When working with a bank on a short sale you may find that the bank is insisting on the right to file for a deficiency judgment against the homeowner for the write-off amount.  However, it is possible to stop the banks from filing a deficiency judgment!

The homeowner can end up in trouble even when you work with them to purchase that foreclosure property.  There are many steps to the arrangement of a real estate investment deal, so it’s easy to forget a few little details, such as the deficiency judgment!

Lots of times in a short sale, the bank will agree to your offer, saying, ‘alright, we’ll take your deal and sell you the property for $60,000, but we’re still going to get a judgment against the homeowner for the remaining mortgage debt.”  This debt on a mortgage of say $100,000 can be $40,000 that the homeowner will still be responsible for in the face of a court ordered deficiency judgment. 

A deficiency judgment basically says that the homeowner is still responsible for the remainder of a mortgage to the bank, when that bank sells the property for less than the mortgage.  Banks are required by law to either get a deficiency judgment on the property or send the homeowner a 1099 Form showing the bank’s write-off of $40,000 as income for the homeowner.  There are ways to deal with the 1099 Form so that the homeowners on the foreclosure property don’t have to pay taxes on that ‘income’.  However, a deficiency judgment can attach itself to the homeowner’s new property mortgage if they get another home and can remain with the homeowners for up to 2 years. 

It’s very important to negotiate with the banks to also keep them from filing that deficiency judgment when the property sale goes through.  Sometimes you’ll come across a bank that just insists on filing for that deficiency judgment.  They may have their reasons, but it is a big problem for your homeowners and your deal. 

Stop the Deficiency Judgment by Becoming the Bank
You can avoid this deficiency judgment for the homeowners by buying the mortgage note from the bank instead of the property.  This way you become the bank because you hold the mortgage.  Changing the short sale deal to a note purchase is a simple matter and all you need to do is get the bank’s agreement on the deal.

If you are the bank, you have the right to decide if you will be sending the homeowners a 1099 Form or if you will be getting a deficiency judgment against them.  Which way do you think you’ll go?

Of course, you’ll opt to send the homeowners a 1099 form instead of getting the deficiency judgment. A big part of foreclosure investing means working with the homeowners and helping them out of a problem mortgage.  Plus, it’s a lot less work to send the 1099 Form.

You could approach the bank about a Short Sale on a defaulted property you’re interested in, but it does involve a lot of physical effort.  Another easier method is simply to buy the mortgage note from the bank on that same defaulted property.

You’ve been buying mortgage notes for a little while and are comfortable with the practice.  However, you’ve noticed that there are a lot of pre-foreclosure homes out there with mortgages on them too.  This is a large section of the mortgage note industry that remains untapped, but how can you get in on the profits with a defaulted property in the mix? 

It is possible to buy the mortgage note on a defaulted property.  When you use this method of real estate investment you still begin with the normal means of contacting the homeowner in pre-foreclosure through direct mail.

After you’ve spoken with the homeowner and they’ve agreed to sell to you, you’ll have the homeowner under contract to sell their home to you.  This is even though you are going to buy the note on their mortgage.  You’ll just have them sign the contract so they are locked in with you, and the homeowner doesn’t turn around to try and sell the house to someone else while you are working with the bank.  Once, you buy the note the contract becomes irrelevant.

How to Approach the Bank
Go into the bank and ask them if they would consider a Short Sale to you.  A short sale involves buying the actual real estate property at a reduced price and the bank writes off the remainder of the mortgage.  Usually they’ll say yes and begin to give you all kinds of information to turn in for final approval on a short sale.  Then, you can come up with, ‘Hey, wouldn’t it just be easier if I bought the note from you?”
 
If the bank knows how to do a note sale on a defaulted mortgage, then they’ll usually jump on your suggestion because it is so much easier to sell the note than get the process of a short sale through their system.

Once You Buy the Mortgage Note
After some negotiation the bank agrees to give you a note purchase on this property and they accept your offer of say, $70,000 for their mortgage of $115,000. 

By purchasing the note to the property you basically become the bank.  You buy the right to collect the remaining $115,000 left on the defaulted mortgage.  That’s crazy, right?  Nope.

Once you have the mortgage note you have a few options to move forward.  You as the mortgage note owner could continue on with the foreclosure and kick the homeowners out of their home, not very nice since you did approach them first.   Or you could get a “Deed in Lieu of Forclosure”. 

The Deed in Lieu of Foreclosure basically means that the property owner gives you the deed to the property when they can’t make payments on the mortgage.  When you first approach the homeowners about helping them out of their property, you’ll want to let them know that you aren’t going to save their mortgage you’re just trying to give them a clean escape from having that defaulted mortgage on their credit. 

This means that you aren’t going through with the foreclosure and the homeowner gets out without having a foreclosure mark on their record because they are just giving you the deed to the property.

The process of buying the mortgage note on a defaulted mortgage adds one more step to the basic process involved in a short sale.  However, it’s usually quicker, easier and lets you get your piece of real estate investment property

You are working with a homeowner and the bank on a short sale for a defaulted mortgage.  Suddenly, the homeowner wants to know why you need all of their information.

When you’ve been in the mortgage note industry for a little while you’ll learn a few things that you weren’t expecting.  One of those things involves getting the homeowners you are working with to give you’re their information!

Getting information from the homeowner going into foreclosure can sometimes be worse than working with the bank.  Most homeowners just aren’t familiar with the steps involved in a mortgage sale, even though they themselves have a mortgage.   On the other hand, as the property investor you’ll be asking them for a lot of information, some of it quite personal in order to put together a packet for the bank and the hardship letter.  As a result the homeowner can become as stubborn as a mule when it comes to giving up information.

