Residential Real Estate Q & A
The following are questions that have been submitted by Realtors, Brokers, clients and readers of our published articles, to which we have responded and are sharing with you! We know you will find this information helpful, informative and interesting. If you have a specific Residential real estate question that you would like ask, please don’t hesitate to contact us at: questions@naglelaw.com.
Please remember that due to the large volume of correspondence we receive, we can’t answer every message, nor can we provide personal legal advice.
Q: Is it necessary to understand the basics of personal bankruptcy when negotiating a short sale or considering a strategic default?
A: Bankruptcy is a potentially powerful tool for homeowners in financial difficulty, so yes, it is invaluable to at least know the basics of personal bankruptcy. Of course, as each homeowner’s particular situation may be unique and as the bankruptcy laws are complex, it is strongly recommended that an experienced bankruptcy and real estate attorney be consulted to provide comprehensive guidance and advice.
Q: Can you give an example where knowledge of the basics of bankruptcy could help when negotiating a short sale?
A: Yes. It is extremely important in those situations where a homeowner has a second mortgage such as a home equity loan. Because of Arizona’s anti-deficiency laws, there is the possibility that upon the foreclosure of a first mortgage, the homeowner will not be personally responsible for any deficiency left on the first mortgage. However, even though the lien of the second mortgage will be extinguished due to the foreclosure of the first mortgage, the homeowner will still remain personally responsible for the amount owed on the second mortgage. Homeowners will discover that when negotiating a short sale, it may be difficult to obtain the consent of the second mortgage holder because the first mortgage holder will demand most of the short sale proceeds, leaving the second mortgage holder with little. The second mortgage holder, however, may be persuaded to take a relatively small amount from a short sale, rather than getting nothing if the homeowner were to file for Chapter 7 bankruptcy and extinguish the second mortgage debt.
Q: You mentioned Chapter 7 bankruptcy. What is Chapter 7 bankruptcy?
A: Briefly, a Chapter 7 bankruptcy is where all of a person’s non-secured debts (credit cards, medical bills, etc.) are completely extinguished, but all of their non-exempt assets (bank accounts, etc.) are used to satisfy these debts. In order to qualify for a Chapter 7 bankruptcy, however, a person must “qualify”, which in Arizona means that a person’s income must not exceed a certain level depending on family size. For example, as of the date of this article, the income for a family of 4 cannot exceed $69,205. If the income exceeds $69,205, then unless a person qualifies under a more complex “means test analysis” involving disposable income, then a debtor would have to file for a Chapter 13 bankruptcy.
Q: What is Ch. 13 bankruptcy?
A: A Chapter 13 bankruptcy is used by people with regular income who have either too many non-exempt assets which would be lost in a Chapter 7 bankruptcy or whose income exceeds the Chapter 7 limits. Under Chapter 13, the debtor’s disposable income is used to pay his debts over a 3 to 5 year period and at the end of such period, the remaining balance of the unpaid debts are extinguished. The current bankruptcy laws are complex, so it is imperative that homeowners discuss their personal situation with an experienced bankruptcy attorney.
Q: As a realtor or broker, are you pre-qualifying your clients for deficiency risks?
A: In today’s turbulent residential real estate market, it is imperative to pre-qualify your clients for risk! Just as traditionally realtors have their clients pre-approved for a mortgage, so today, in our more challenging market, it is vital to pre-qualify your clients with respect to the strategy you use to help your clients purchase or sell a home.
It is vitally important to have all the facts at hand at the start of working with a client so that you can give your client the most current and succinct information regarding their personal situation. Even though the market is flooded with short sales, REO, and foreclosure properties, there are a number of factors that makes every situation somewhat unique. It is difficult and time consuming for realtors to work both efficiently and effectively in the current market while keeping up with the barrage of new and different information on a daily basis.
The most valuable way to pre-qualify your clients for loan deficiency risk is by recommending that the clients enlist the help of an experienced residential real estate attorney as soon as they call you to purchase a home. With 48% of homeowners being underwater with respect to their mortgage and over 60% of the housing inventory being sold via short sale or bank owned, both “seller” and “buyer” should have an attorney’s counsel when entering into a real estate transaction these days. If both the client and the realtor fully understand the financial and legal risks, liabilities and the specific situation that the client is currently facing, the realtor will be better equipped to help their client. This would drastically mitigate wasted time, money and effort as well as eliminate the frustration of finding out specific pertinent information and the consequences of that information a few months down the road, after dedicating hours and hours to a specific path.
For both the realtor and the attorney, the client always comes first – your client will be much more comfortable knowing the legal ramifications upfront and understanding what options are available.
Equipped with this knowledge and insight, the realtor and client can go forth with peace of mind and a extensive understanding of their options, the risk associated with each option and the best course of action for their specific circumstances.
By recommending that your clients get pre-qualified in terms of which strategy to implement today, you will not only be meeting your fiduciary responsibility to your clients as per the realtor code of ethics, but you will be exceeding your clients expectations, whilst minimizing your risk and maximizing your value! You can then better focus on the transaction knowing that your clients have the best available information and advice at their fingertips at the beginning of the transaction.
Q: Strategic Default – A Moral Dilemma or a Contract Right?
A: Despite the fact that walking away from a mortgage may be in the best economic interest of homeowners, many refuse to do so because of a sense of moral obligation to honor their commitment to pay the mortgage.
This perceived “moral obligation” seems to be limited to the residential real estate world. Owners of commercial properties generally feel no such obligation and will walk away from their mortgage if it makes economic sense. The reason commercial property owners do not feel this moral duty is because they are exercising a right given to them in their mortgage loan. This is because many, if not most, commercial mortgage loans are “non-recourse”. This means that if the owner does not make the required mortgage payments, the lender can foreclose on the property, but cannot sue the owner for any deficiency between the value of the property and the amount owed on the mortgage.
Unlike commercial mortgages, residential mortgage loans are not explicitly written as non-recourse. Because of Arizona’s anti-deficiency laws, however, most mortgages of one or two family dwellings will, in fact, be non-recourse so that the lender cannot sue the homeowner for any deficiency. These laws, therefore, are an implicit part of the mortgage contract and all lenders in Arizona are aware of these laws when they make any residential mortgage loan. It is usually the homeowner who is not aware of the anti-deficiency laws. Walking away from a mortgage, therefore, can be simply viewed as exercising a right given to the homeowner in his mortgage contract. Is it morally wrong to exercise a right given to you by your contract? The mortgage lender knew when it wrote the mortgage that there was a possibility that foreclosure would be its only remedy in the event the homeowner elected to walk away. So why should the homeowner feel any sense of shame or remorse when this outcome is simply what the homeowner and mortgage lender bargained for?
Additionally, the anti-deficiency laws serve a broader public purpose than simply protecting the assets of the homeowner. If lenders come to realize that they will have no recourse (other than foreclosure) against borrowers who elect to walk away from their homes, perhaps in the future they will take a more careful and disciplined approach to lending and thereby we will all avoid some of the worst consequences of ill-advised mortgage loans.
Walking away from a mortgage is not an easy decision to make and it is strongly advised that the homeowner seek the advice of an experienced real estate and bankruptcy attorney and tax accountant before making such a decision, as it is imperative to understand all available options, the risks and liabilities associated with each option and the impact any decision will have.