By Jeana Morrissey, on November 16th, 2009
I consult with property owners several times each week concerning their risks, protections and obligations under Arizona’s foreclosure laws, as well as the legal, tax and practical implications of alternatives to foreclosure, such as short sales, deeds in lieu of foreclosure or loan modifications. One recurring issue that I address has to do with misinformation people are receiving from real estate agents and other sources – even legal professionals- concerning short sales.
A common assumption of many home owners and real estate agents is that Arizona’s anti-deficiency statutes always apply to protect borrowers in a short sale as well as a foreclosure. This is incorrect. The anti-deficiency protections clearly apply where a purchase money lender forecloses on an Arizona property. In a foreclosure situation, Arizona statutes and case law define the circumstances in which a lender is prohibited from pursuing a deficiency action against the borrower. In many situations, the statutes allow the lender to pursue such an action against a borrower after foreclosure…
When a borrower short sells a property, there is no automatic protection from a lawsuit by the lender for the balance of the note. Although there are cases that suggest a purchase money lender may be not be allowed to obtain a judgment against the borrower for balance of the note if the property also qualifies for anti-deficiency protection, the borrower must be sure to negotiate for a release from the lender to be protected. I am aware of situations in which a home owner, ecstatic to obtain the bank’s approval of a short sale, quickly signs the approval agreement without carefully reading and understanding its terms. In many cases, the bank has a right to sue and reserves its right to sue the borrower in the future for the balance owed on the note. It is also important to note that the 90 day limitation after a trustee’s sale for filing the deficiency action against the borrower/home owner does not apply in a short sale situation. Normal statutes of limitation apply and can run for up to 6 years in cases where the bank has the right to sue.
It is critical that all homeowners and realtors are aware of this important distinction and do not rely on misinformation when deciding whether to consummate a short sale transaction.