These days many properties and homes are selling for far less than “market value,” making them great buys for real estate investors. In this market, you will likely be dealing with a variety of distressed homeowners, including those seeking to avoid foreclosure via short sales and those who are facing foreclosure. It will help you to understand some basic ramifications of these options for those homeowners even if you are not facing the situation yourself. One thing that you will likely need to address with the motivated sellers with whom you are working is the issue of deficiency laws.

Deficiency laws vary from state to state. These are the laws and pieces of legislation that govern if and how a lender can pursue a homeowner who defaults on a mortgage – even if that default is worked out with the lender prior to the transaction in which the property changes hands, as in a short sale. For example, in some states, a lender can pursue a homeowner for the deficiency – the amount of debt left over – after a short sale is completed. This option is particularly likely if the property owner used a short sale to exit ownership of a second home or rental property. Another issue for property owners facing foreclosure may be the issue of “subsequent loan” deficiencies. While many homeowners believe that once the foreclosure is complete, the issue with a lender is over, in reality they may still be liable for secondary or subsequent loans, such as amounts of money taken out of previously existing equity to finance improvements on the home. While a foreclosure may resolve the original loan, often the lender can pursue the former owner for the subsequent loan amount if that loan is not included in negotiations.

As an investor, being able to explain these issues to a distressed homeowner can help demonstrate why it behooves that homeowner to work with you to sell the property rather than simply await foreclosure or postpone dealing with the problem. How do you deal with the issue of deficiency legislation in your area?

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While fraud risk in the mortgage industry peaked in 2007 and has been headed downward ever since, California-based company CoreLogic reported this week that one in 200 home loans still contains misinformation or even misrepresentations that have the potential to result in default later in the life of the loan . The report showed that fraud risk leveled off in 2009, but that short sales in particular showed “very suspicious” activity in the form of activity less than 60 days after the short sale for more than 20 percent of the short sale price.

This is continuation of a trend of demonizing short sale investors, but the report did not stop there. Less controversial examples of common fraud included misrepresentation of income and internal fraud on the parts of lenders, loan servicers and lender representatives. Additionally, false identities, occupancy information and information about the property were included in “common” types of fraud.

This report is disturbing on multiple levels. Of course, it is disconcerting that such a high number of loans are still at risk for fraud, but it is also a problem that the report demonizes common – and legal – investor practices, such as buying low, fixing up and selling high in an accelerated manner. Do you think these “fraud” classifications are fair? Are they hurting your ability to do business?

Thank you for reading! Your comments and questions are welcomed below.