About Short Sales

You probably already know what a deficiency judgment is. Generally, it’s a lawsuit to collect unpaid debts, and in our business, it’s a lawsuit to collect the balance due on a mortgage after a foreclosure. Not all states allow lenders to do this, but many of them do.

When you have to sell your home through foreclosure or short sale, is there any way to prevent a deficiency judgment from being awarded? What happens in those situations?

Most of the time, the only way you can avoid a deficiency judgment is by negotiating with the lender during the pre-foreclosure process. They know how expensive it is to maintain their REO properties. The lender may consent to waive their right to collect the rest of the debt if they see that it will cost them less money in the long run to allow a short sale and simply let the debt go.

When that isn’t possible, depending on state law, the homeowner may have a deficiency judgment on their hands, whether the short sale was approved or the foreclosure went through. At that point, the debt only goes away through payoff or bankruptcy.

What will be the amount of the deficiency judgment? In the case of a foreclosure, the judge will take the balance due on the mortgage and subtract the greater of the high bid at the auction or the appraised value of the home. When the house is sold in a short sale, the amount the bank received from the sale is subtracted from the mortgage balance.

So, the former homeowner now has a court order which says he has to pay the rest of that mortgage debt to the bank. If there were two or more mortgages or liens, that homeowner may even have two or more deficiency judgments against him.

Immediately after the judge signs the order, the deficiency judgment begins earning interest. If the lender adds its REO expenses to the balance, the interest just keeps climbing higher. There is an interest rate of 11 percent per year on deficiency judgments in Florida. What’s the rate in your state?

The debt is usually sold afterward for 5 to 10 cents on the dollar. Banks don’t see much point in trying to collect those debts themselves, especially since most homeowners with that kind of debt are broke. They would rather take the 10 percent now than hope for a larger payment later while keeping the debt on the books.

Besides the deficiency judgment, the former homeowner also has a wounded credit report and a lower FICO score. Having a foreclosure on record is one thing, but a deficiency judgment or a low FICO score could influence a critical decision by others on whether to give that person a job, a loan, or a rental home.

With the number of foreclosures increasing faster than ever, the number of deficiency judgments are increasing right along with them. As the government re-evaluates how foreclosures are done in various scenarios, they may also reconsider how deficiency judgments are handled as well. On the other hand, they may not.

In the meantime, if you are about to lose your home, your best bet is to try talking with the lender. You or your agent may be able to help their loss mitigation department see how cost-effective it is for them to tell the credit bureaus that your mortgage is “paid in full as agreed.” If you don’t take the time to negotiate now, you could be paying for it later.

Need to learn more about foreclosures? Visit the Strategic Real Estate Coach website. You’ll be able to register for weekly updates on the latest developments in the mortgage industry and more!

When you’re trying to close a sale, your actual starting point is that first meeting with a client. In the short sale business, that first conversation is your key to helping a homeowner in trouble.

If you’re going to be in sales, the first rule is to find out specifically what their issues and concerns really are before you try to sell them anything. When you understand their situation, you’re in a better position to help everyone get what they want. Every experienced salesperson does that.

A short sale investor’s clients are people in financial trouble who need to sell their homes. Their issue is pretty simple, right? They are in default on their mortgage payments, and the lender wants either the home or the money. When you look a little deeper, that doesn’t really tell you what their needs are. Different people are worried about different aspects of losing their home. Facts are important, but a short sale investor who wants their trust and their business will find out what they’re really worried about before moving on with the conversation.

Once you get to the emotional root of the problem, you can focus on creating the solution that will help them the most. As you’re listening to them talk about their problem, you need to be looking for that win-win somewhere in that awful situation. There is usually a win-win there for both you and the homeowner. Your job is to find it, and then help them see it.

Ask them questions before you try and teach them anything, and listen carefully to their answers. This is the time to let them have the floor. Let them tell you what’s going on and how they feel about it and why. When they finish answering your questions, then answer theirs by moving into the Positive Results Conversation.

The Positive Results Conversation opens the door for you to introduce yourself and your services. In this conversation, you can use what you learned from listening to them and explain how you can meet each one of their needs. As a short sale investor, you should focus on helping the homeowner understand the different foreclosure options and how each one might affect this specific situation.

After a good discussion of their options and alternatives to foreclosure, you and the homeowner should discuss the short sale process. Any short sale investor should be able to talk about how this works and why this can be their best option, but you should also be prepared to answer objections from people who don’t trust the system. Together, you can set realistic expectations for the outcome.

Managing expectations is the key to the success of the Positive Results Conversation. If you explain what can and can’t happen to their credit beforehand, that homeowner is able to make informed decisions based on facts instead of wishful thinking. If you don’t get to this part of the conversation, and something doesn’t happen according to Plan A, you could end up with a very angry, suspicious homeowner on your hands.

Finally, don’t try to wrap up the conversation before they hear everything, even if the seller asks you to. There is a reason that each one of your talking points is in your presentation, and you will do the homeowner a great disservice by leaving out part of it. You need to make the entire presentation for them to give your offer and your solution the full value it deserves. Without that, it will be much easier for the homeowner to cancel the deal for minor reasons or a slightly better offer coming along from the bank or one of your competitors.

Bring your own personality to the table, but stick to the script and keep the conversation under 90 minutes. By the end of your presentation, the homeowner should be able to see some positive results already: there is a knowledgeable professional in front of them who is willing and able to help, and there is a solution to their problem besides running away from it and watching what’s left of their credit rating go down in flames.

Want to see the entire Positive Results Conversation? Check out our website, and look for the original Short Sale Manifesto. Our experience has proven that covering every topic on the list really does get positive results for everyone. Then you can get ready to submit their short sale package to the lender.

Don’t forget that we put together the Positive Results Conversation from our own experience and successes in the short sale business. We know it works. And you’ll know it too, when other people in your area start asking you to help them with their problem property. You will be known as “the short sale guru”!

Need to learn more about talking to property owners in pre-foreclosure? Check out the Strategic Real Estate Coach resource page and learn our best short sale success strategies!

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