Changes in Arizona Anti-Deficiency Laws

Take note if you are or plan to be a real estate investor in Scottsdale, Phoenix, or any other part of Arizona.  On July 10, 2009, Arizona Governor Brewer signed legislation that as of September 30 changes the Arizona anti-deficiency law contained in the Arizona Revised Statutes – Section 33-814(G), the trustee’s sale statute.

Investors in trust property in Scottsdale or Arizona real estate need to find out how this ruling affects their situations, if at all, with regards to plans for foreclosures and short sales.  We strongly advise consultation with qualified tax professionals before deciding to do a short sale or foreclosure.  There are possible derogatory tax consequences resulting from Arizona  foreclosures, shorts sales, and loan modifications.

The current Arizona anti-deficiency rule keeps lenders from seeking a deficiency, or suing directly on the note, following a foreclosure or short sale of investment real estate in Arizona that meets certain criteria.  It is advisable for real estate investors to seek professional help analyzing each foreclosure or short sale to determine their rights and obligations.  The lender’s remedies under the Promissory Note and other loan documents spell out the terms.

Designed to limit the type of borrowers that will qualify for anti-deficiency treatment, the new Arizona law changes the criteria.   Criteria under the current laws are simple:  the anti-deficiency rules apply only if the foreclosed property is under 2 ½ acres and utilized as a single one-family or single two-family dwelling.

The current law goes something like this:  In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. 33-721 et. seq., or non-judicially by conducting a trustee’s sale per A.R.S. 33-801 et. seq.  If the foreclosure price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the difference.  Arizona has anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.  In both judicial foreclosures and trustee’s sales, anti-deficiency rules apply only if the property being foreclosed meets the criteria.

However, after September 29, 2009, there are additional criteria:  The trustor must have lived in the property for at least six consecutive months and must have a Certificate of Occupancy.  Investment properties sold at a trustee’s sale will not qualify for anti-deficiency treatment if the trustor has not lived in the property for the six consecutive months.  There are more details in the fine print.  Be aware.

For more information about the estate homes and luxury real estate in the area, contact the LUXE Real Estate Group at 1-888-900-LUXE.