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The law has more than its share of trapdoors waiting to snare the unwary. One of them may affect sellers of real estate. Sellers are affected by defaults if they helped finance the sale, that is, if they carried back some portion of the purchase price for the property they sold. By way of example, assume Smith sells Jones a home for $80,000. Jones agrees to make a $10,000 down payment to Smith and assume Smith's note and deed of trust with a balance of $40,000. This leaves $30,000 remaining on the purchase price. Jones signs a promissory note and secures it with a second deed of trust to Smith for the $30,000 balance. Because of financial problems, Jones cannot make his payments to Smith or to the lender holding the first deed of trust. He defaults on both obligations. Because Smith wants to salvage something more from the transaction, he takes steps to reacquire his interest in the property from Jones while maintaining the obligation on the first deed of trust. Smith generally has two options available to him. He can terminate Jones' interest with a forced
sale of the property, or he can accept a deed to the property back to him from Jones. This latter
approach avoids the delay and expense of a formal proceeding to recover the property and is There are pitfalls, however. A deed back in lieu of foreclosure returns title to Smith, but the title may carry new problems with it. If additional liens and encumbrances attached to the property during the period of Jones' ownership, Smith will inherit these burdens on his title - burdens that were not there when he sold the property to Jones. A trustee's sale or mortgage foreclosure typically would clear these encumbrances. Smith would get the title back in a condition no worse than when he originally sold it to Jones. The lesson here is "seller beware." If you find yourself in Smith's position, consult a lawyer before agreeing to accept a deed in lieu of foreclosure. It is a quick, simple procedure that can be financially dangerous. |