We recently received a call from a downtown Phoenix homeowner considering a short sale. The man was under the impression that he was protected under the Arizona anti-deficiency laws if he did a short sale. The truth is many people are not protected under our State’s anti-deficiency laws and won’t find out for several years when they get a collection notice from their former mortgage holder or their collection agent.
Before we move on it is probably wise we define what the term deficiency means and what a deficiency judgment means. Please note that the author is not an attorney and these terms we are discussing are legal in nature. Thus, ours is a layman’s definition, not a legal one.
Deficiency, when discussed in a short sale, speaks to the difference between what one owes on his mortgage/s verses what the lender nets when the home is sold. For example, let’s say your home loan still has a balance of $300,000 and you sell the home for $200,000. There is a shortfall of $100,000 to the lender. In addition, the lender will have costs associated with the sale that will make the shortage a bit more. The loss to the lender is also called a deficiency.
Deficiency Judgment describes a monetary amount a homeowner would owe the lender after the short sale is complete. This can be in the form of a promissory note to the lender/investor or simply noted as being owned to the lender in the final short sale agreement. Generally, lenders say they reserve the right to collect on the deficiency in the future.
In many cases Arizona homeowners own their lender nothing at the conclusion of a short sale. However, in some cases the homeowner can owe their lender a tidy sum of money at the conclusion of a short sale. This can only be determined by a through and honest evaluation of the homeowner’s situation. There are a lot of variables that need to be considered and we STRONGLY recommend the work be performed by an attorney who specializes in this aspect of real estate law and a knowledgeable tax attorney. It is very important the homeowner is forthright in his conversation with these professionals.
At a recent short sale panel discussion, an attorney talked about a case where a Phoenix homeowner stated that he only had one loan and that he had never refinanced the loan. Based on this information, the person was advised a short sale was a viable option and the homeowner would be protected by the anti-deficiency laws. As the short sale proceeded forward it was discovered that the man had two loans and he had refinanced the first and taken out money. When asked about this, the homeowner said he forgot about those things… a big oops that could be very costly.
A recent article in the Arizona Republic and reposted on USA Today talks about potential of owing money after a short sale. We’re glad this issue is being discussed. We fear there are a lot of people in Phoenix who have done short sales without seeking legal and tax counsel. Plus, the lenders can be pretty subtle about disclosing potential deficiency judgments. This combination can leave a person doing a short sale high and dry.
For more information about short sale in downtown and Greater Phoenix, the Urban Team has a site dedicated to the subject of short sales including a section dedicated to attorneys and tax professionals who can help keep a homeowner out of short sale hell.