Facing Foreclosure? Here's How a Deed in Lieu Works

By David Pannell

David Pannell is the Managing Broker and founder of Cities Real Estate, a forward-thinking brokerage based in Fort Worth, Texas. A licensed Realtor since 2005 and a broker since 2010, David is known for his expertise in helping families sell homes quickly, especially those navigating the complexities of probate and inherited property.

I got a call last week from a homeowner facing foreclosure. They’d already done a loan modification, and they’d waited until almost the last second to decide whether to sell the property or make a move.

In a situation like that, there’s one option left that can preserve your credit in most cases, and that’s if the mortgage company is willing to take the property back and sell it themselves. It’s called a deed in lieu of foreclosure, and here in Dallas-Fort Worth, we call it a friendly foreclosure. If the mortgage company is trying to foreclose, or they’ve got a delayed response on your loan modification, or they just don’t seem like they’re working with you, you do have options.

Maria’s story shows how this works. Before I get to the steps, I want to tell you about her, because it’s a hard one. Her husband died about 18 months ago, and he was the sole income for the house. Two or three years back, they’d borrowed money to make some necessary repairs, just to make the place comfortable, and the loan now roughly equals what the house would sell for as is. She didn’t want to call her family because her kids are off living their lives, and she doesn’t want to be a burden; she just wants to be a grandmother. She didn’t want to call a real estate agent either, because every agent who came over told her she needed to make repairs and do a bunch of work to get it on the market.

Then she found us through an online search and our YouTube channel. We ran comps and looked at the sales history, and what we found was that she’d borrowed just enough over the years that she’d pulled out all her equity. The best solution for her was a deed in lieu. She does have somewhere to go; she’ll likely move in with her kids, and with her permission, we got them involved. She’s just going to tell them she sold the house.

Step one: Call the bank first. If you’re at the very end of this and trying to avoid foreclosure and buy yourself some time on the property, this is probably your best option. The same goes if the house has failed to sell or there’s some situation where you simply can’t sell it. The moment you realize that, call the bank and ask specifically what their steps are for a deed in lieu. They’ll probably transfer you to the department that starts the process.

Step two: Document your hardship. They’re going to want to know what happened. In Maria’s case, her husband passed away, so the household lost its income, and the money they’d borrowed went into improvements that weren’t the right ones to sell the property. She’ll likely need to write a handwritten testimony to the lender explaining why she deserves a hardship and whether she qualifies.

Step three: The bank values the house. They’ll send someone out, usually somebody they know, an appraiser or a broker like me, to give an opinion of value based on the comps in the neighborhood. They’re evaluating whether the house qualifies for them to take it over, because they have to turn around and sell it, and they’d rather not lose money doing it.

Step four: Negotiate the deficiency. Once the first three steps are done, you want to negotiate the gap between what they believe the house is worth and what they can actually sell it for, and you want that settled upfront so they can’t come back to you later. This is called negotiating the deficiency, and you want a waiver signed by them when you sign the deed transferring the house voluntarily.

Step five: Sign the deed. This part looks a lot like closing. You’ll probably do it at a title company, or they’ll send a notary out for you to sign a deed transferring ownership back to them so they can sell the property.

Step six: Set your timeline to vacate. This one runs alongside step five. You want to build in time to stay in the property so you can find somewhere to move. If you’re working with the bank, they’ll often give you up to 90 days to line up another place and get your things out. If you’re foreclosed on instead, it’s an ugly process. It can turn into an eviction, with your belongings on the front lawn. So be careful.

Here’s the truth. A deed in lieu can help you. It can give you more time in the property, it can give you a clear path forward, and it can help everybody involved, even the mortgage company, you probably don’t feel like helping right now. It can still hit your credit if you’re hoping to own another property someday, but it’s not the same as a foreclosure, and it probably won’t stay on your record as long. So open up your options and see what you can do.

If you have equity in your house, or you think you might, we’ll come out and evaluate the property’s condition and tell you what you can or can’t sell it for. We do buy houses, but in these situations, we typically want to try to list your property so you can get more from other investors. A deed in lieu is a better move than your house ending up on the courthouse steps.

If you’re in a situation like this, or you know somebody who’s in the foreclosure process, please reach out. My name is David Pannell, I’m a broker with Cities Real Estate, and I’d love to have a conversation and see what we can do to help. Schedule a call with me here.