By: Melissa “Mimi” Petro
In light of the economy and the declining real estate market, numerous Arizonans are facing the loss of their homes through foreclosures, short-sales, and deeds in lieu of foreclosure. The collective belief has been that a short-sale and deed in lieu may not reflect as poorly on your credit score, or as long, as a foreclosure. We will simply have to see whether that is the case. Deciding whether to attempt to work with the lender on a short-sale or deed in lieu or to let the property go into foreclosure is intensely personal. Making the right decision, however, depends on a variety of factors and what is right for one family might be a disaster for another.
Before making any decision, it is important to understand the choices and the potential consequences. Foreclosure means the lender sells the property to itself or an actual buyer to try and satisfy the loan. This can happen through a judicial (court-ordered) foreclosure or, more commonly in Arizona, a trustee’s sale. A trustee’s sale is a private sale of the house conducted by a trustee for the benefit of the lender. A short-sale is the sale of the property for less than what the homeowner owes the bank. The lender releases its lien on the property even though it is accepting less than the loan amount. A deed in lieu of foreclosure involves a lender accepting a deed to the house from the homeowner instead of conducting a foreclosure.
Perhaps the greatest pitfall with a short-sale is not reading the fine print and making sure the lender has released not only its lien, but its right to file a lawsuit against the homeowner. Many people are protected by Arizona’s anti-deficiency laws, which often prohibit a lender from filing a lawsuit against the homeowner after a foreclosure even if the property is worth less than the loan amount, i.e., there is a “deficiency”. The nuances of anti-deficiency law are beyond the scope of this article; however, it is important to understand whether you are protected by those laws before deciding whether and how to attempt a short-sale or deed in lieu. Arizona’s anti-deficiency laws generally require a foreclosure; simply put, they are not applicable in a short-sale. Thus, the devil is truly in the details and it is vital that the short-sale documents not only release the lender’s lien on the property, but also release any right to file a lawsuit for the deficiency. Some short-sale documents do not explicitly state this, in which case the lender only releases its lien, but does not necessarily waive the right to sue the homeowner. In those instances, lenders have been known to wait until after the short-sale is complete and then file a lawsuit for the deficiency. In some cases, had the home gone into foreclosure, Arizona’s anti-deficiency laws would have automatically protected the homeowner from the deficiency suit; but without the foreclosure or written release, that protection is lost and the lender might actually be placed in a better position.
Deeds in lieu of foreclosure are similar; because it is simply a contractual agreement between the lender and homeowner, the deed in lieu must specifically release any right of the lender to file a lawsuit. Without that release and without a foreclosure, the right remains.
The news is replete with stories of the nightmare involved in going through a short-sale and deed in lieu. Before deciding whether to embark on that process with your bank, you should consult an attorney knowledgeable in this area to provide guidance on whether Arizona’s anti-deficiency laws apply to your situation, the consequences of foreclosure, a short-sale, and deed in lieu, and ways of approaching the three possibilities.  You should also consult with a certified public account as there may be tax consequences in all three scenarios. 
To learn more about short-sales and deeds in lieu of foreclosure, or for legal services in other real estate and transactional matters contact Tucson lawyer, Mimi Petro at Udall Law Firm, LLP.
 One other factor that will have a significant effect on any decision is whether there is more than one lender. If there is a second lender, the situation and analysis change completely and it is vitally important to seek the advice of an attorney.
 This article is not intended to provide any legal advice. Everyone’s situation is different and the slightest change in facts affects whether Arizona’s anti-deficiency laws apply at all and what risk the homeowner has. Nothing in this article is intended to create an attorney-client relationship and if you wish to discuss your situation, please contact an attorney directly to begin the process of establishing an attorney-client relationship.
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