I have been short selling for a little over 5 years as of this article, the two most resonant questions, based on the course of action regarding foreclosure, are as follows:
1. Will I owe the bank money after my house is foreclosed on?
2. If you can negotiate a price and buy it for less than what I owe, will the bank go after me for the difference?
As a homeowner, that would also be a very important question for me. Often when I meet with homeowners, I always explain how the foreclosure process works. If you are not aware of the legal process in your market, you should learn. It is important that you be able to answer this question for the owner when it arises.
When the lender or bank forecloses on the property and ultimately sells the property for less than what was owed, then there is a deficiency on the loan. The deficiency is the difference between what the owner owes and the amount for which he sold the property.
For example, Mary owes $100,000 on her house, and the lender forecloses and sells the property for $60,000 at auction. There is a $40,000 deficiency for which the lender can sue the owner. The key phrase is “can sue.” That is the lender’s right. However, that is a practice that almost never happens, but it is a real concern for the owner. In most cases, the homeowner wants nothing more to do with the lender once the property is sold at auction.
If the deficiency judgment is granted, it will appear on the homeowners credit report in the same way that any other judgment would appear.
While the second question appears to be similar to the first on the surface, it is actually not. That’s because the result is different. The homeowner, even if unfamiliar with the short sale process, will want to know what happens with the difference. That is why he agrees to buy the property and the current loan balance on the property. Will they have to pay the difference? During the short sale process, he can negotiate with the lender not to seek a deficiency judgment against the owner.
Some lenders, as a matter of policy, will not seek a judgment against the homeowner because they feel they have waived their right by agreeing to a short sale; however, if you can get them to admit it openly, they will not seek a trial; the owner will be more than happy.
There is a second issue related to the deficiency and that is the 1099.
The lender will issue a 1099 to the homeowner for the difference. In Mary’s case, the lender will issue her a 1099 for $40,000. This will have to be reported as income Mary received, and therefore she will have to pay taxes on the $40,000 as if it were earned income.
Either way, the deficiency judgment can be of great concern to the homeowner. It is real if the property is sold on the courthouse steps. In my dealings with lenders, we have found that they generally will not seek a deficiency judgment due to hardship.
There are a couple of options the landlord has in connection with the deficiency judgment. In Mary’s case, she could file for bankruptcy to address the judgment. Mary could also short sell the deficiency with the lender at a later date. In other words, she offers the lender a smaller amount as “payment in full.”
Here is an important note. The lender, if it issues a 1099, cannot sue for a deficiency judgment. The lender can only pursue one or the other. In other words, Mary cannot receive both a deficiency judgment and a 1099 from the lender.
Finally, as you disclose this important information to the landlord, you should inform them of the ramifications of the deficiency and the 1099. It is up to the landlord to continue working with you or not.
Obviously, the homeowner’s best interest is to be proactive and deal with foreclosure. At least there is a chance that the investor can negotiate the deficiency before it becomes a problem.
About the Author…
Mark Sumpter is not a ‘secret weapon’ hotshot, or a ‘go-to guy’ for Wall Street investors. His system has allowed him in one case to pocket an additional $68,000.00 in just 47 days.
In fact, he’s such an ordinary guy, an ex-Kansas City police officer, that you’ll be amazed at this simple, easy-to-operate, time-tested system that Mark Sumpter uses to successfully launch the careers of countless other investors in the financial stratosphere.
He will show you, step by step, exactly how to use the same awesome power of this Magnum-Force, the ‘Real Estate Investor’s Short Sale System,’ so you can consistently average a staggering $42,000.00 profit per transaction, month after month…”
This system is so easy to follow and so dynamically powerful, that it trained Carissa, a 19-year-old student, to put together the complete package for the bank, negotiating the short sale, and closing not one, but up to 80 exciting and profitable deals at once…
It’s a paint-by-numbers system that allows your students to pull off winning deal after deal, week after week, and still have time at the end of each day to spend with their families.
