“With a $165,000 price tag, the two-story, four-bedroom house for sale in Avondale was a steal.

Three years ago, when the house was new, a family paid $416,000 for it.

But its soaring living-room ceiling, whirlpool bath, three-car garage and pool with a slide and waterfall weren’t enough to make it much more than a handyman’s special.

Thieves made off with the home’s $30,000 custom-kitchen and other fixtures after it went into foreclosure…”

Read the article: http://www.azcentral.com/arizonarepublic/local/articles/2009/09/08/20090908junkyhomes0908.html

“You warn that the other shoe is about to drop when it comes to foreclosures in Arizona. What are you referring to?

Goddard: Billions of dollars of payment-option adjustable-rate mortgages(ARMs) were originated in Arizona, particularly near the end of the housing bubble. These loans allowed many consumers to buy homes and make a minimum payment that is only a fraction of the interest due on the mortgage. More than 120,000 payment-option ARMS are expected to reset in Arizona in the next 12 months. According to experts, a large percentage of payment-option ARMs could default once the reset is made…”

Read the article: http://www.azcentral.com/arizonarepublic/opinions/articles/2009/08/24/20090824aztalk-newsmaker24.html

“Even as Americans suffer rising unemployment, foreclosure rates in three states hit hardest by the housing bust — California, Arizona and Florida — stabilized in June, offering hope that the worst of the real estate crisis is over, according to The Associated Press’ monthly analysis of economic stress in more than 3,100 U.S. counties.

The latest results of AP’s Economic Stress Index show foreclosure and bankruptcy rates held steady from May in some states. Yet mounting unemployment is hampering an economic recovery in some regions, especially the Southeast and industrial Midwest.”

Read the article: bit.ly/11E1Xe

“Arizona legislators and real-estate advocates met Tuesday morning to try to work out a last-minute compromise on controversial changes to the state’s foreclosure laws.

Representatives from Gov. Jan Brewer’s office and the state banking industry were also part of the meeting. Other meetings continued throughout the day as real-estate lobbyists tried to explain the unintended harmful consequences of Senate Bill 1271. ”

Read the article: http://bit.ly/zURRa

by Michelle Lind, AAR General Counsel/Assistant CEO

Sen. Steve Pierce, sponsor of SB 1271, feels the bill needs to be fixed due to the unforeseen and unintended consequences of the legislation. He has asked the Legislature and the Governor’s office to repeal the bill so that legislators and industry stakeholder groups can work on a new bill to accomplish the original objective of 1271- to help small community banks in Arizona.

Pierce met with AAR and other stakeholders yesterday to discuss changes to the legislation. The consensus was that there is a more direct way to assist local Arizona banks, who were not eligible to receive any TARP funds, on the ever-growing foreclosure issue.

AAR will continue to work with the Legislature and the Governor’s office on this important homeowner issue.

We’d like to thank Sen. Pierce for all of the time and energy he has put into working on this complex issue as well as for being an open listener and participant in the discussions with all of the engaged stakeholder groups.

Please check www.rallinow.com for more information on this as it develops.

“SB 1271 dramatically alters well settled Arizona law on the relationship between Arizona residential real estate owners and their lenders. The bill has far reaching effects, well beyond those testified to in committee… We respectfully request that you amend your Call for Special Session to permit the Arizona Legislature to reconsider these amendments to our laws.”

Read the letter to the governor as well as practical and legal issues with SB 1271: http://www.aaronline.com/documents/GBrewer072209.pdf

“Just as the nation’s housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy.”

Read the article: http://bit.ly/ZpX8S.

by Elizabeth Hurd

The March, April and May issues of Arizona REALTOR® included numerous articles on short sales, REOs, foreclosures and loan modifications. In the June issue, AAR included a quiz to help you determine how much you learned about these hot topics. Find out the answers here!

