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.
