Real Estate Finances

Arizona Anti-Deficiency Laws Are Changing

July 16, 2009 By Jon Griffith 3 Comments

The following information was provided by Marc McCain, Attorney at law, regarding the changes that are coming regarding the Arizona Anti-Deficiency legislation.

A deficiency is the amount that you still owe the bank after the bank forecloses. If you are selling your home short of what you owe, or you are about to experience a foreclosure, then this information is important for you. As always, please seek professional legal council when it comes to your particular situation. I can help you sell your house, but I’m not an attorney. We leave that up to the legal experts.

Arizona’s anti-deficiency laws are changing effective September 30, 2009!

The change is designed to limit the type of borrowers that will qualify for anti-deficiency treatment. Set forth below is a general outline of Arizona law regarding when a borrower may be subject to a deficiency action or sued on its note following a foreclosure or short sale. However, borrowers must understand that these are only general rules — every situation must be analyzed carefully based on the specific facts – consult with a professional at all times to determine your rights and obligations in connection with a foreclosure or short sale.

In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721
If the foreclosure price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the difference. However, certain states, including Arizona, have what are called anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.
In determining if anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note. The applicable law should NOT be assumed. Read your Promissory Note and other loan documents carefully and understand their terms.
Assuming Arizona law applies to the lender’s rights under the Promissory Note, Arizona’s anti-deficiency laws are found in 2 places – in A.R.S. § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).
In both judicial foreclosures and trustee’s sales, anti-deficiency rules apply only if the property being foreclosed meets the following criteria: (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling. However, on July 10, 2009 Governor Brewer signed into law a change to A.R.S. § 33-814(G) which will take effect September 30, 2009. In addition to the above requirements, the trustee’s sale statute will also require that: (a) the trustor has lived in the property for at least 6 consecutive months; and (b) a certificate of occupancy has been issued. Until September 30, 2009, there is NO requirement that the trustor use the property as a residence – residential investment properties satisfy the anti-deficiency criteria. Effective September 30, 2009, investment properties sold at trustee’s sale will NOT qualify for anti-deficiency treatment if the trustor has not lived in the property for at least 6 consecutive months. Commercial properties and loans secured by residential homes being developed for sale but never used as dwellings don’t qualify for anti-deficiency treatment. In addition, a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property.
A.R.S. § 33-729(A) also requires that the loan be a purchase money (“PM”). However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan. A PM loan doesn’t lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
In a judicial foreclosure, only a PM lender on qualifying residential property is prevented from seeking a deficiency; a nonpurchase money (“NPM”) lender is not – it can obtain a deficiency following a foreclosure or sue the borrower on the note.
In a trustee’s sale, both PM and NPM lenders that foreclose on qualifying property are prevented from seeking a deficiency and from suing directly on the note.
Junior liens extinguished by a 1st position foreclosure may be able to sue on the note. The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
If a lender can not seek a deficiency, then the lender can NOT waive its security and sue directly on its note. This means that a lender under a PM loan on qualifying property will NOT be able to sue the borrower on the note. This rule also applies to short sales. Note there are gray areas regarding cash out refi’s. Other Lender claims are also not barred – e.g. mortgage fraud.
Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste. In other words, don’t damage the property, take fixtures, A/C units, etc., or let the Property go to waste.
Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
Last, but not least, consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure. 1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications. Know what tax consequences you will face and plan accordingly.

Filed Under: Blah Blah Economy, Market Updates, Real Estate Finances Tagged With: applicable law, foreclosure, information, legislation, mortgage, short sale

Good News for Phoenix Real Estate

June 21, 2009 By Jon Griffith Leave a Comment

It’s not a big surprise considering the number of homes that have been selling recently that the inventory has depleted considerably and the availability of affordable housing is drying up after this massive real estate hemorrhage.

I cannot tell the future, but I can see when there’s a break in a pattern, as you will also see indicated in the graph below. Whenever a market corrects, it usually over corrects to a comparable intensity of the original inflation. Prices were so overinflated, and people have SO overreacted, that the low prices in the valley are deflated and can be considered as artificially low as they were high.

