Why Go Shopping, When You Can Buy The Whole Mall?

Monday, May 08, 2017 by Elliot Schon, Esq.


Why Go Shopping, When You Can Buy The Whole Mall?

A mall in Vermont that was purchased at the height of the pre-recession bubble was recently acquired by the lender in a transaction known as a Deed in Lieu.  According to the news story, 

“At the time of securitization in January 2007, the property was appraised at a value of $116.3 million or $190 per square foot. In August, the appraised value had dipped to $46.3 million or $76 per square foot.”  You can read the entire article here.

What is interesting here, is how the lender can become the owner of the property. When a borrower defaults on a loan, there are several options available to the lender to recoup their money. How the lender chooses to proceed can have implications in regard to the title of the property. 

One of the most common tactics for a bank or other lenders is foreclosure. This process allows the lender to exercise their lien on the property, and they can force the sale of the property, and collect the proceeds as payment of their loan, or in many cases force a sale of the property to themselves. The entire process of a foreclosure is beyond the scope of this article, but there are some basic elements which need to be understood.

Safe but Slow

The foreclosure process tends to take a long time, sometimes up to two years or more. During this period the lender can spend a great deal of money on legal fees and costs associated with the foreclosure.

The Death of Liens

A foreclosure can extinguish all liens and claims on the property, which allows the lender that forecloses to get the property free and clear of any issues. For example, if the borrower had taken out additional loans on the property, or had judgments filed against him for a slip and fall on the property, or the borrower had violations that accrued fines from the city, a foreclosure by the lender removes those claims against the property. Foreclosed properties are usually sold to a new owner, who should order title insurance when purchasing the properties. 

One issue that can come up is if the lender neglected to name all the outstanding liens in the foreclosure. If that happens, even though the lender foreclosed on the property, only named liens are extinguished. So if the lender missed any liens they are still valid!

Foreclosure Alternatives
Because of theses issues, lenders may sometimes go with an alternative route to recoup their loan such as taking a deed in lieu of foreclosure. Another option is the short sale. We will discuss a Deed in Lieu.

Deed in Lieu
The lender may choose to forego the foreclosure process and accept a deed in lieu of foreclosure. The borrower simply deeds the property to the lender as is, and the debt is considered repaid. Transactions conducted using a Deed in Lieu have a different set of issues when it comes to title insurance. Since the property did not go through the foreclosure process, all the old liens are still valid. Therefore, the lender or any subsequent buyer of this property needs to be aware of all the issues. In this scenario, ordering title insurance from a competent and experienced title agency like Riverside Abstract is imperative.

Got questions about "Deed-In-Lieu" or other Title topics? Click here to ask an expert and get the answers you need.

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