The homeowner can’t have a clean get away after a short sale on their defaulted property sale.  They’ll have to face the possibility of a judgment for the remainder of the mortgage or having to deal with the IRS!

When you are negotiating a short sale or note purchase through the bank on a defaulted property it’s easy to overlook the possibility of a mortgage judgment being filed against the homeowner after the sale.  It can be common practice for a bank to file a judgment against homeowners fro the remainder of a mortgage after a property has been sold for less than its mortgage.

A typical short sale involves negotiating with the bank to let you buy a property at a lower price than what is left owed on the mortgage to the homeowners.  This allows you to pick up a property cheap, the bank to unload a mortgage that the homeowners just can’t make payments on and the homeowners to get out from under a mortgage that’s downing downhill fast.

What Happens after the Short Sale?
Sometimes you’ll find that the homeowners don’t get away from this deal as Scott-free, as they were led to believe.  The bank may say okay, we’ll let you buy this mortgage or this property for say $60,000 when the homeowners still owe $100,000, but we’re also going to court later on to get a judgment against the homeowner. 

This judgment against the homeowner basically says that the now former homeowner still owes the bank $40,000, which was the amount of the write-off the bank took on the sale of that property to you.  That judgment will remain attached to the homeowner for 2 years and can really mess up their ability to get into a new home.  It can also attach to another house that the homeowner buys after selling you the property.  So the homeowner automatically gets a $40,000 debt tacked onto their other mortgage.

The bank can also decide not get a deficiency judgment against the homeowner for the write-off on that defaulted property.  While you are negotiating with the bank for that property you can also negotiate with them to not get that mortgage judgment against the homeowner.  When the bank doesn’t get a judgment, it is required to send out a 1099 form to the homeowner.  This 1099 form shows the $40,000 write-off by the bank as income for the homeowner for that year. 

What to Do about the 1099 Form?
As you can imagine, most homeowners will be terrified by this possibility.  Either they get a deficiency judgment against them for the remainder of the mortgage or the IRS views that $40,000 write-off as income.  Be sure to tell the homeowner, that when they get this 1099 Form they need to see their CPA or someone who is certified to do their taxes. 

The CPA will be able to tell them how to work with the IRS, so that this 1099 isn’t shown as income.  The homeowner may qualify for an ‘exclusion’ from the 1099 for selling their own home if they have lived in that home for the past 2 out of 5 years. 

In addition, there is a Form 982 that the homeowners may be able to fill out that shows they are ‘insolvent’ and have no funds from this sale. If they qualify through this form the IRS may not require them to pay taxes on that $40,000 write-off. 

Don’t blame the banks for this little predicament that can pop up and ruin the homeowner’s deal.  They are required by law to get a judgment against the homeowner or to send out a 1099 form to the homeowner.  Just make sure that you lee the homeowner know in advance that if they take the short sale or note purchase deal they will face one of these two possibilities.

Conducting a real estate short sale is all about you and the bank negotiating.  Knowing that loss mitigation departments do short sales day in and day out can help you to get in the right mindset to negotiate with them. 

With the high rise in foreclosures these days, even those who do not invest in real estate are starting to hear the term “real estate short sale” or “mortgage short sale.”  A simple definition of a short sale of real estate is an investor or buyer making a deal with the primary mortgage holder to accept less than the amount due on a mortgage; rather than the lender taking over the property through the foreclosure process and then ultimately loosing money on the property by selling it at a foreclosure auction.

Once a property goes into foreclosure the lender passes along the file they have on the property over to their loss mitigation department.  It is the loss mitigator’s job to deal with the foreclosure and help the lender to retain as much money from the deal as possible.  While the loss mitigation department may not act like they want to conduct a mortgage short sale, the truth of the matter is that generally they loose less money that way than having to auction off the property on the courthouse steps. 

Dealing with a loss mitigator can be very challenging, especially to new real estate investors.  The best advice I can give you is to try and always remember that it is in the loss mitigator’s best interest to ultimately deal with you.  While they may act like they are not interested in negotiating with you, they are from the first time you reach out and contact them.  For those who will not deal with you, there really is nothing you can do but go find another deal to make and leave that one on the table.  There is nothing you can ultimately do about it and you are much better off finding other deals which will make you money. 

Many real estate investors ask what is a reasonable offer to make to a lender for a mortgage short sale?  Generally the rule of thumb is about 80% of the current mortgage balance on the property.  But, the absolute rule is that you should never offer more money than you want to have into the property, and never more than you think the property is worth to work with and either sell or rent out. 
 
By making a reasonable short sale offer, and treating loss mitigators well, you can generally close a deal with a mortgage short sale to your benefit.