Average Monthly Sales

If I base my opinion simply on the pattern in this graph which outlines average monthly sales in the Greater Metropolitan Phoenix Market, then we are on track to recover, and we will bounce back. Since Arizona is a national leader in real estate trends, we should see a healthy recovery. Again, I cannot predict the future.

It was towards the end of 2003, beginning of 2004 that things started to exponentially bloat, soaring to ridiculous heights, and absolutely crashing as quickly as a 747 filled with solid lead.

In August of 2005, my neighbor bought the same unit I purchased in 2003 for $200,000.00 more than I paid for mine. They are still there. Oops.

The market’s plateau began in approximately June of 2006, rose a bit more, and then decidedly burned in flames at about January of 2008, through March of 2009. The number of homes sold began to increase in May of 2008, but the price continued to drop.

What would have happened if we had continued to grow at a normal, typical rate of 4% per year? Perhaps the following, showing a line drawn at about a 4% increase over the same period of time. This shows that a starting value of $175,000.00 would over the time represented in this graph, grow to approximately $244,000.00.

Average Sales with Assumed 4% Annual Increase

One could argue at this point one of two possibilities. Either a) the market will quickly correct, over correct, and bounce back and forth over the next 8 years or so to find equilibrium along that blue line, or b) the blue line must be adjusted down, erasing all of the growth in this millennium.

If that’s the case, then the home you’re living in, which is now worth what it was pre-Y2K, will not be worth what it should be worth for as long, if not longer than it takes to re-write the entire first decade of this century. To reach home prices that we should be at, we’re looking at roughly 10 years of steady growth at a “normal” rate.

The problem is that nobody knows what normal is anymore BECAUSE OF THAT GIANT HUMP in the middle of the chart. Who’s to blame? Many people think it was the government forcing the banks to lend to people who couldn’t afford it which drove them to “get creative.” Dave Ramsey calls “creative financing” “Too Broke to Buy a House.” I tend to agree.

Either way, it will be interesting to see what happens, and ultimately, it appears as though we’ve experienced the beginning of the bottom of this roller coaster ride. Which means one thing…

If you haven’t bought a house yet, it’s time to buy. There’s blood in the streets and the street sweepers (the investors) have been very busy recently. Don’t miss out.

Filed Under: Blah Blah Economy, Market Updates, Real Estate Finances, Real Estate News Tagged With: Arizona, average, growth, market, pattern, Phoenix, PRICES, RealScottsdaleLiving, Scottsdale, value

It’s a Bottom Line Issue

June 19, 2009 By Jon Griffith Leave a Comment

A recent post on raincityguide.com got me going about the bottom line when it comes to short sales.

The article, written by Ardell, touches on the apparent importance of the assets that a property owner may have that could affect the bank’s decision regarding whether or not a short sale will be approved.

At present, there’s no guarantee that any lender will approve a short sale, ever.

Just because the value of a property is obviously less than the amount owed, that does not mean that the seller’s lienholder is going to approve the short sale.

Consider this. If a property owner has a net worth of $1,000,000.00 and they decide to quit paying their mortgage, what happens? The bank forecloses. It doesn’t matter if the seller has money or not. They have made a decision to walk away, and one thing is certain…if you have a home with a mortgage and you quit paying it, the bank will foreclose.

So, when this seller, who arguably is walking away from a moral obligation, decides to attempt to sell the property to reduce their potential deficiency liability and potential income tax liability for current market value, which may be less than what they owe, would it, or would it not be in the bank’s best interest to allow the short sale? If they don’t allow it, will they waste money on the foreclosure process, and lose money when they list it for sale for less than market value? They will.

Ardell’s Auto Metaphor

You lend your friend $10,000 to buy a car. He decides to sell it when he still owes you $8,000. He tells you someone is willing to pay $5,000 for the car and he wants you to take $5,000 as payment in full. You look at his offer, you find out he he has $15,000 in a savings account. You find out the blue book value for the car is $6,500. The person who wants to buy the car for $5,000 is getting impatient wating for an answer. What would you do?

My answer? It doesn’t matter to me whether or not my friend has money in the bank. The only thing that matters to me is how much the car is worth on the open market, and how much is being offered.

