Just Compensation and Your Mortgage

If the government has said they’re going to take part (or all) of your property and you’re feeling confused, scared, and maybe a little frustrated, you’re not alone. One question we often hear is: “What happens if the government is taking my land and I still owe money to the bank for my property?”

Ideally, the government would give you a fair offer from the outset and you would own the property outright (no loans, no tax liens, no issues with title). But sometimes it seems like just when the government is about to pay up, the bank, the IRS, the state and county tax authorities, and someone who owned the property in 1970, are all standing in front of you with their hands out trying to take your compensation.

If you’re like many people you may have a loan, mortgage, or equity line of credit on your property. This debt complicates the eminent domain process, but it is usually not insurmountable. The bad news is that a mortgage company usually has the right to get paid before you do. But, there are solutions. An experienced attorney can try to help ensure that banks don’t cause needless delay, and that you are treated fairly.

The 4 options

But first you need to know about the “second check” approach!

If you hire an attorney to oversee your eminent domain case, they’re going to try to maximize the amount you receive for your property. To do this, some firms (like ours) use what we like to call the “Second Check Approach.”

This is where we wait for the government to deposit their estimate of “just compensation” (what they believe your property is worth) with the county’s clerk of court. Then, we go through the correct legal proceedings to collect it for you without technically accepting it. Finally, we present a case for why the government should pay you more for your property. If we’re successful, they will cut you a “Second Check” for your property.

Now if a bank is involved, you will likely find yourself in one of the four situations below.

Option 1: Payoff

If the amount the government offers you is greater than the amount you still owe on your property, it is usually not difficult to solve the bank issue.

The attorney would simply request an updated payoff amount from the bank, and have the bank paid off completely from the deposit (first check). Any money left over would then be yours and the bank would no longer have an interest in the subsequent lawsuit, so you would be free to pursue additional just compensation (second check) without the bank getting in the way.

Option 2: Complete waiver

In some situations, the government’s offer is low enough that there’s no incentive for a bank to pursue it. For example, let’s say the government is only taking a small portion of your property and only paying you a few thousand for it. In these cases, it is often possible to get the bank to agree to waive all interest in the deposit and lawsuit.

If a bank agrees to this waiver, they will have no claim to the initial deposit (first check), or to any future money gained from the lawsuit (second check). This doesn’t mean the bank is forgiving your loan, it just means you may choose to pay off part, all, or none of the loan with the money you receive from the government.

Option 3: Partial waiver

If the deposit amount is large enough that the bank will not agree to waive their interest in it, but not large enough to completely pay off your loan, your attorney might be able to get a partial waiver.

To do this, he/she will review the deed of trust for your property to determine what portion of the deposit the bank is actually owed. Some deeds of trust have clauses that determine how much the bank will receive if there are “damages” to the property. For example, it might say that the bank is entitled to 80% of compensation.

Sometimes your attorney can get the bank to accept a portion (80% in the example above) of what the government deposits (first check) and waive their interest in any future compensation (second check).

In other cases, the bank might recognize that the government has not paid you enough for the “damages” to your property, but instead of having to hire their own appraisers and lawyers, your attorney may be able to work with the bank to get them to accept the full amount of the deposit (first check), while waiving their interest in any future money from the lawsuit (second check).

Option 4: Partial payoff and refinance

Occasionally, the attorney can’t remove the bank by paying off the loan or by having the bank agree to waive all or a part of their interest in the money from the ensuing lawsuit (second check).

In these cases, your best route is usually to have the entire amount of the deposit (first check) sent to the bank, paying down your loan. In most cases, you will then be in position to refinance to either allow your loan to be paid off more quickly or to decrease your monthly payments.

This refinance has the additional benefit of removing the bank from the lawsuit (for the second check). Since the property would be refinanced after the government’s taking, the new bank that you refinance with will have no claim to your compensation.