Try to Short Sell Units, Deed In Lieu of Foreclosure Not Likely in Arizona

Arizona residents own three four-plexes in East Phoenix that are secured by one loan. When they purchased the three four-plexes seven years ago, the buyers knew the neighborhood was not a very good one, but believed that the neighborhood would improve. Unfortunately though, the neighborhood has continued to deteriorate. And because of the deterioration, the loan balance now greatly exceeds the value of the three four-plexes, and the owners can no longer make the mortgage payments. Their lender has refused to accept the deeds for these four-plexes in lieu of foreclosure. The lender wants them to do a “short sale”, however they would still have to pay the remaining loan balance. If the lender continues to refuse to accept deeds in lieu of foreclosure, can the lender foreclose on these properties and demand payment of any deficiency?

The answer in short is, yes. A lender is never under an obligation to accept a deed in lieu of foreclosure from the borrower. And in fact, lenders rarely accept deeds in lieu of foreclosure. If the borrowers do not make the loan payments, the Arizona real estate law of anti-deficiency statute will not protect them from a deficiency judgment after the foreclosure sale because Arizona’s anti-deficiency statute only applies to loans secured by a single-family home or duplex, not a four-plex. Therefore, the borrowers in this case should try to do a short sale, and negotiate with the bank about the amount that they would still pay back the bank. If their financial situation is poor, the bank may agree to settle for significantly less than the amount of the remaining loan balance. If they do not agree with the bank and close a short sale, the bank will eventually conduct the foreclosure sale and file a lawsuit against them for the amount of the deficiency. The bank must file any deficiency lawsuit within ninety days after the foreclosure sale.


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