Here are some of the more common pitfalls of working with a homeowner with an information problem:

• They have no idea where they’ve placed all of their important documents
• They haven’t filed tax returns and so can’t give them to you for your own package to the bank.
• They just don’t understand why they need to give you all of the information if they are in default.

Try not to lose your patience with the homeowner.  They aren’t familiar with these processes, which is part of the reason you are there in the first place. 

The homeowner just needs to be made aware of the fact that the bank will make a major write off on this mortgage in the short sale or the mortgage note sale on the property.  That means you’ll need lots of information to back up your proposal and to convince the bank to take this deal. 

Explain to the homeowner, that the hardship letter that you put together for the bank is one way of providing the evidence you need to convince them to take a short sale.  It shows in dental that the homeowner hasn’t been earning enough income to be able to pay their mortgage.  Thus, you’ll need the homeowner’s tax returns as further evidence to back up the letter.  Be sure to explain this in detail to the homeowner so they really understand the reasons behind your need for lots of their personal information.

The banks really do care about the homeowners that are in genuine hardship.  So the hardship letters that you are putting together are very important.  The bank will be able to look at the letter and the evidence provided to confirm that your homeowners just couldn’t make payments because of medical bills, loss of job, loss of income or other reasons.  If it looks like the homeowners didn’t make their mortgage payments because they just didn’t feel like it, the bank will not agree to a short sale.

If you take the time to answer all of the homeowner’s questions and thoroughly explain your need for their personal information, you’ll find it’s much easier to work with the homeowner in default.

You can’t just approach the bank with your best offer and expect to close the deal.  You need to persuade them to accept the short sale first with a little negotiation.

You’ve found a great real estate investment to purchase, signed on with the homeowners and gotten all of your information in order.  All that’s needed is to approach the bank with a short sale offer and close the deal right?  Maybe not.

There is an art to negotiation in the real estate investment industry.  Negotiating a short sale isn’t simply approaching the bank with your packet of paperwork and your best offer to close the deal. 

You’ll need to endure at least two rounds of negotiation with the banks most of the time.  So, don’t approach them with your final offer right off.  It’s probably best if your first offer to the bank is a price that’s lower than what you are willing to pay.

Send a Cover Letter
Submit to the bank an offer cover letter filled will all of your points to justify the discounted offer you are making on the bank.  The banks you usually end up negotiating with get tons of offers for their properties.   This submitted cover letter helps you stand out and makes you look a little more professional as a real estate investor. 

The cover letter can outline your interest in the property, certain negative aspects you’ve noticed to the default property and your first offer on the property.  Don’t be afraid to make a low offer on the property when negotiating short sales.  You can always up your offers, but you can never lower them.  So, if you start out by giving them the most you are willing to pay for the foreclosure property you are interested in the bidding could quickly enter a price range you aren’t able to afford.

Make it Personal
Making more personal offers, such as using the cover letter submission, will get you into more negotiations with banks and help you close more deals.  You’ll waste a lot of time if you go out make a 100 low ball offers in a very impersonal manner.  It just won’t make real estate investment worth the time. 

Instead, go out and find ten default properties that you are interested in and make more personalized offers on them.  Put together a nice cover letter for each that outlines the points above and you’ll find that you enter more deal in less time.  Less time spent means you are making more money for your effort and you are more likely to make that real estate deal. 

There is more than one way to invest in the real estate market.  Now you can tap into a little known section of the industry using short sales to purchase properties with little or no equity and still make a profit!

You know that it’s possible to buy a house that has little or no equity in it for less than is owed on the mortgage!  Yes, it’s possible.  Let’s say that you, as a property investor come across this homeowner who is behind in their mortgage with the bank.  On the current real estate market the defaulted property is worth $100,000, but the homeowner is actually in debt for $115,000.  It is possible for you to get that homeowner’s house for just $70,000.

This seems impossible, but a little known practice called, “Short Sales” in defaulted note buying allows you to purchase property that is over financed and has little or no equity in it!   This is basically when you work with the bank to renegotiate the selling price of the house and the bank writes off the remainder of the mortgage. 

Getting Started with the Short Sale
When you work with this homeowner, you will become the homeowner’s advocate or intermediary with the bank.  So the first thing you’ll need to do is get an “Authorization to Release Information”, and fax it to the bank so that you can negotiate with the bank.  This basically means that the homeowner is giving the bank permission to speak with you concerning their mortgage.

When you contact the bank you’ll want to explain to the bank the reasons why they should be willing to let go of the house for less than it is valued and for less than is owed on the mortgage.  This involves putting together a little package with information that the bank may request from you and extra information that you include on the condition of the house.

For example; the house may need a new roof.  There could be all kinds of deferred maintenance and it needs all kinds of repairs.  You could even point out that the housing market is declining in the area or point out that there are loads of other houses on the same street that haven’t sold.  Basically, you present your case to the bank explaining the reasons that they should let the property go cheap.  Be sure to include digital photos of the damage to the property or the decline.

Using the Short Sales technique it is possible for you to work with the bank to reduce the selling price of that defaulted property.  You are able to purchase it from the homeowner for a reduced price and the homeowner can get out from under this mortgage without it being on their credit. 

All you need to do is approach the banks professionally, put together a good case for reducing the price (such as needed repairs to the property) and for good measure include some digital photos of damage or neglect on and around the property.

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.