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Eduardo,  in Scottsdale, AZ

Bank of America Short Sale

Asked by Eduardo, Scottsdale, AZ Tue Jan 26, 2010

I am representing a client who is short-selling through Bank of America. The negotiator just came back with a counter offer that included a requirement that my client sign a promissory note for a significant amount. This is the first time I have seen this included in a bank's response. Can anybody share their experience?

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Dear Eduardo:

Lenders will try to convince a borrower to sign a note for the shorted amount in Arizona and are often successful. Many borrowers feel an obligation or guilt in paying at least a portion of the shorted amount on loan after a short sale. However, they should be aware that Arizona law protects them.

To answer your question specifically regarding the deficiency on your client's mortgage that will be created with the short sale of theirhome, many homeowners/borrowers are not aware that Arizona is a "Non-Deficiency" State for short paid mortgages. This means that, unless there are specific issues in the loan agreement, which only an attorney can advise you on, the lender is prohibited by Arizona Statue 33-729 from pursuing a judgment against the borrower if the home has sold for a deficiency, an amount less than the mortgage balance due to a diminished value of the home (or secured property).

Specifically, Lenders are prohibited by Arizona Statute (33-729) from obtaining deficiency judgments in foreclosures where the land size is 2.5 acres or less and where the property was used as either a single one-family or single two-family dwelling. The actual language from the Arizona Statue follows:

Arizona Statute 33-729. Purchase money mortgage; limitation on liability

A. Except as provided in subsection B, if a mortgage 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, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

B. The balance due on a mortgage foreclosure judgment after sale of the mortgaged property shall
constitute a lien against other property of the judgment debtor, general execution may be issued thereon, and the judgment may be otherwise satisfied out of other property of the judgment debtor, if the court determines, after sale upon special execution and upon written application and such notice to the judgment debtor as the court may require, that the sale price was less than the amount of the judgment because of diminution in the value of such real property while such property was in the ownership, possession, or control of the judgment debtor because of voluntary waste committed or permitted by the judgment debtor, not to exceed the amount of diminution in value as determined by such court.

It is my opinion that a professional short sale negotiator shoud represent your client in working out a full release of the deficiency in writing to allow your client to have "peace of mind" that the lender will not pursue payment for the deficiency. The lender is prohibited by law from doing so. However, if the borrower signs a separate note to he lender for the deficiency, that new note would govern the deficiency balance owed on the debt. A Realtor often does the negotiating for the borrower (and often are successful), but this is a complex issue. The bank's have professional "Loss Mitigators" that try to maximize the bank's return on a short sale to avoid an even larger loss in a foreclosure. Your client has the law behind to ask for a full release of the deficiency amount.

In my practice, I will bring in a negotiator that will be the advocate for my client in the short sale and will, if the home is sold at current market value, will obtain a deficiency release from the lender. My goal is to get the house sold at market value, the negotiator's job is to get the release for the borrower on the deficiency.

Borrowers need to know that Arizona is a "Non Deficiency" State. Again, an attorney's advice should be obtained if you believe you have special situations outside of the Arizona Statute. Unless, the borrower feels that they have a committed responsibility to pay the deficiency, or are trying to protect their credit rating, or have available funds to pay the deficiency, your Realtor and Short Sale Negotiator have the right to ask the lender for a full release under Arizona Statue 33-729.

I hope this helps you.

Regards, Jeff

Jeff Masich, Realtor®
Arizona Homes and Land
HomeSmart Real Estate
Web Reference:
2 votes Thank Flag Link Tue Jan 26, 2010
Long story short, call an attorney as soon as possible. your client MUST get proper legal advice!
0 votes Thank Flag Link Tue Aug 16, 2011
First question, do you have a buyer for this property. BOA is getting away from requiring a promissory note but I have seen it in the acceptance letter from time to time. Here is the answer, accept the terms of the acceptance letter if everything else is satisfactory and just say NO ! to the promissory note. They want to sell the house more than they need to get a note from the seller that they can't pay anyway.
0 votes Thank Flag Link Tue Apr 19, 2011
Be careful on the advise from us Realtors...we cannot advise on legal matter but direct you to the source yes.

I noticed below:
"Specifically, Lenders are prohibited by Arizona Statute (33-729) from obtaining deficiency judgments in foreclosures where the land size is 2.5 acres or less and where the property was used as either a single one-family or single two-family dwelling. The actual language from the Arizona Statue follows: "

Note in the statement above "obtaining deficiency judgments in foreclosures..." a short sale is not a foreclosure so do examine the banks letter regarding release of lien and pursuit of deficiency language and have it reviewed by your attorney before proceeding. Better yet, before you list a short sale see an attorney with your loan docs and pay the flat fee many charge to advise you on if short sale is better than foreclosure. This way the seller is more prepared and parties time is better utilized.

All my best
Laura Myers
Keller Williams Arizona Realty
0 votes Thank Flag Link Sat Sep 25, 2010
Continue to negotiate it. You press them hard enough, they'll go down...many times to nothing. Prove to them that it's better not to seek a promissory note because your client cannot afford to pay it...unless according to the financial statements the lender received, it shows that your client can afford it.

I have had them try this a couple of times, both while working as an agent and as an investor. Play hardball with them.
0 votes Thank Flag Link Tue Jan 26, 2010
Sherry is correct and totally agree--have your client contact an attorney before signing anything .
0 votes Thank Flag Link Tue Jan 26, 2010
I have heard that BofA is notorious for asking for a promissory note. I would advise your client to seek advice from a real estate attorney before signing anything.

Sherry Kesling
Associate Broker'
0 votes Thank Flag Link Tue Jan 26, 2010
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