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The unsecured promissory note is becoming a more commonly used tool to prevent future deficiency judgments. If you haven't experienced this already with a short sale, where you are the listing agent, be prepared because it is coming your way.

Upon bank review of the agreement they will counter the offer to the homeowner requesting them to sign a unsecured promissory note for the remaining short balance. As you can imagine, this type of counter from the bank, can throw a monkey wrench in the entire process and possibly kill the deal.

So how can you prevent the bank from requesting and unsecured promissory note? Well it's all going to revolve around percentages. If the short balance is greater than 15% to 20% of the total amount owed you can most definitely expect the bank to request a unsecured promissory note to be signed by the homeowner. It is important that this possibility be disclosed to your home owner up front when the obtaining the listing so that you don't have any uncomfortable surprises towards the end.

I'm sure your next question is why would the bank make such a demand. The first thing to understand is that the request of a promissory note is the bank's way of telling you and the homeowner they will most likely pursue a deficiency judgment if they agree to the deal. The promissory note is the bank's way of giving your client and out, of sorts. In other words, sign a promissory note today or expect a future deficiency judgment, if they decide to do the deal at all.

Keep in mind this is a business decision the bank is making, they have supposedly done the math, looked at the credit, looked at the assets, read over the hardship and determined the deal may be worth losing. This may sound crazy to you and me however from the bank's financial point of view some deals just aren't worth the paper they're written on and therefore they ask the homeowner to have some type of responsibility and the short sale of their home.

In closing, if you have an experienced a promissory note by now count yourself among the lucky few because I guarantee in this market of uncertainty the unsecured promissory note is going to start appearing more and more often in a short sale situations than it ever has before.

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Comment by Eric Baird on March 31, 2009 at 2:09pm
I think you are right on.
Comment by Jesus (Jesse) Gonzalez on September 22, 2008 at 2:03pm
Great clarification......and I got to tell you that if I answer, I would just be speculating. Because tax's are so unique to each individual and I know the Act has some requirements, I would advise my clients to speak with a tax professional.

In my opinion, it wouldn't be null and void till the debt was paid because eventually it or some part of it may be "forgiven". However, I know that the act has a statue of limitations that may play a role in these types of situations. So, once again, I would advise my clients to seek out a CPA or Tax Professional for an answer with their particular situation.

I know that the "safe" answer but, given how much of this is evolving daily...it's really the best answer, in my opinion.
Comment by Kim Lineberger on September 22, 2008 at 11:18am
To clarify....this promisory note allows the bank to collect, from the seller, the difference of the original note and the new purchase price??? If that is correct, does the tax forgiveness act become null and void for the seller if the home is/was their primary residence???

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