A Deed in a Box? Understanding the Deed in Escrow

Deed in escrow has multiple meanings. In this article, we’ll discuss the concept as it applies to community restoration, and we’ll also discuss the deed in escrow as a way of averting a foreclosure.

Using the Deed in Escrow for Community Restoration

Some states allow lenders to hold a deed in escrow to help people buy homes in need of repairs. This can be a great opportunity for the right buyer. The idea can be very appealing to those who love the challenge that comes with fixer-uppers — and those who’ve struggled to buy their first homes.

Consider the restoration work done by the Cuyahoga Land Bank in Ohio, which supports dozens of Cuyahoga County buyers buy and fix up homes every year. People can apply to buy a low-priced home by doing renovations in the months following their agreement to do so.

How does it all work? The land bank holds the deeds while the buyers go through the process of getting all necessary building permits. The typical land bank home needs a new HVAC system, new flooring, perhaps a roof replacement, and so on. The buyer is rewarded with an accessibly priced home.

Here’s the gist of the deed-in-escrow method in the land bank’s own words:

Once a purchaser enters into an agreement with the Land Bank, the title/deed to the home is then held in escrow until the renovations are completed.

Of course, the amount of work a buyer would need to do to a land bank home depends on the condition and history of the specific home. But the buyer gets support from the Cuyahoga Land Bank in the form of an individualized restoration plan that will enable the buyer to meet applicable codes and building standards.

Could Be the Ultimate Win-Win

You can see the overall benefit of a community restoration group holding a deed while construction plans are designed and backed by permits, and passing the deed on when a buyer has done the legwork. A neighborhood loses an abandoned, rundown building and gains a restored (usually owner-occupied) home. Every deed holder in the area benefits from the improvement in home values, and safer, more healthful surroundings.

And the buyer gets a number of benefits:

• The deed to a home, after putting in the time and effort to have a stake in its renovation.

• The satisfaction of making restoration happen.

• A home that doesn’t rely on developers breaking new ground. (Reduce, reuse, recycle!)

• Support from the land bank to plan the rehab.

The Cuyahoga Land Bank has helped get more than 10,000 deeds in buyers’ hands.

And There’s More…

And through the Deed-in-Escrow Owner-Occupant Improvement Plus Program, fixer-upper buyers may apply for funding from the Cuyahoga County Housing Program. This means the buyer could qualify to have the county cover the repairs. Duplex buyers can get up to $50K and single-unit home buyers can get up to $25,000 in renovation funds. The county wants these fixer-upper buyers to succeed!

What exactly can the county cover that supports the restoration of a home? Here are a few examples:

• Installation of a new heating and air conditioning system.

• Electrical wiring replacements.

• Repair work to correct faulty plumbing in the home.

• A new roof.

• New driveways or walkways, landscaping work, or exterior renovations.  

Nothing to sneeze at. Now, let’s look a second major way the deed in escrow could be beneficial. This one’s for someone who already holds a deed… but has fallen behind on the mortgage payments.

Putting a Deed in Escrow to Avert a Foreclosure

Yes, it’s a thing. Some lenders call it putting a deed in a box.

There are a number of ways a lender can agree to work with a mortgage borrower in the interest of getting distressed homeowners back on their feet. One option (depending on state law) is to delay foreclosure in return for the borrower’s agreement to convey a deed into escrow. This “deed in a box” agreement can be good for the bank — and for the borrower, if it successfully buys time for borrower to resolve immediate financial pressures. Either way, it keeps the home from going through a tedious, time-sucking foreclosure.

But it has to be carefully done, with protections for the borrower at the forefront:

• Help for a distressed borrower can’t give the lender a “collateral advantage.” That is, it can’t deprive a borrower of the ability to redeem the loan before the foreclosure process.

• To protect the borrower, the deed in escrow is generally allowed by law only if the borrower is truly underwater, with no home equity at stake.

What About the Lender’s Risks?

What are the risks to the lenders? For one, a borrower could enter into bankruptcy to avoid foreclosure.   

Additionally, a borrower could decide to sue to get a deed back.

Or both.

In 2018, the courts considered a borrower who defaulted on a mortgage. Forbearance went on for a year, the borrower went into bankruptcy, and the bank took the deed from escrow and recorded it as a bank-owned property. Ouch!

A few months later, the defaulting borrower went to court, hoping to void the bank’s action as unjust. But at the appeal stage, the bank won. Here’s why this deed in escrow got the court’s blessing:

• Court precedent supported a bank’s taking a deed into escrow for possible recording when done as part of a court-administered agreement. (This case had that same characteristic.)

• The reason the bank put the deed in escrow was to give the borrower more time to remedy the default — even though the bank already got a foreclosure judgment. The bank has acted to ease, not worsen, the borrower’s financial predicament.

The district court upheld the “deed in escrow” — and the bank’s ultimate recording of the deed — as fair.

Deed in a Box: Takeaways

Speak with a land bank representative, a mortgage consultant, or a real estate attorney in your state to learn more about deeds in escrow. Placing a deed “in a box” is not always an option. It depends on the state and the buyer’s circumstances.

But sometimes it is an option. And the it has power to help people buy homes, help revitalize neighborhoods, It and even save an existing homeownership during times of acute financial stress.