Q: Do Arizona’s anti-deficiency statutes apply to all properties?
A: No.  For the anti-deficiency statutes to apply, the property at issue must be a duplex or a single family residence; the real property must be two and one-half acres or less; and the loan at issue must be a purchase money mortgage.
A purchase money mortgage is one where the loan proceeds are used to acquire title to the property. A refinance of a purchase money mortgage is also considered a purchase money mortgage for purposes of the statute. A HELOC that is obtained after the close of escrow is generally not considered a purchase money mortgage.
Assuming all three of these requirements are met, the Arizona anti-deficiency statutes apply. What this means is that the lender’s remedy will be limited to regaining possession of the real property at issue through a foreclosure process or otherwise. If the anti-deficiency statutes apply, even if the amount due to the lender exceeds the value of the property, the lender may not pursue the borrower for the difference or deficiency.  The anti-deficiency statutes can be found in A.R.S. Title 33, Chapter 6.1.

Q: Does the Mortgage Forgiveness Debt Relief Act of 2007 exclude any debt forgiven through foreclosure or a short sale from being treated as 1099 income for tax purposes?
A: No.  The Mortgage Forgiveness Debt Relief Act of 2007 (Act) created limited circumstances under which sellers facing a foreclosure can be granted a relief from this requirement if they are able to work out a solution with the lender such as a short sale, where part of the debt is forgiven.  To be afforded protection under the Act, the debt must be considered qualified principal residence indebtedness.  Also, the total debt must be less than $2 million (or $1 million for married couples filing separately).

Q: In a short sale, when do the time periods in the contract begin to run?
a) Upon delivery of the accepted offer to the lender
b) On the date the offer is accepted and signed by both parties
c) Upon delivery of the Short Sale Agreement Notice to the buyer

A: The date of the seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. In the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency. 

Q: My buyer wants to make an offer on a short sale property.  Do I have to lower my commission?
A: No.  As a cooperating broker, you are entitled to the amount of commission specified in the offer of cooperation.  You may enter into an agreement with the listing broker to accept half of whatever commission the lender will allow, although this is not required.  If the listing broker refuses to pay the amount of commission specified in the offer of cooperation, you may pursue them for the balance. 
Commission agreements should be handled professionally at all times.  Understand that the listing broker is in a difficult position, making an offer of cooperation when the lender might come back and condition their acceptance on a lower total commission.  Since you are aware of this possibility before making the offer, it would be wise to come to an agreement beforehand regarding how any commission reductions will be handled.
Note: A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of the client. This prohibition does not obligate a licensee to agree or alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy.”

Q: I represent the seller in a short sale transaction.  We have received multiple offers on the property.  Must we submit every offer to the lender?
A: No.  All accepted offers must be submitted to the seller.  Once the seller has accepted an offer, it must be submitted to the lender.  Unless otherwise prohibited, the seller may accept subsequent offers as backup offers.  However, once accepted, these backup offers must be submitted to the lender as well.

Q: Are all REOs sold “as is”?
A: Yes.  The bank/seller will normally not offer any warranties or guarantees.  However, in some limited circumstances, the lender may be willing to negotiate a price which allows for needed repairs.  If this is a concern for the buyer, they should submit an inspection report together with estimates on the cost of needed repairs.  There is no guarantee the lender/seller will agree to reduce the price.

Q: Can anyone qualify for a loan modification under Obama’s Making Home Affordable Plan?
A: No.  The Program, effective March 4, 2009, includes many restrictions. The Program is only available for owner-occupied properties, and therefore no investors will qualify. Furthermore, the maximum loan amount for a single family residence is set at $729,750.00.  The plan includes a few different scenarios under which a home owner may qualify to modify their existing loan.  The home owner should talk with their lender honestly about their situation.  The lender will be able to determine if there is a modification option available, based on the information they provide.

Q: Is a foreclosed home owner allowed to remove appliances from the home after foreclosure?
A: Yes.  Appliances, unless they are considered fixtures, are normally classified as personal property and belong to the home owner.  However, any appliances built-in, such as a built-in microwave or range hood, would likely be considered fixtures and stay with the property.  Some foreclosed sellers have been known to “strip” a property after foreclosure.  However, foreclosed home owners should be advised that removal of fixtures constitutes criminal theft pursuant to A.R.S. §13-1802. The lender can file criminal charges accordingly.
Note: The lender may also be able to file a civil lawsuit against the previous owners for “waste” due to the wrongful removal of the fixtures.

Elizabeth Hurd is a curriculum writer who has written continuing education courses for real estate agents, including AAR courses for rCRMS and GRI.

