exchange for releasing a borrower from the mortgage obligations. According to the American Bar Association, a deed-in-lieu transaction may prove beneficial when a borrower owes more on the property than its fair market value.

Property value may determine a deed-in-lieu transaction

Before executing a deed-in-lieu agreement, a creditor must conduct a professional appraisal of the property. An appraisal generally shows how much a property may sell for in the current marketplace.

Property referred to as “upside down” means it has less market value compared to the amount a borrower owes on a mortgage. A creditor may find it more profitable to take back a saleable property than wait for a borrower going through bankruptcy to fulfill the terms of a mortgage.

Ohio real estate developers relinquished property to lender

When developers of an Ohio shopping center ran into serious financial issues, they had the opportunity to relinquish property back to the lender rather than wait for economic conditions to improve. As reported by Cleveland.com, a deed-in-lieu transaction allowed the developers to avoid a foreclosure lawsuit.

Litigation may require more time and expense than relinquishment, and a bankruptcy may not release borrowers from their obligations. If a debtor does not have the ability to repay a loan, the bankruptcy court may create a new payment arrangement that a creditor may need to agree to. A lender taking back a property, however, might prove more beneficial for both parties.