TGIF Legal Tips


Bankruptcy in a short sale comes in two forms – the seller is already in bankruptcy or files during the short sale process.

QUESTION: Why should a seller in or considering bankruptcy perform a short sale?

ANSWER:  To start their “waiting period” before a borrower can be eligible for certain loans.  The short sale waiting period is usually shorter than the foreclosure waiting period.

Generally bankruptcy serves to eliminate the obligation to pay a debt.  In the words of the greater bankruptcy lawyer Robert Charles.  It does not eliminate the debt, it just eliminates one party’s obligation to pay. In recent history persons seeking bankruptcy would more or less abandon over encumbered properties, allow it to go to foreclosure and wait some number of years before their re-entered the economy in attempting to purchase a home. Today, certain loan programs allow purchases after a short sale sooner than a foreclosure, even after a bankruptcy.

Look at FannieMae for example. FannieMae has a great role in conventional mortgages as America’s largest mortgage buyer. It sets guidelines to lessen the chance a borrower will go into foreclosure. FannieMae’s current guidelines have separate waiting periods depending on the type of foreclosure, in other words if it is a short sale or a classic foreclosure. Fanniemae underscores in their separate waiting periods, the “importance of borrowers working with their [lenders to avoid foreclosure.” Short sellers are rewarded with the shorter waiting period, currently a difference of 7 to 2 years depending on the circumstances. It is more complicated than simply stating 7 vs. 2 years.  This is just one example, but there is a difference and the short gets the longer end of the stick…you can read guidelines àhere.

Bankruptcy has its own restrictions, its own waiting period effects. However, even with bankruptcy (and its additional waiting periods) combined with a foreclosure, vs. a bankruptcy combined with a short sale; again the short sale can have drastically different waiting periods.  And if the debtor has “extenuating circumstances” waiting periods post bankruptcy combined with a short sale can be quite reasonable.

ALSO, by not performing a short sale a debtor is waiting for the lender to foreclose. The lender has no duty to hurry up the foreclosure.  Nor does the bankruptcy process really address this issue.  Bankruptcy removes liability, but does not necessarily aid in starting the beginning of the waiting period.

I have been brought in on numerous transactions in 2012 where a purchase fails due to the time period not being ripe yet for a new buyer.  Each time the buyer filed bankruptcy some years prior. And each time the buyer believed that eventually their home had been foreclosed upon.  In some instances the buyer was not even aware they were still on title to their former residence and in others the foreclosure had only been finalized some months prior, although the bankruptcy case was successfully completed years prior.  In these scenarios each time, the purchaser (formerly in bankruptcy) was unable to get around the requirements of the current lender and were instructed they would have to “wait” out the actual period.  A short sale during bankruptcy starts the waiting period more effectively.

 

Darren Welsh, General Counsel

Prudential Arizona Properties

480.505.6300

darren@dwelshlaw.com

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  Lease Options often seem like a good fix.  Seller wants to sell, but wants a higher price.  Buyer wants to buy, but needs time…

  Sellers in Lease Option scenarios  should consult with an attorney.  A seller in a Lease Option runs a risk of not being able to evict the Buyer under Arizona’s evictions laws.

  Normally to evict in Arizona a landlord  can use the “special detainer action” under the Arizona residential property owners’ rights and obligations with respect to tenants are governed by the “Arizona Residential Landlord and Tenant Act” found in A.R.S. § 33, beginning at A.R.S. § 33-1301.  The ARLT uses the same process as the “forcible detainer” laws found in A.R.S. § 12, beginning at § 12-1171.  Generally, the purpose of a forcible detainer or special detainer action is to provide a speedy, summary remedy for a landlord to obtain possession of property being wrongly withheld by a tenant. United Effort Plan Trust v. Holm, 209 Ariz. 347, 351, ¶ 21, 101 P.3d 641, 645 (App.2004)

Typical Residential Eviction In Arizona When Tenant Does Not Pay Rent.

Whether a Landlord hires an attorney is a personal choice.  An eviction can be done without an attorney.  The Tenant must be served with a Five Day Notice demanding the rent, late fees etc.  If the Tenant does not cure the outstanding balance, or other breach, the Landlord may then proceed to the actual eviction process.  The Arizona Supreme Court provides the following sample justice court eviction forms: Summons; Complaint; Affidavit / Certificate of Service. The Maricopa County Justice Court has a good website with additional forms.  But beware; the special detainer action is limited in scope. The only issue that the court will decide is “possession” of the unit.

Why Lease Option Evictions Fail

Assuming the documents described above are filed and there is a trial as to the special detainer.  If a tenant argues that he/she is an equitable owner of the Property, in other words a part owner, not merely a tenant and this is proven to the Court, the special detainer fails.  You cannot merely evict a title holder.  The Court in a special detainer cannot hear matters of title, only possession.  Examples that may cause the court to classify the lease as a sale and not just a pure lease with an option to purchase:

  • Who is responsible for maintaining property? Is the Landlord passing responsibility for maintaining the property? (A.R.S. § 33-1324a)
  • How much is the rental deposit?  Collection of more than 1.5 times is a violation of Arizona law, and can look like a down payment. (A.R.S. § 33-1321a)
  • Did the Seller collect an option deposit or are they granting rental credits?  Again, it can look like a down payment.
  • Is the price known?  This can look like a long escrow, simply a sale disguised as a lease.

What If the Eviction Fails Due to a Tenant Showing Ownership Via a Lease Option?

If the eviction is deemed a question of title, it is dismissed.  The only way the Landlord can get possession is via a Judicial Foreclosure. This is a formal lawsuit.  It is more cumbersome than a non-judicial foreclosure.  A non-judicial foreclosure is what consumers are used to, a “Trust Deed” and a “note”.  The note outlines the terms of the loan and the trust deed is a lien placed against the property and is the instrument that is used to force the defaulting party out the property and to sell it.  A judicial foreclosure does not have the statutory time periods easily marked out.   In the case of a Judicial Foreclosure, there is no trust deed, and because there were no legally recognized terms spelled out in the agreement in case of default, a judge has to decide the issue.  This can be expensive and take many months.

Darren Welsh, General Counsel

Prudential Arizona Properties

480.505.6300

darren@dwelshlaw.com

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