The what you may be missing about this example is the fact that my friend has made a decision to eliminate a debt, and he’s going to do it one of two ways…he’ll either a) let the car get reposessed, or b) try to sell it for as much as he can and ask for a forgiveness of the remaining debt. True, he may no longer be a friend, but that’s what he’s doing.

So, what do I do? Well, in this case, the car should sell for $6500.00 based on Kelly Blue Book private sale. I as the lender now have a few options. I can a) take the car back, or b) agree to sell it for the offering price, or c) require that my friend find a buyer willing to pay market value.

Perhaps the cost of repossessing the car, reconditioning the car, licensing and registering the car, and re-marketing the car will exceed $1500.00, the difference of market value and the current offer. In that case, I would be an idiot not to take the offer. I as the lender, will make smart decisions in mitigating my loss, which means that I would in fact approve the sale.

If all of my costs to resell that car are less than $1500.00, then I would deny the sale and require a higher price.

Should you just take the car and try to sell it for the $6,500 or better, so that you can still collect the amount your friend owes you after you sell the car?

This is a classic example of the tug of war that we face with lenders between the concept of Loss Mitigation and Collections. At this point, I’m not interested in collecting. I’m interested in preventing further loss, because I know that my friend is not going to pay. So, I want to get the car OFF of my books as quickly as possible for as much as I can possibly salvage with as little time invested as possible.

If I am concerned with collecting, knowing that my friend has the money to satisfy the debt, I will surely become bitter at him for not paying, and then I will do something stupid, like refuse to agree to mitigate my loss, which in the end will eat up time and energy, and money. Give me my $5000.00, get the headache out of my life, and let me put that money somewhere it can begin earning again.

Is it possible to short sell more than one home of the same owner who has plenty of money in the bank but has chosen to walk away from their obligation? Yes. Is it right for them to walk away? That becomes a moral question that the seller would have to ask of his self.

Bank executives understand loss mitigation, and they don’t care about each person’s personal financial situation. They care about 3 things and 3 things only.

Is the owner walking away from the property?
What is the market value of the property?
What is the current offer?

Anything else has zero bearing, from the bean-counter’s perspective.

Some second lenders (junior lien holders) will hold up the sale of a property because they just want to get back at the seller for not paying. This is a ludicrous path to follow, because it gains them nothing. If the senior lien holders were to behave the same way, then ultimately they lose more than if they allow the short sale.

Do lenders have to approve short sales? No, they do not. Would it be better if they did? Yes, but only if it means avoiding foreclosing on the property, which is something that the bank cannot prove the owner has actually decided to allow.

Filed Under: Bank Antics, Personal Finances, Real Estate Finances, Short Sales Tagged With: cost, current market value, mortgage, Perspective, short sale

Low-Ball Appraisals Cause Problems

June 5, 2009 By Jon Griffith 3 Comments

The original article was posted on the NAR website and I have re-posted it here. I don’t typically copy others’ articles since I enjoy writing my own, but for the sake of getting the word out, because I am in the middle of this problem right now, I thought I’d pass it along:

Real estate practitioners in Nevada, one of the areas hit hardest by foreclosures, say low-ball appraisals are slowing sales and preventing recovery.

Mark Stark, CEO of Prudential Americana Group in Las Vegas, says he thinks appraisers are too focused on projecting how much prices could fall rather than reflecting what values really are.

“The appraisers are being very conservative,” Stark says. “They are trying to cover themselves.”

Mark Madsen, communications director for Raintree Mortgage Services, says appraisers are just doing what they’ve been told. “I think appraisers are scared to get blacklisted,” he explains. “If the appraisals are too high, then banks may no longer accept appraisals from that person.”

Source: Brian Wargo, Las Vegas Sun (06/05/09)

My recent experience involved Bank of America on a beautiful home well worth the offering price in Gilbert, Arizona. Bank of America’s appraiser came in $20,000 short on a property that was worth every penny of the offering price based on comps and upgrades. There’s no doubt about it. As a result, we have been forced into a tailspin of events that have caused everyone grief due to the affect that the appraisal had on the loan to value ratio and the ability for my buyer to obtain conventional financing at that ratio. It’s a nightmare, to say the least.

