Episode Transcript
[00:00:00] Speaker A: Hey, everybody, I just got a great question on the ask Joe anything, and I just want to go ahead and answer it really quickly before I head home for the evening.
This one is a situation where a seller sold their home, sold their property on seller financing. That means that they sold it to a buyer, and then as part of their purchase price, they took back a note and a mortgage, and the buyer has now come back to the seller and said, hey, I can't afford to pay anymore. I need to get out. So I just want to quick claim the property back to you and the seller, as the lender wants to know. Hey, can I just take a quick claim deep back and take the property back that way and not worry about it?
And no, I wouldn't recommend that. That's not the best course of action. There's a couple of things at play here. Number one, anytime a lender takes a deed in lieu of foreclosure, which is exactly what this would be, it is a deed in lieu of foreclosure.
Number one, you've got documentary tax that has to be paid on the outstanding amount of the mortgage. So you're going to have pretty significant documentary stamp taxes, depending on how much is outstanding on the mortgage. So, for instance, if the mortgage outstanding is $100,000, that's zero, zero seven, that's $700 in documentary taxes that have to be paid when that deed is recorded. Now, that is, whether it's a quick claim deed or a warranty deed, it doesn't matter the type of deed. What matters is the consideration in this case, that is the outstanding amount of the mortgage that is being forgiven. Number two, you don't know if this borrower is going to declare bankruptcy. If they declare bankruptcy within a certain amount of time after they give you the deed back, then all of this can be nullified in the bankruptcy court. They could pull it back and force to sell the property to satisfy other creditors. Which brings me to the third point. Other creditors. You don't know if this borrower has not been paying homeowners association dues. If they've not been paying their credit cards, if they've not been paying for their car, they could have other judgments, other money problems. Typically, if they can't pay you, they're not paying other people. So these other people may have sued them and gotten judgments. So these could have attached to the property. There could be code enforcement violations that you don't know about. So there are lots of things out there lurking that you need to check. So number one, before you take a deed in lieu of foreclosure back.
Number one, calculate how much those documentary taxes are going to be and determine whether it's going to be better for you to just go ahead and foreclose. And you can go ahead and foreclose and do a consensual foreclosure where the seller consents and doesn't put up any fight and you go through the foreclosure. And if you are the successful bidder at the foreclosure sale, you get the property back and your documentary stamps. Your documentary tax is only seventy cents at that point because you bought it effectively for a know, it's weird, it doesn't make sense, but that's the way it works.
Or better yet, a third party could come in and bid and buy this property and pay more for it than you were owed. In that case, hey, you get all your money back plus your court costs and attorneys fees and any interest that has accrued in the meantime. And lo and behold, there's money left over and your borrower who didn't have enough money to pay you now has what's called a surplus that they can claim and they can get that money back assuming there's no other liens against the property.
Number two, you're going to want to go ahead and have a lien search done to make sure that there are no other liens. Have a title search done at least updating since the time you sold the property. And what I recommend usually is try to go back to the title company who closed the sale of the property because they already have the title up to that point and then they can just update it and let you know if anything else has happened.
Number three, have an attorney prepare a full deed and lieu package of documents that includes a deed. Whether it's quick claim or warranty deed, it doesn't matter. But have that attorney prepare that deed and that deed is going to have special language in it that says that even though this is a deed in lieu of foreclosure, the mortgage does not merge into the deed. So the mortgage is still out there in case you do need to foreclose it in the future. So let's say you decide, I'm not going to foreclose it, I'll go ahead and do the deed and little foreclosure. That's going to be cheaper even with the documentary tax, even with the attorney's fees to prepare this deed and these other documents as part of this package. And I'm just going to take the deed and lure foreclosure and let the chips fall where they may.
Get the seller out of the house, get the. I'm sorry, get the buyer out of the house, get the borrower out of the house, take the property back through the deed and lieu of foreclosure, and get them out of my hair. Record the deed and lure foreclosure. But it didn't merge the mortgage into the deed. So if I have to later, I can still go back and foreclose it.
And as part of that document package, to get around the bankruptcy issue, the borrower who is deeding the property back to you is going to sign a what's called a solvency affidavit that says that they are still solvent and they are not bankrupt, that they do have enough money to pay their outstanding debts and obligations, except this one to you. And if it does get pulled back into a bankruptcy after the fact, you have this wonderful affidavit of solvency that at least you can go into the bankruptcy court and say, the borrower, the debtor, told me they were solvent, so there was no hanky panky going on here. I thought they were solvent. I had a good faith belief they were solvent. They signed it under penalties of perjury, under oath, and what else could I do? So you're going to get that package of documents prepared by a lawyer. You're going to record the deed, and you're gonna do it the right way. Don't just go to the borrower and get a quick claim deed, because let me tell you what happens if you do that. You get a quick claim deed from them. They deed it back to you. Now you've gotten the property back, you record it. Your mortgage now merges into the deed. If other liens have hit the property in the meantime, you've essentially satisfied your mortgage. It's gone. So now you can't foreclose it. If the borrower decides, well, now I'm gonna declare bankruptcy to get rid of these, the personal liability that I have for these other liens out there, these other debts, you run the risk that that property is now going to be sucked back into that bankruptcy, and you're going to be dealing with a bankruptcy trustee and a bankruptcy judge in a very expensive federal bankruptcy court hearing and proceeding. So best advice, get a title search done, have a lawyer prepare the deed in lieu of foreclosure that has specific language in it that says the mortgage does not merge into the deed. And number two, ensure that you have a solvency affidavit. Signed by your borrower at the time that they execute and deliver the deed to you saying that they are not bankrupt, they are solvent to help prevent you being dragged into bankruptcy court and if you are to make quick work of it to keep it as cheap and fast as possible for you. So I hope that answers your question. If anybody else has any other questions for Ask Joe, please submit them to us. Direct message comments through social media emails we have text numbers out there. You can text us the question as well. We'll put them in the comment section down below. And again, it's great to see you guys with that. I'm going home and going to bed.
[00:08:35] Speaker B: And thanks for listening to this edition of trust this. If you got something out of it, please press like and subscribe and give us a five star review to help us reach others who can benefit from this series. Until next time, keep aspiring to a better life.
