When your home is in pre-foreclosure, you need to know about deficiency judgments. Of course, the deficiency is the leftover debt after the home is sold, and the judgment part means that the court will formally order you to pay it back. Your state may not allow this, but several states support the lender’s right to collect the rest of the debt.

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 the lender won’t agree to waive their right to collect that leftover debt, they ask the court to grant them a deficiency judgment against the homeowner. Afterward, only paying off the debt or having it discharged in bankruptcy will make it disappear.

How is a deficiency judgment figured? First, the judge will look at the proceeds from the sale of the home. If there was a short sale, the amount of the deficiency judgment is the mortgage debt less the sale proceeds. If the home went to auction, in most states, the judge will take the greater of the appraised value of that home or the highest bid from the auction and subtract that amount from the mortgage debt.

Either way, the court will order the homeowner to repay that amount to the lender. If more than one lienholder on the home chose to file a similar lawsuit, the homeowner may end up with more than one deficiency judgment.

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?

After establishing the new debt from the deficiency judgment, a bank typically turns around and sells the debt for pennies on the dollar. Banks know that collecting money from someone who couldn’t pay their mortgage is not worth their time and expense. They prefer to cut their losses and unload the debt on someone else.

Payment or no payment, the former homeowner now also has a huge ding on their credit report, as if having a foreclosure on record wasn’t bad enough. That judgment will stay on a credit report for at least seven to ten years, depending on certain circumstances, and it will send a FICO score down. That lower FICO score means that the former homeowner could be turned down for loans, jobs, or even housing because of it.

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.

For now, your best strategy is to try and get the lender to see the wisdom of forgiving the debt and reporting the mortgage as “paid in full as agreed” on your credit report. Negotiating that deficiency judgment away is the key to survival here, because it can hang over your head for a long time.

Need to learn more about how deficiency judgments can affect your life? Visit the Strategic Real Estate Coach website. You’ll gain access to weekly webinars on current events in the mortgage industry and more!

As short sale professionals, we know that meeting with a homeowner in trouble for the first time is crucial to successfully closing the deal. The results of that first conversation will set the tone for the results of your last one.

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.

In the short sale niche, our clients are homeowners in default on their mortgage. Generally speaking, their problems are obvious, right? They’re losing their house, and they’re drowning financially. Specifically, though, not everyone has exactly the same thinking about their needs during financial troubles. If you want to help these homeowners, you need to hit home about what is really bugging each of them personally about their situation.

After you find out what their real concerns are, that’s when you begin tailoring your answers to those concerns. As they speak, listen carefully for the win-win proposition that you think will work for both of you. It’s a rare day when there isn’t a positive solution available for a homeowner in financial trouble. All you do is educate yourself about them, and then educate them about your possible solutions.

You’ve been listening to them for a while, and you now know their story. (If you’re smart, you’ve been letting them do most of the talking.) When they’re done – and only when they’re done – you need to talk about how working with you is the right solution to their problem. That’s where the Positive Results Conversation comes in.

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 you explain foreclosure options and alternatives, you will want to help the homeowner understand how short sales work. Short sale professionals already know that they have the best chance of minimizing the negative effects of the lender’s actions, but the average homeowner doesn’t. You also need to help them set realistic expectations of what the whole process will and won’t do for them.

There is no substitute for realistic expectations when it comes to getting involved in someone else’s financial business. An informed client who makes informed decisions is so much more likely to be a satisfied client. When you manage their expectations, you increase your chances of seeing the Positive Results Conversation work. When you don’t talk about what can and can’t happen, you risk putting yourself in the position of having to explain some unfortunate events later.

Finally, make it a point to finish the Positive Results Conversation. Even if one of you is getting tired, you will help the homeowner more by making each and every point in your presentation. The solution you offer could be valuable to them if it is implemented with full knowledge and understanding. If this doesn’t happen, the homeowner is more likely to switch gears and impatiently throw a wrench in the deal.

Be honest and show them the real you, but at the same time, try to stick to the script for the main points. You should be able to wrap it up in around 90 minutes or less. When you are done, emphasize the positive results of your presentation. They don’t have to run away from the problem; there is a solution. They don’t have to worry about scammers; they have a knowledgeable person on their side.

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.

Always remember that we put this presentation together from our own experience in dealing with homeowners in trouble. Everything on the list has a purpose; everything on that list is there because it will help you succeed as a short sale consultant. You will begin to see your own positive results when people in your own neighborhood start calling you “the problem property expert” and sending referrals your way!

Need to learn more about helping homeowners avoid foreclosure? Check out the Strategic Real Estate Coach resource page for the best short sale success strategies!