The lenders, in conjunction with government regulation, seem to be causing the real estate practitioners to bang their heads against the wall as they attempt to put good buyers into properties that they CAN afford.

Filed Under: Market Updates, Personal Finances, Real Estate Finances Tagged With: America, NAR, offering, Source Brian Wargo

What Makes a Buyer’s Market: Supply and Demand

February 9, 2009 By Jon Griffith 3 Comments

This is a pretty simple concept that can be over complicated by economists. A buyer’s market simply means that it’s better to be buying than selling. Why? Too many houses (supply surplus) and not enough buyers (no reckless lending.)

Supply and Demand

When a supplier (people selling homes) floods the market with too much product (houses) the buyers tend to take longer to choose what they want. As a result, sellers who are tired of waiting will lower their prices to spur the buyer into taking action. This is a natural movement that many sellers miss because they don’t understand the LAW of supply and demand. When the supply is low, buyers climb over themselves to bid on what product is available which drives the price up.

The red line represents the supply. The green line represents the demand. The point at which they cross is the market value or market equilibrium. This is the price that we aim for when we price a home.

The graph can be interpreted as such. On the demand curve (green) when the price of the product is $1.00, the number of units sold will be 100. When the price is $10.00, the number of units sold will be about 14. It’s the economists challenge to set the price of his product as close to market equilibrium as he or she can whereby the most money is made for the least amount of production. 100 units sold X $1.00 = $100.00. 14 units sol X $10.00 = $140.00, but 50 units sold at a price of $6.00 each is $300.00.

Shifting Curves

This is the important note for supply and demand. When supply is increased, the entire red curve shifts to the right by the number of units produced. Assuming demand remains the same, the point at which the lines cross will naturally fall and the price will naturally fall. If the price is not adjusted, the product will not sell. If demand increases at the same rate as the supply increases, then the price will remain the same because market equilibrium will simply follow along. True, more product will be sold, but the price will stay put. Remember, when supply and/or demand increases or decreases, the entire line shifts left or right. For example, if demand suddenly dropped off for a given product like homes, and there was an excess of supply or a surplus such as we have now, the price point would fall dramatically.

Buyers Market

In Phoenix, we have a surplus of homes. Nation wide we have a shortage of buyers because of tightened lending. In many cases, the buyers are really still there, but they’re just afraid to move forward and/or they don’t realize they actually can get a home loan. While the buyer’s market exists, it means the influence of movement on the supply and demand curve has shifted to the demand curve. Buyers can ask for more, and have more to choose from than ever before, so why not wait it out?

On the contrary, if it’s a buyer’s market and there is blood running in the streets, take advantage of it because you won’t want to be buying in a seller’s market.

Filed Under: Blah Blah Economy, Real Estate Basics, Real Estate Finances Tagged With: buyers, Buyers Market, market, Shifting Curves

Leveraging Your Money to Get Rich Part III

October 2, 2008 By Jon Griffith Leave a Comment

So how can I get stinking rich, not just rich?

Well, you could still benefit from that profit of $420,000 if you had rented your home out and put someone else’s money to work for you. But let’s think bigger now.

Let’s say for the sake of argument, that you did have $200,000 in the bank. What would you do with it? Honestly, that’s between you and your financial advisor, but let’s look at a basic example.

Assuming you are doing quite well financially and you have a large income, let’s say you decided to split that balance up into 5 equal portions of $40,000.00 each. Then, you shop around and locate five $200,000 homes that would make great rentals. You put $40,000 down on each property and the bank extends 5 loans to you in the amount of $160,000 each. You now own 5 homes, and you owe the bank $800,000.00. You’ve shown that you can afford the monthly payments, and you’re off and running, hopefully earning a standard property appreciation rate as averaged over the past 10 years or so. As in my previous example, assuming all of the properties appreciate at 4% annually for 30 years, by the end of that time you will have 5 homes completely paid off all worth $620,000 each for a total real estate portfolio worth 3.1 Million dollars.

What if I’m unable to carry that much debt?

