With half of the homes in Arizona upside down in value, a common question from clients is whether they ought to walk away from their homes or consider a short sale. My answer always begins with the classic lawyers’ response: “it depends.” That response is not simply a lawyer’s stalling technique, but a reflection of the practical realities of the down real estate market.
The decision to pursue a foreclosure or a short sale—or both—can be surprisingly complex. When I meet with a client, we have a detailed discussion about the outstanding obligations with the home, such as first and second mortgages, home equity lines of credit (“HELOC”), homeowners’ associations dues, and taxes. We contrast those obligations with the current fair market value of the home. We also analyze whether the homeowner may have any protections under Arizona’s anti-deficiency statutes. With those variables defined, we can have a frank discussion regarding the client’s potential obligations in the event of a foreclosure.
But the discussion really only begins there. In addition to the mortgage issues at stake, there can be tax consequences and credit implications that the client will need to consider.
Oftentimes the ultimate decision has more to do with a combination of personal factors. Can the client afford to pay the mortgage obligations? What is the client’s overall financial picture? Is bankruptcy being considered? Does the home still fit the family’s needs? Is there a divorce on the horizon? Is this a good opportunity to move away from a troublesome neighbor? These personal variables are unique to each client. However, once we have identified the client’s concerns and objectives, their course of action usually becomes clear.
In August 2011, 31 percent of existing home transactions in Maricopa County were sales of foreclosed homes. This is down considerably from August of 2010, when foreclosed homes made up 45 percent of all resales. – From the Arizona Republic article “Sales of foreclosed homes down from 2010” published September 21, 2011. Figures from Jay Butler, professor emeritus of the W.P. Carey School of Business at Arizona State University.