Every real estate professional who works with homeowners in default needs to know a little about bankruptcy. At the very least, you should know enough to join the conversation because bankruptcy and foreclosure often go together.

Keep in mind that you’re not there to advise them on whether or not they should do it. Stick to talking about the facts related to how bankruptcy affects homeowners in foreclosure, and advise them to take that information to a bankruptcy attorney. You don’t want to let them think you can help them file, or be accused of practicing law without a license.

The point is to know enough about bankruptcy to speak with the homeowner like the professional you are. It is critical to know what bankruptcy will and won’t do for people in foreclosure, and that begins with learning a few terms. Once you understand the basics, you can help them figure out which questions to ask their bankruptcy attorney.

Bankruptcy Stay: A judge can order a stay to freeze the progress of the foreclosure. It doesn’t prevent the foreclosure from ever happening, but it does prevent the lender from taking further action for a while – even an hour before the sheriff’s sale. This has the effect of giving the homeowner more time to work things out.

Motion for Relief of Stay: This is the lender’s response to a bankruptcy stay. Mortgage lenders will often file a Motion for Relief of Stay with the bankruptcy court, which may or may not allow that lender to continue or restart the foreclosure process.

A motion for relief of stay may be justified in one of two ways. First, if the property has negative equity, the homeowner will receive nothing from the sale of the house anyway. Since there will be no proceeds from the sale to distribute among the other creditors, the court may see no point in freezing the foreclosure process. Second, the homeowner may already be in trouble with the court because they can’t keep up with their repayment plan. The court will see no point in giving most homeowners a second chance to save the house if they aren’t cooperating in good faith with the bankruptcy process.

Abandonment of Assets: In bankruptcy court, an asset is considered abandoned when its value has decreased to the point that nobody will be interested in it but the owner and its secured lienholder. One example of an abandoned asset is a home that is worth less than the mortgage debt.

Bankruptcy Discharge: The court discharges all debts in a Chapter 7 or a Chapter 13 bankruptcy after all procedures have been followed. A discharge tells future creditors that the borrower is no longer legally responsible for those debts.

Dismissal: In bankruptcy court, a dismissal means that the court has refused to discharge the person’s debts due to noncompliance. When an individual fails to cooperate with a Chapter 13 repayment plan or fails to submit any paperwork requested by the court, the judge can dismiss the bankruptcy and tell the person that they don’t qualify for debt relief anymore. In 2005, part of the bankruptcy reform laws made it harder for an individual to file another bankruptcy after a dismissal.

Bankruptcy is a common topic among people who are in financial trouble, especially when it involves a mortgage. If you would like to continue this conversation, don’t forget that you can always find a colleague at Strategic Real Estate Coach. You may never become a bankruptcy expert, but as a real estate professional, you can at least know what everyone else is talking about.

Take time to get more information on how a bankruptcy can affect a homeowner in default. For now, the most important thing to remember is that filing bankruptcy does not prevent a foreclosure from occurring. It can only stay or temporarily freeze the action.

Need to know more about how bankruptcy affects homeowners in default on their mortgage? Get free online training from Strategic Real Estate Coach. You’ll gain access to this and much more helpful information!

When you’re about to lose your house, the stress can be pretty overwhelming. You already have financial problems, the debt collectors are constantly calling, your family is getting stressed out as well, and you find yourself wondering where you will live when they take the house away from you. Your main goal in life becomes getting rid of the stress.

You might know someone who has been through that already, so maybe you have an idea of what can happen. You might not even realize you have more than one or two options. Walking away from the house is tempting, but your real options have to include your end game. What do you want your debt and your credit to look like after the house goes away?

Whether you’re a homeowner, a real estate agent, or an investor, you need to know all the options for someone facing foreclosure. As a homeowner, your best bet is to get enough information to make an informed decision. As someone who helps homeowners, you need to make sure they understand that information. You need to set realistic expectations for the loss of their home.

Two of the options have been covered frequently in the media lately: deed-in-lieu and loan modifications.

A deed-in-lieu means that the homeowner agrees to simply hand over the property to the bank. It helps the bank make the repossession easier, but it still hurts the homeowner’s credit as if the foreclosure had actually taken place.

What about loan modifications? The government’s Home Affordable Modification Program (HAMP) promotes mortgage loan modifications as being a viable way to deal with the foreclosure crisis. Yet the current rate of success for those loans to go from trial to permanent modification is 4 percent. Using California as an example, roughly 140,000 trial loans have entered into the modification process; however, only 5,600 loans will be modified based on their current success rate (4 percent). California filed over 450,000 notices of default for 2009. Those being helped are few and far between given the current numbers.