Note: This article was edited on 3/8/10. Under the question that begins, “Q: I represent the seller in a short sale transaction….,” the first portion of the answer was changed from, “A: No.  All accepted offers must be submitted to the lender.” to “A: No.  All accepted offers must be submitted to the seller.”

Arizona

• Legal – Foreclosures and Liens: www.aaronline.com/documents/Foreclose.aspx
• Arizona Foreclosure Prevention Task Force: www.arizonaforeclosuretaskforce.com/
• Facing Loan Foreclosure or Alleged Foreclosure Rescue Scams? Arizona Department of Financial Institutions: www.azdfi.gov/foreclosure/Intro.htm
• Field Guide to Arizona Foreclosure Help-Line: www.housingaz.com/ShowPage.aspx?ID=248

General Assistance

• Guide to Avoiding Foreclosure: http://www.hud.gov/foreclosure/index.cfm
• Consumer Assistance – Foreclosure: www.aaronline.com/ConsumerAssistance/Foreclosure.asp
• Field Guide to Foreclosures: www.realtor.org/library/library/fg329

By AAR General Counsel Michelle Lind, Esq.
Arizona is reported to have one of the highest foreclosure rates in the nation. As a result, many REALTORS® are involved in the sale of properties that are owned by lenders. The vast majority of foreclosures in Arizona occur through a trustee’s sale. If the lender is the highest bidder at the trustee’s sale, the lender takes title and becomes the owner of the property. When listed for sale, these properties are referred to as “foreclosures,” “bank owned,” “lender owned,” or “REO” (real estate owned) properties. For more information on the foreclosure process, go to www.aaronline.com/documents/AzPropForeclosure.aspx.
 When the lender enters into a contract to sell the REO properties, the lender is generally treated like any other seller from a legal perspective. However, transactions involving the sale of lender-owned properties involve numerous unique considerations.

Liability and Insurance Issues with REO Listings

Because of the potential liability, every broker should have errors and omissions (“E&O”) insurance and consider general liability insurance. E&O insurance generally covers the amount a broker is legally required to pay as damages for a loss that results from performing specific real estate duties, which are specified in the policy. Most E&O policies have deductibles and limits of coverage for each wrongful act and for each policy year. E&O policies also have exclusions.
 Some REO listing agreements require the listing broker to perform duties, such as inspections, maintenance and repair of the premises. These activities may be considered property management by the insurance company. Therefore, confirm that the E&O policy will cover any claims that arise from these activities. Some listing agreements also require the broker to indemnify the lender, which may not be covered under the E&O policy. Therefore, read the terms of the listing agreement, understand the duties the lender expects to be performed on the listed property and discuss these issues with your broker and insurance representative.

REO Properties Are Often Sold “As Is”

If the lender directs that the property be sold “as is,” use the AAR As Is Addendum if at all possible. The AAR As Is Addendum will clearly define the terms of the sale and address all of the affected provisions in the AAR Residential Resale Real Estate Purchase Contract. The AAR As Is Addendum provides that the parties agree that the property is being sold in its existing condition and the seller makes no warranty to the buyer, except that the seller agrees to maintain and repair the premises so that at the earlier of possession or COE, the property will be in substantially the same condition as at the time of contract. If the seller declines to correct the defects disapproved, the buyer is entitled to conduct inspections during the inspection period, provide notice of items disapproved, and cancel the contract pursuant to Section 6j.
 Many lenders require the use of the lender-drafted “as is” addendum. If the lender requires the use of their own “as is” addendum, the brokers and the buyers should carefully review and understand its terms and conditions before entering into a purchase contract. 

REO Addenda

Many lenders require additional addenda to be included in any contract for an REO property. These addenda may contain many provisions that change the standard terms of the AAR Residential Resale Purchase Contract. For example, the addenda may contain terms that:

• alter the inspection period in the AAR Contract
• alter the seller warranties in the AAR Contract
• alter the financing provisions in the AAR Contract
• impose monetary penalties for the buyer’s failure to close escrow on the agreed upon date
• contain mold and other environmental disclaimers
• limit the seller’s liability

Again, it is imperative that the buyer and brokers involved in the transaction thoroughly review and understand all the provisions in the REO addenda before agreeing to the terms.

