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Understanding Arizona’s Anti-Deficiency Statutes

In Arizona, absent some agreement, rule or statute to the contrary, a lender can generally seek a deficiency judgment after foreclosing on a property securing a loan, if the property does not sell for enough money to satisfy the debt in full. Fortunately for most typical Arizona homeowners, the Arizona legislature has adopted anti-deficiency statutes that preclude such recourse in many typical fact scenarios.

In the event of non-recourse loans, the non-recourse provision should be included in the mortgage or deed of trust. In most cases, the lender agreeing to a non-recourse loan will also want assurances in the loan documents that the borrower will not commit acts of waste.

In the absence of express agreement, Arizona law provides protection for borrowers against potential liability stemming from the sale of a property at less than market value in a foreclosure sale. The borrower, however, must act quickly to protect his or her rights. If the property sells for less than the amount owed to the lender, the borrower is entitled to ask a court to determine the property’s fair market value. In the event the court agrees that the far market value is higher than the sales price the buyer gets credit for the higher amount. This not only protects the borrower from an unfairly low price, but encourages lenders to make a credit bid for an amount near fair market value.

There is an even more favorable statute protecting borrowers against deficiency judgments involving single or dual-family dwellings on 2 1/2 acres or less where the loan is “purchase money,” meaning it was used to pay the purchase price of the property. Typically, loans used to refinance purchase money loans are also considered purchase money loans, although the use of some of the proceeds to pay other debts, obtain cash out, or for other uses may expose the borrower to recourse liability.

Significantly, even if the loan is not a purchase money loan, the lender’s election to utilize non-judicial foreclosure on the deed of trust renders it non-recourse by operation of law. The lender may, however, instead seek judicial foreclosure, which is more expensive and time-consuming, but preserves the ability of the lender to obtain a deficiency judgment. This anti-deficiency statute also allows a lender to seek a deficiency judgment against the borrower in the event of waste.

Because interpretation of the Arizona anti-deficiency statutes and related real estate laws can be very complicated, borrowers and lenders are advised to seek the assistance of an experienced real estate attorney with any questions or concerns they may have.

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