There are four more successful options.

1) The homeowner can stay in the house and file for bankruptcy, allowing the courts to stall the foreclosure as long as possible. It doesn’t mean the foreclosure won’t happen, but it does mean that the homeowner can refuse to pay for a place to live until the auction date.

2) List the house for the amount of the debt and hope someone comes along who loves the house so much that they will pay your asking price before the auction date. You can dream all you want, but the odds are that nobody will pay more than the house is worth, and you’ll end up going back to option one.

3) List the house as a short sale, find a buyer, and make the buyer wait out the short sale process in order to buy the house at a discount. Many real estate agents recommend this solution because it sounds like the easiest thing to do while still earning their commission, but it’s a little more complicated than that.

One complication arises when the agent has to convince the buyer to not only sign the purchase agreement, but to wait at least 60 to 90 days to take possession. The typical buyer needs something that is already available.

Several roadblocks can come up during the process of negotiating a short sale if the seller and/or his agent don’t completely understand how to manage those negotiations. Lenders are very careful to train their loss mitigation department in debt collection, so sellers and agents who aren’t as well-trained in short sale negotiation skills can be easily sidelined.

For instance, sometimes promissory notes and deficiency judgments can be avoided after a short sale. Did you know that? It can be worth a great deal to a homeowner when you not only learn how the system works, but also how to work the system.

4) The real estate agent could list the house as a short sale, while arranging the purchase by a short sale investor who doesn’t mind handling the paperwork, negotiating a successful short sale on the seller’s behalf, and waiting for the lender’s approval before closing on the house. The homeowner would avoid a foreclosure, the agent would still get the commission, and the buyer would get the home as an investment property to sell or rent.

Why should the homeowner work with an independent short sale investor? People who negotiate short sales every day know the best ways to get the best deal for the homeowner. For instance, the BPO process is more than just having an appraiser stop by. An experienced investor will know how to handle the situation to the homeowner’s benefit.

As a real estate professional, you should be able to explain these four options to a homeowner who is facing foreclosure. They can let it go and file bankruptcy, they can sell for the amount of the debt, they can apply for a short sale and wait for a buyer, or they can apply for a short sale with a buyer already waiting for them.

If you’re interested in finding out how the short sale approval process really works, sign up for free downloadable reports on the Silver Membership page of the Strategic Real Estate Coach website. You’ll also learn about the foreclosure process, and you can gain access to networking opportunities with other people who are interested in helping homeowners avoid foreclosure.

Finally, if you want to get some insight into a variety of legal issues influencing real estate investing, be sure to check out attorney Jeff Watson’s blog at topshortsalelawyer.com.

Use the most current information about foreclosure options to inform yourself and the homeowners you work with. Educated homeowners are better able to decide what is best for their financial situation and make it possible to avoid foreclosure and go on with their lives.

Need to know more about foreclosure options? Get all the information you need from our real estate coaching website!

Those doing short sale investing or who are real estate agents dealing with short sales must understand “Shadow Inventory” and what it’s going to mean for your future in real estate.

Some experts say that the shadow inventory doesn’t exist, or that it doesn’t pose a problem, while others insist that the shadow inventory will cause another real estate market crash.

I’m going to discuss what shadow inventory is and how it will benefit short sale investors and real estate agents that deal with short sales. Let’s cover Shadow Inventory.

1. Millions of homeowners that are currently “safe” with their payments, and in no trouble with their loan simply want to move for location sake, upsize, downsize etc. Many of these homeowners are waiting to put their properties on the market, because they feel like the market will “turn around” and they can get a much better price. The end result will be when these millions of homeowners decide to sell at the same time, creating an oversupply of homes on the market, thereby driving prices down.

2. Let’s talk about the six hundred thousand homes that lenders are holding in their REO inventory. Most people don’t know that when a lender forecloses on a home, they don’t have to sell it right away. They can hold it until they decide to sell. What are they doing? Well, they too are “waiting” for the market to go up so they can add their huge inventory to the market.

3. There is an estimated 7 million homeowners currently in default in the US. this is massive beyond all measure, and will add to the 2 above. They will be trying to sell before losing their home to foreclosure, or simply adding to the banks’ inventory.

If you’re a real estate agent working short sales, or if you’re doing short sale investing, you are part of the solution. Without these solutions, the market will most likely get worse. Worse then we’ve ever seen it. Now is the time to learn about short sales, if you’re involved at all, you can help. It can also be very lucrative.

You can get a free ebook and the top 10 mistakes to avoid with foreclosure at our foreclosure training website. The 3 best strategies on buying foreclosed homes is also available there as a free gift.