P. Ray, Home Seller in Bullhead City, AZ

Short Sale: going smoothly, but worried about aftermath.

Asked by P. Ray, Bullhead City, AZ Mon Jan 11, 2010

Hey Trulians! I am currently in escrow (30-45 day) of what has been a very quick and smooth bank approved short sale on a rental in Arizona (I am L.A. resident). I will not be happy until close, but for now things are going well. My worry is wether or not the bank (Wells Fargo) will chase us for the shortage. I'm told a 1099 is easily possible, but what are the chances they will pursue us for their loss - approx. 30-35k? Thanks for your input!

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Candice A Donofrio’s answer
You DEFINITELY need to talk to your attorney about this. And I completely agree with those who said this issue should have been addressed PRIOR to undertaking a short sale transaction.

Those statutes pertain to FORECLOSURES. NOT short sales. Short sale avoids foreclosure and the rules are different.

Also, communicate with your bank's loss mitigation person. I am presuming you are not broker represented, but if you are, have your broker communicate with the LM analyst. Find out what the bank is going to do. It may or may not be pleasant but at least you will know.

There are some variables I have encountered from my short sale experiences:

1. Some banks have a threshhold of pain where it comes to deficiency. You said 30-35k but what is the price of the house and the amount of debt? I did one this summer via BOA and they said they needed 80% of the loan back after costs to not pursue the deficiency. That was an investment property.

2. Just closed one this past month and the property was an investment property. That bank is pursuing the deficiency.

3. Just did one this Fall with Chase. That was a seasonal home. The bank got 50% of the loan amount but did not pursue deficiency for that seller.

These are anecdotal and not to be used as a guideline. The point is that different banks do different things and short sales are not foreclosures.

Good luck at any rate... :)
1 vote Thank Flag Link Mon Jan 11, 2010
Dear P. Ray:

To answer your question specifically regarding the deficiency on your mortgage that will be created with the short sale of your home, 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 your loan agreement, which only your 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 you in working out a full release of the deficiency in writing to allow you 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 banks 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. You have 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
480-556-0940
jmasich@usa.com
HomeSmart Real Estate
Web Reference: http://ArizonaHomesLand.com
1 vote Thank Flag Link Mon Jan 11, 2010
P.
I am surprised that you are asking this question now. Negotiating the precise terms of the sale and how it will be treated (whether or not you are going to be pursued for a deficiency, how it will be reflected on your taxes, credit report, etc.) you should know BEFORE you enter escrow.


Good luck! If in doubt consult an attorney or CPA.
0 votes Thank Flag Link Mon Jan 11, 2010
Keith Sorem, Real Estate Pro in Glendale, CA
MVP'08
Contact
Jeff be careful what you say, AZ is an Anti Deficiency state you are correct. However as you can see in the ARS 33-729 you just posted yourself, in the headline it states "Purchase Money Mortgages". ARS 33-811 covers non purchase money mortgages and it reads entirely different.

As stated before, it much depends on the type of loan P.Ray has
0 votes Thank Flag Link Mon Jan 11, 2010
P. Ray,

Another reason a lender may consider a short sale is whether a state has anti-deficiency laws. An anti-deficiency law is a law that prevents a lender from recovering any loss over the price received at a foreclosure sale from the borrower/home owner. In essence, anti-deficiency laws limit a lender ability to recover from home owners.

Arizona has a relatively broad anti-deficiency that protects home owners. If your home is secured with a deed of trust and your home is sold at a trustee's sale the lender may not recovery any deficiency if:

The property is 2.5 acres or less;
Used for single family or two family dwelling; and
Sold pursuant to the Trustee's power of sale.
If the home is secured by a purchase money mortgage, that is a mortgage used to pay all or part of the purchase price of the property, the lender may not recovery any deficiency if:

The property is 2.5 acres or less
Used for single family or two family dwelling; and
The home owner did not reduce the value of the home by waste.

Again I would contact my CPA or Real Estate attorney....
0 votes Thank Flag Link Mon Jan 11, 2010
It much depends on the type of loan you have if they can pursue you. Arizona is a Anti Deficiency state, which in short means that if you have a purchase money mortgage the lender have no recourse. But like I said, it much depends on the loan and also on the type of property.

A potential tax complication that it sounds like would affect you since this does not sound like it is your primary residence is that you will have to pay taxes on the forgiven portion of the debt. All lenders will issue a 1099 for the forgiven portion of the debt, weather they will pursue you or not.

You do need to consult a real estate attorney and a CPA to have these questions answered, it is well worth the money. You can visit my website for further information about deficiency and tax complications.
0 votes Thank Flag Link Mon Jan 11, 2010
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