Arizona Short Sale Law

Greeves & Roethler, PLC

Here’s some information on Arizona Short Sale Law. Many ask, “Should I short sale my house is Arizona?”  As attorneys, we usually replay with the short answer is “probably not” — it is usually NOT in the seller’s best interest to do a short sale.

Typically, the only parties to benefit from a short sale are the Realtor, the first mortgage holder (the bank), and the buyer. The Realtor gets a commission, the bank has you working for free to get more money for the bank, and the buyer gets a cheap house.

First, you may ask: what is a short sale?  When the amount owed on a home loan (the mortgage) is higher than the sale price of the house, this is called a short sale.  The “deficiency” is the amount left over that the seller still owes the bank.  Many home owners in Phoenix, Tempe and outlying areas like Chandler, Queen Creek, Mesa, Maricopa, and Apache Junction are faced with the prospect of having to do a short sale or let their home be foreclosed. Of course, other options include bankruptcy, mortgage modification, or to “beg, borrow or steal” to continue paying a mortgage you simply can’t afford.

The disadvantages of an Arizona short sale are many:

(1) It will take a lot of time and energy on your part.  First, you must get the bank’s approval which involves submitting tax returns, financial records, and a hardship letter.  Then you have to hope the bank doesn’t lose your documents — which it will once or twice.  Next, you have to show the house, which, as you know, involves keeping the place immaculate and letting strangers traipse through your home.  This entire process will take months.

(2) If the short sale is completed, you run the risk of receiving from the bank a 1099-C tax form that shows debt forgiven.  The IRS may consider this forgiven debt to be taxable income — colloquially referred to as “phantom income.”  Therefore, we suggest you have a lawyer review your short sale contract to attempt to avoid this income tax burden.

(3) No one can say exactly what the effect of a short sale in Arizona will be on your credit report.  Everyone’s case is different and the credit reporting system is simply too secretive.  Suffice it to say, the “ding” on your credit report will be in the neighborhood of 100 to 300 points if you do a short sale.

(4) You cannot stay in your Arizona home after a short sale, unless you rent from the new owner.  On the other hand, if you file bankruptcy, you may be able to stay in your home for several months (possibly a year or two) for free.

(5) Will you be able to get a new mortgage loan after a short sale?  I’m a lawyer, not a mortgage expert.  But here’s what I know.  Different people will give you different answers.  A quick Google search led me to several Realtor websites that all said “Come on down, do a short sale and we’ll get you a new loan in a few months.”  I doubt it.  Remember who profits from your hard work in a short sale — the Realtor.  “Official” figures I’ve seen from the government say it takes 2 to 7 years before you can get a new mortgage loan after doing a short sale (depending on the type of mortgage).

As you can see, short sales in Arizona are complicated.  Maybe a short sale is right for you, but you need to explore all your options.  It may be better for you to “walk away” from the house or reorganize your debt via a Chapter 13 bankruptcy.  The lawyers at Greeves, Price & Roethler, PLC can review your situation and help guide you through this complex and critical situation.  Please call us at 480-345-8100 to set up an appointment.

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