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January 2011 Newsletter

Foreclosure and Short Sale Issues You Should Know About

In the current Sedona AZ Real Estate market there exists a great deal of confusion regarding foreclosures and short sales, two significant factors that remained largely invisible during the hectic run up leading to the Great Recession.

Today, if you are considering buying or selling a home in Sedona and the Verde Valley (or anywhere in Arizona), here are some of the things you should be aware of:

1.    If you are buying a foreclosed property, you are fully protected from any claim of deficiency by the lender. This protection is only available if the "home" is a single family or duplex, is on two and a half acres or less, and is used as a dwelling.

2.    In today's real estate market a second mortgage loan, whether a purchase or non-purchase money loan, will never foreclose since the second mortgage lender does not have any deficiency claim against the owner of the home.

3.    If a loan was used to purchase the home, the loan is a non-recourse loan. In other words, the homeowner has no personal liability for the loan, unless there is excessive damage such as vandalism or flooding. Therefore, the lender cannot waive foreclosure and sue to collect the amount of the loan.

4.    If there has been a refinancing of the original purchase money loan on the home, the anti-deficiency statutes will still protect the homeowner from a deficiency after the foreclosure of the refinancing loan. If, however, there has been a "cashout", then the law at this time is not clear.

5.    The anti-deficiency statutes remain unchanged for 2011 and have remained so for the last 30 years.

6.    The rights of tenants after foreclosure are now protected by Federal law. A tenant after foreclosure is entitled to stay in the home until expiration of the lease term, unless it is a "month-to-month tenancy" or if the purchaser at the foreclosure sale intends to use the home as a primary residence.

7.    If a home is "upside down" and the lender approves a short sale by the seller/borrower, the short sale "difference" (not technically a "deficiency") is waived by the lender after the lender releases the loan so that the short seller can close the sale. Once the loan is released the seller has no liability for the difference, unless the seller/borrower agrees to a lender's requirement to pay back that difference, which is negotiable!

8.    The buyer can cancel the purchase of a short sale home at any time prior to notice from the seller that the lender has approved the sale. If a seller's lender does not accept a short sale purchase contract within 60 days, seller has the right to cancel the purchase.

9.    A lender cannot require either the listing agent or the buyer's agent to reduce the commissions below six percent on short sales by Fannie Mae lenders and banks participating in the HAFA program.

10.    The Mortgage Debt Relief Act of 2007 basically provides for no tax on the short sale "difference" or "foreclosure deficiency" of a purchase money loan if it is a primary residence. If the loan was used by the investor to purchase the home, the loan is considered non-recourse debt and the lender cannot sue the borrower after a short sale or foreclosure.

Due to the increasing number of foreclosures and short sales in Arizona in the past few years, this area of the law is still evolving. New appellate court decisions, especially on "cash out" refinancing are anticipated.
If you are interested in purchasing a foreclosure or a short sale here in the Sedona area, I have been involved in a number of such transactions and I have been certified by the National Association of Realtors as a Short Sale Foreclosure Resource and as a Distressed Property Expert.

I am happy to share my experience with you. It is definitely a way to save money in today's chaotic market.

If you have any questions, please feel free to contact me by phone or by E-mail. Have Healthy and Happy New Year Holidays!  You can E-mail me at lee@leecongdon.com or call me at 928-300-5050.

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