$14k note, borrower signed a deed in lieu, house sold for $46k five months later

Paper notes confused me for months, so I bought the smallest thing I could find that still had real collateral behind it. Note balance $27,400, last payment mid 2022, small two bed frame house in a working town where a rented version of it goes for around $700 a month. I paid $14,000.

The reason it worked is that the borrower didn't want the house. She'd moved two states away, had no plan to come back, and had been ignoring letters from the prior servicer for a year and a half. When my servicer's introduction letter went out with an actual phone number on it, she called within a week. What she wanted was to stop having her name attached to it.

So we did a deed in lieu of foreclosure instead of filing anything. Her signature, a release of the debt, $2,500 in cash for keys because she still had furniture in there and I wanted her to clear it out properly rather than me hauling it. Delinquent taxes were $2,100 and I paid those. Attorney and title work to clear it and confirm no other liens ran $1,800. Total in: $20,400.

Sold it as-is to a local landlord for $46,000, closed at month five. Net to me was somewhere around $23,500 after the selling costs, which I'd been told to expect at roughly 6 percent.

The part that nearly broke it was the title work. There was an old judgment against a person with the same last name as the borrower, and for eight days I thought I'd bought into a mess. It turned out to be a different person entirely, but if it had attached I'd have been staring at a foreclosure I didn't budget for.

What I'd keep: buying small enough that I could afford to be wrong, and calling the borrower early with a real option instead of just sending demand letters.

4 replies

1ryanmck27SC2C

The deed in lieu is the part that sounds easy and I don't think it is. She signs a document and you own a house free of her claim? What stops her from coming back and saying she was pressured, or that she didn't understand she was giving up equity?

2laurenkim53Passive

I work rural and low price points, and my question is the $46k. One local landlord who wanted it is a market of one. If he'd passed, who's the second buyer at that price, and how long does it sit? In some of my towns the answer is nine months and $38k.

1stephen_ok9CO2CPRO6

Change one variable: she wants to stay. Now you're negotiating a modification on a $27,400 balance in a $46k house, or you're filing. What does your $14k look like then, vellum? I'd guess the collateral still covers you, and the five months becomes fifteen.

2Rena Expert

The thing that made this work is that your entry sat far enough under the collateral that every resolution path cleared. $14,000 against a house that traded as-is at $46,000 is roughly 30 percent of realized value. At that basis a deed in lieu is excellent, a foreclosure with 12 months of carry and $8,000 of legal still clears, and a discounted payoff at $20k is a fine outcome. That's the cushion doing the work, and it matters more than the speed you got.

On halyard's question, a deed in lieu transfers title voluntarily and is normally paired with a written settlement and consideration, which is part of why cash for keys exists. Whether it's later attackable, and what recording and documentation the state requires, varies by state, and the release of the underlying debt has its own consequences for the borrower. Those are questions for an attorney in that state and, for the borrower, for a tax professional.

The title scare is worth sitting with. An eight day gap between finding a judgment and clearing it means you learned the lien position after you bought. Ordering a current title search before the bid, at a cost usually well under $200 for a preliminary product, moves that finding to a point where you can still walk or reprice.

On meridian's version, a borrower who wants to stay changes your instrument from a house play into a workout, and the yield on a modified loan is a different underwriting exercise entirely. Price both before you bid. The number you'd accept on the slow path is the number you should have paid.

$14k note, borrower signed a deed in lieu, house sold for $46k five months later

4 replies