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Legally Speaking: Walking away from property debt? Think again

Do you have vacant property and can no longer afford it? Wondering if “walking” on the property would be a better option?

According to the Arizona Supreme Court, there might not be a magic get-out-of-debt-free card. It recently issued a decision in BMO Harris Bank, N.A., v. Wildwood Creek Ranch, LLC et. al. that could affect many people who are in financial trouble and invested in property they can no longer keep. The case deals with Arizona’s anti-deficiency law.

Here is the typical scenario many Arizonans find themselves in: Back during the housing bubble, you purchased a vacant lot with either the intent to build a house or cabin on it, or maybe flip it for a profit. You initially were able to make the required payments on the loan but, due to the past several years of hardship, you find yourself struggling to make the payments and now realize it is not worth holding on to. You have heard that walking away from the property might be a good option since the lender cannot sue you. Sounds good right?

Not so fast.

Arizonans in financial hardship are fortunate compared to residents of other states because of A.R.S. 33-814. This law is affectionately referred to as “the anti-deficiency statute” and it helps give some relief. This statute bars deficiency judgments for most residential properties and states:

If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.

What does this mean?

To explain, let’s take the scenario above: You purchased the vacant lot with a loan of $200,000 but can no longer pay for it. The lender exercises its right to take it away from you and sell it in order to recoup the $200,000 it loaned you to buy it.

The lender either goes to court for permission to sell it or sells it at a trustee’s sale. After good faith efforts, the property only sells for $150,000. There is a difference (aka deficiency) of $50,000 and the lender wants to go after you for the money.

The lender just might be out of luck and you might be saved by Arizona’s 33-814 if certain conditions exist. Those conditions are:

• First, the home must be on 2.5 acres or less and,
• Second, it must be a single one-family or single two-family home.

If these two conditions exist, then you might be saved and not have to pay the difference.

Seems simple, right? The question then came up, “What if the property is vacant land?”

Is that covered under the statute? What if the property owner had every intention to build a home on it but just did not get around to it for whatever reason? That is where this case comes into play.

The Arizona Supreme Court decided that an owner of vacant land is not protected under the anti-deficiency statute.

“[T]he property in question here had never been used as a dwelling, and was in fact not yet susceptible of being used as a dwelling. There is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling…Vacant property is not being utilized for a dwelling even if the borrower intends someday to construct and occupy a home there.”

The bottom line is that you might still be responsible to pay for that vacant land, even if you walk on it. The best course of action is to go speak to an attorney for an hour and see what your realistic options are.