REO Disclosure Obligations

A seller, including a lender-seller, has a legal obligation to disclose all known defects to a buyer, even when selling a property “as is.” Of course, it is unlikely that a lender-seller is aware of all of the property’s defects. Therefore, most lender-sellers will not provide an AAR Seller’s Property Disclosure Statement (SPDS).
 If the lender indicates that a SPDS will not be provided, a buyer’s broker should nonetheless advise the buyer to request the SPDS in the offer. The seller can respond with a counter-offer that a SPDS will not be provided. However, before the buyer agrees to waive the SPDS, the buyer’s broker should provide the buyer with a blank copy of the SPDS form, which will enable the buyer to make an informed decision regarding whether to waive the SPDS. In these circumstances, a buyer’s broker would be wise to obtain the buyer’s written acknowledgment of receipt of the blank form. The buyer can and should utilize a blank SPDS as a checklist in conducting the desired inspections and investigations. The SPDS can prompt questions that will assist the buyer in evaluating the property.
 Federal lead-based paint law (42 USCS §4852d) and the subsequent rules and regulations require that before a buyer is obligated under any contract to purchase a home constructed prior to 1978, the seller must make certain lead-based paint disclosures to the buyer. “Foreclosure transactions” are exempt from the lead-based paint disclosure requirements. The law defines “foreclosure” as: “any of the various methods, statutory or otherwise, known in different jurisdictions, of enforcing payment of a debt, by the taking and selling of real property.” See, 24 CFR §35.86; 61 FR 9064 at Section IV(A).
 In other words, a trustee at a foreclosure sale who is enforcing the terms of a deed of trust is not considered a seller and is therefore not required to make the lead-based paint disclosures. However, when the lender becomes the owner at the trustee’s sale, the lender is required to comply with the lead-based paint disclosure law when they sell the REO. Thus, the lead-based paint disclosure exemption applies to the trustee’s sale, but not to the sale of the REO acquired through foreclosure.
 A seller of five or fewer parcels of land in an unincorporated area of a county, other than subdivided land, is required to furnish a written affidavit of disclosure to the buyer at least seven days before the transfer of the property. A.R.S. §33-422. The only exemptions to this requirement are: a trustee of a deed of trust who is selling property by a trustee’s sale, or any officer who is selling property by execution sale to enforce a judgment or to foreclose a mortgage.
 Therefore, again, when selling an REO after foreclosure in an unincorporated area of the county that is not in a subdivision, the lender-seller must provide the buyer with an Affidavit of Disclosure. The Affidavit must be recorded at close of escrow.

Subdivision Public Report Requirements

The Department of Real Estate has taken the position that when a lender forecloses on the sixth property (or forecloses on six or more properties) in a subdivision, the lender is a subdivider and must obtain a Public Report before offering the properties for sale. The Department adopted Substantive Policy Statement No. 2008.02 (SPS) in an effort to create expediency in these cases. This SPS is available at www.re.state.az.us/LAW_BOOK/Documents/SPS_Documents/SPS_2008.02_Subsequent_Owners_Public_Reports.pdf. Brokers working with REOs should consider alerting the lender of this requirement in writing.

Septic and Other On-site Wastewater Disposal System Requirements

Any on-site wastewater treatment facility (conventional septic tank or alternative system) must be inspected within six months prior to a transfer in ownership. Within 15 days after the date of ownership change, the buyer is responsible for submitting the Notice of Transfer form to the applicable governmental agency. The only exemption in the Rule is that the inspection is not required if the facility was not put into service before the property transfer. A.A.C. R18-9-A316(E).
 The Arizona Department of Environmental Quality (ADEQ) has indicated that when a lender forecloses a property with an on-site wastewater system, ADEQ does not consider this act a “property transfer” between a “buyer” and a “seller” and the inspection is not required. However, when the lender sells the REO property, the parties must comply with the Rule. Therefore, when the REO is listed for sale after the foreclosure, the lender is required to obtain a septic inspection and the buyer is required to file a Notice of Transfer form at close of escrow.

Additional REO Information

The AAR Legal Affairs podcasts have additional information on the issues related to REO transactions at www.aaronline.com/PodCast/Default.aspx. AAR also offers several webinars addressing this issue at www.aaronline.com/Webinars/Recorded.aspx. Other REO and fore- closure related information is available at www.aaronline.com/documents/Foreclose.aspx.

AAR General Counsel Michelle Lind is a State Bar of Arizona board certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.