Rarely will a consumer find so much contradicting, confusing and downright incorrect information on a legal topic as they currently do when it comes to short sales and related issues.  Rarely heard of just 2-3 years ago, short sales now make up a significant majority of current MLS listings in the metro Phoenix market and the trend doesn’t seem to be changing any time soon.  Agents, consumers and other professionals are scrambling to get up to speed on the process, strategies and legal issues surrounding short sales.  From a legal perspective, there are three (3) main issues I discuss with clients who may be considering a short sale (or other loan workout for that matter):  (1) deficiency issues, (2) credit issues, and (3) cancellation of debt income issues.   

With respect to issue #1 – deficiencies, short sales present interesting issues and possible outcomes.  Arizona has two anti-deficiency statutes that act to prevent a lender from collecting on a deficiency following a judicial or non-judicial foreclosure on certain residential property situated on 2.5 acres or less.  Because these statutes deal with foreclosures, many real estate professionals, including attorneys, take the position that Arizona’s anti-deficiencies have no application to short sales.  This is categorically false.  Either these real estate professionals do not understand the law, or they are trying to create confusion to help attract clients for their services.  While a short sale can result in a deficiency situation where a foreclosure on the same property would not (for instance, without a lender’s agreement to not seek a deficiency, a short sale involving a non-purchase money loan on qualifying property will not extinguish a borrower’s liability for a deficiency, while a foreclosure by the same lender at a non-judicial trustee’s sale will result in the lender being barred from seeking a deficiency), for many loans (specifically, purchase money loans on qualifying property), a short sale should never result in a deficiency for a borrower. 

Notwithstanding Arizona’s relatively broad anti-deficiency protections afforded to purchase money loans on qualifying property, lenders continue to misrepresent their rights and borrowers’ liabilities in short sale transactions.  Lenders continue to demand cash contributions from borrowers to approve short sales even though they would have no right to seek a deficiency if they foreclosed on the property.  Borrowers and their real estate agents should never engage in short sale negotiations without knowing exactly what rights and obligations a lender and borrower have under the loan and any particular workout scenario.

 For a more detailed analysis of Arizona’s anti-deficiency laws and their applicability to short sale transactions, see my letter to the Editor of Maricopa Lawyer attached. 

letter-to-the-editor-of-maricopa-lawyer

 

Marc McCain, Attorney at Law,  McCain & Bursh, PLC  602-604-2138

www.mccainbursh.com    mmccain@mblawaz.com

Contributed by Mario Romero, CRS, CDPE, CLHMS
602-252-4191 office, 602-254-9810 fax
The Romero Team - Melcher Agency
www.TheRomeroTeam.com
www.ShortSaleTeamAz.com
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