Most homeowners, and unfortunately many real estate agents, who are familiar with Arizona’s anti-deficiency laws, mistakenly believe that those laws also protect homeowners who use a short sale to sell their home. The anti-deficiency statutes currently on the books, in particular A.R.S. § 33-814(G), apply only to instances where the property is “sold pursuant to the trustee’s power of sale,” not in the case of a short sale. Although there have been discussions of enacting legislation addressing short sales, and in particular the issue of deficiency liability in a short sale, no such legislation has been enacted.
A short sale is not a foreclosure or a trustee’s sale, it is a negotiated sale that involves a compromise by a third party, the lender. Specifically, the lender must agree to take less than it is owed in order for the sale to occur. Of course, because of the anti-deficiency statutes, lenders are often willing to approve a short sale because they know that in the event of a foreclosure they will receive nothing.
Nonetheless, the agreements reached among the parties govern the transaction and the potentially continuing liability thereafter. Sometimes the lender will agree to allow the sale to go through by releasing its deed of trust, but will specifically reserve the right to collect the remaining amount owed after the sale. Sometimes the agreement will be silent on this issue, leaving open the possibility that the lender may try to collect.
Because Arizona’s anti-deficiency statutes favor borrowers in most cases you can easily negotiate the terms of the agreement to clearly and unequivocally release you from any further liability. To ensure your liability is released, however, you should have an attorney review the relevant documents before closing on the sale.