Quite honestly if you cannot afford the debt, you’re setting yourself up for financial disaster, which is where lots of people are right now. Not only did they invest in a portfolio of properties, but they paid way too much for them on loans with interest rates that are about to adjust upwards and have no equity gained because the home’s value has dropped. Not only that, but the loans that were written for them were interest only, so every dollar spent goes straight to the bank and nothing goes into the house.

But, for the sake of this example, if you cannot afford to make the house payment, then you find someone who can. Someone who is willing to rent will cover your costs, provided rental rates exceed your mortgage payment. So let’s see…

You own 5 homes to the tune of $1,000,000 ($200,000 X 5) and your initial investment is only $200,000.00. You owe $800,000 in loans, and your monthly mortgage requirements on each home are somewhere in the $1200.00 range. You manage to put renters in each house at $1300 per month, creating a passive income of $500.00/month ($100.00 X 5 Homes). The renters pay your mortgage bill which saves you the $200,000 in interest over the 30 year period. At the end of it all, you’ve tied up $200,000 to leverage the growth of one million dollars worth of real estate resulting in a portfolio of homes worth $3.1Million dollars in 30 years, owned free and clear.

Not bad, but not without risk. Always remember that there’s risk, and be prepared for the hard times, like when the rents are low, or when you can’t get someone into the home.

Filed Under: Real Estate Finances Tagged With: appreciation, Leveraging

Leveraging Your Money to Get Rich Part II

September 25, 2008 By Jon Griffith Leave a Comment

Can you avoid risk by getting rich by borrowing money?

No. There is always risk involved. There is the possibility that your home will not increase in value, in which case you would end up owing more on the house than it is worth. So now what? Sell the house? Not likely. You’ll have to ask the approval of your master, the bank. Think about it. You started free and clear with $20,000.00, and now the bank owns you, and your $20,000.00. The debtor is the lender’s slave. However, if you don’t use the $20,000 for leverage, it won’t grow fast enough to outpace inflation and in 10 years will buy half as much as it can now.

Is it possible to buy a house without borrowing money?

Of course it is. You just have to have enough money. Banks are opportunistic. They know that most Americans don’t have $200,000 sitting around in the bank. The system has been designed to allow you to enslave yourself under the lender for a small fee, every month. Here’s how the transaction goes down, it’s quite simple. You show the bank you can pay the monthly mortgage payment, they write a check to the current owner of the home, then you pay them back over time. They take your down payment and invest it, and they collect massive amounts of interest from you every month on the outstanding balance of the loan.

In the previous scenario, you made a profit of $200,000 over 30 years. Imagine if you had paid for that house up front, free and clear. Your profit would have been $420,000.00.

Filed Under: Real Estate Finances Tagged With: borrowing, Leveraging

So Who Can Buy A Home?

September 24, 2008 By Jon Griffith Leave a Comment

The media is drilling you with the same information day after day. “Banks are failing. Unemployment Rates are climbing. It’s impossible to get a loan.”

The truth is, it’s not impossible to get a loan. Why would they say this? Because they continue to look in the rear view mirror at all of the high risk, no documentation, interest only loans they wrote over the past few years. Guess what…those people are not the right people to be buying a home.

So who is it that can actually buy a house right now.

Well, obviously cash buyers can buy a house, but they are few and far between. The next group of people are the only other group that really have a chance of buying a house right now. That’s you and me. The hard-working american who pays his bills on time, consistently, has a low debt to income ratio (and remember that lenders calculate debt to income ratios by including the potential loan that you’d be getting from them,) and has a good credit score.

If you fall into this category, and you’re renting, STOP THE MADNESS. Buy a house. Don’t worry so much about the fact that it may not be the perfect home. Find something suitable that you might be able to turn into a rental down the road, and buy it, and live in it, and make it a home.

If, however, you’re low on income, have nothing to put down, have a low credit score, and don’t may your payments on time, then you can forget about home ownership. Some people will always be renters. If this is you, I would recommend learning as much about managing personal finances as you can from someone who knows before you consider even attempting to buy a house.

Filed Under: Real Estate Finances Tagged With: home, house, ownership, rental, Unemployment, who can buy