Arizona Anti Deficiency- Does It Protect Your Short Sale Clients?
As an experienced Phoenix Realtor who sells a ton of short sales, the one question I'm asked most often pertains to the Arizona Anti Deficiency Statutes, and whether a lender can pursue my clients after a successful short sale. When asked this question, I always do two things. I send them the following Arizona Revised Statute links... A.R.S. 33-729(A) and 33-814(G), and I ask them to contact an experienced real estate attorney who understands the short sale process, and how the Arizona Anti Deficiency Statutes pertain to them.
Today, I stumbled across a "blurb" that Christopher Combs (a very highly respected Phoenix real estate attorney) wrote on this very issue:
When is the Homeowner Liable After a Short Sale For the Short Sale Difference?
If the home is “upside down” and the lender approves a short sale by the seller, the short sale “difference” (not technically a “deficiency” that occurs after foreclosure) is waived by the lender after the lender releases the loan in order for the seller to close the short sale to the buyer, unless the seller agrees to the lender’s requirement to pay back the short sale difference. An example is a home worth $60,000 and the loan is in the amount of $100,000. The lender approves a short sale of $60,000 to a buyer; the short sale difference is then $40,000. After the lender releases the loan and the short sale to the buyer closes, the seller has no liability to the lender for this $40,000 short sale difference unless the seller agrees to pay this $40,000 short sale difference to the lender, e.g., if the seller signs a new $40,000 promissory note to the lender.
Feel free to contact the Combs Law Group for more information on the Arizona Anti Deficiency Statute, and how it may affect your short sale client.
I'm not an attorney, don't pretend to be an attorney, and don't play one on television or the internet. However, here are a few bullet-points on the Arizona Anti Deficiency Statute:
1. The loan must be a purchase money mortgage, but AZ courts have also ruled that it applies to purchase money deeds of trust that are foreclosed judicially. The statute defines a purchase money mortgage (or deed of trust) as one that is "given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price." So, in the case of a Home Equity Line of Credit (HELOC) that was taken out after the home was originally purchased, homeowners are not protected.
2. The property must be "2.5 acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling." The AZ Supreme Court took a stance that the dwelling must be built and occupied occasionally. That being said, it can be occupied by either the owners or rented to third party tenant(s). There is word that the bank lobby in Arizona is looking at changing the statute in the very near future, to exclude homebuilders with "spec homes" from the statute. Stay tuned for more details.
3. If the borrower trashes the home (which the statute calls "voluntary waste"), the statute may not protect them (tell this to your clients the next time they feel like they can take their appliances and/or fixtures with them before closing). Yes, I've actually been in homes where the borrower had cleared everything out, then tried to short sell the home. Don't let them do it!
If you Google the phrase "Arizona Anti Deficiency-Short Sale", you will get many, many opinions from attorneys, real estate agents, mortgage brokers, etc. One of the opinions I often run across on this subject has to do with whether a borrower is actually covered under Arizona Anti Deficiency in the case of a short sale. There are attorneys that feel that because short sales are not addressed in the statute, that they may not be covered, leaving the borrower open for a possible deficiency judgement (regardless if their property qualifies using the 3 criteria mentioned above).
While I always make it a point to share this information with my clients, I also make sure they speak with a reputable real estate attorney before deciding their best course of action. I've asked several very prominent attorneys the following question. "Does the Arizona Anti Deficiency Statute cover short sales, or only foreclosures"? Generally, their response is that while short sales are not a part of the statute, generally speaking, it would be easy to show "intent" on the part of both the lender and borrower. In other words, the borrower could have allowed their home to go to foreclosure, but offered to work with the lender to short sell the home. The lender, when faced with their options, felt that a short sale was in their best interest, and approved it. So, there was a "meeting of the minds", so to speak.
Again, I'm not an attorney, and I'm not giving legal advice here. I'm simply sharing information obtained from a few very well-known real estate attorneys when asked about this topic. I always make it a point to stress the importance of having my clients meet with an attorney before proceeding if there is any doubt in their mind on the Arizona Deficiency Statute, and how it might affect them "down the road". I'd rather see them spend $250 on a consultation fee and sleep well at night.
Summit Home Consultants prides itself on helping our clients make the best decision by presenting them with all of their options. While it is crucial to understand the differences between a short sale vs foreclosure, it is even more important to know the long term ramifications that go along with either option.
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