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With AZ being a "non-recourse" state, can lender still seek deficiency on foreclosure of investment property ?

Phoenix, AZ |

I am considering a strategic default on an investment property in Arizona that is extremely upside-down. I am a bit confused by reading that AZ is a "Non-recourse" state, but that they can do either judicial or non-judicial foreclosures. Does that mean that there is a risk of the lender seeking the deficiency?

Attorney Answers 5

  1. Best answer

    When considering walking away from real estate that you own that is upside-down, BE CAREFUL. There are several issues that should be considered. The most common problem with liability existing after a trustee's sale (foreclosure) is that many people have taken out second mortgages or HELOCs (home equity line of credit). If you have a second mortgage or HELOC, or other type of second lien, and the money you received was not used to purchase that specific property, the Arizona anti-deficiency statute will not protect you.

    Also, many Arizona properties are governed by HOAs (home owners associations). Most HOAs in Arizona have the power to do two things when they don't receive payment: 1) place a lien on the property, 2) sue the homeowner personally to obtain a judgment for the amount owed plus attorney's fees and costs. If you have an HOA on this property, you will likely be liable for all HOA assessments and charges for as long as the title to the property is in your name. HOAs are getting much more agressive these days and I have seen lawsuits filed for debts as small as $1,200. Sometimes the bank takes a while before the foreclosure sale actually happens, and you will owe the assessments and fees for that time even after the foreclosure sale.

    One more point. As long as title to the property is in your name, you are responsible for it. That means that if the property goes vacant and there is an injury on the property, you may be liable. If there is a pool that breeds mosquitoes, you may be liable. If you don't maintain insurance on the property and it gets damaged, you may be liable. Etc. Things like this don't happen often, but if they do, it can cause a big hardship.

    If the property is a one or two dwelling residential property that is less than 2 1/2 acres, any loans incurred for which the proceeds were used only to purchase the property will not be collectable against you after the trustee's sale. It does not matter if the home was a rental or your primary residence. I recommend having an initial consultation with a knowledgeable attorney for a review of your situation. It is usually worth paying a little now to save some major headaches down the road.

    IF YOU FOUND THIS ANSWER HELPFUL, PLEASE CLICK TO MARK IT AS A GOOD ANSWER. The information provided above does not constitute legal advice and should not be relied on for anything other than informational purposes. This communication does not create a lawyer-client relationship.

  2. In many cases you will be protected from a deficiency in Arizona on your property. There are specific rules that you must pay attention to and it can be a little tricky. Non-judicial foreclosure is uncommon. I offer 30 minute consultations to review you loan and property situation and answer that question definitavely. If you do not meet the specific requirements of state law, or do it incorrectly, you could find yourself facing liability.

  3. It depends on your loan and property type. If its a single (or two) family dwelling on less than two and a half acres and all the money you borrowed against it was to purchase the property, then the lender has to do a trustee sale and there is no deficiency liability. If it is more than two family dwelling, on over two and a half acres, or you did a cash out refinance, the lender could judicially foreclose by suing you and demanding a judgement for the deficiency remaining. I haven't heard of a bank doing a judicial foreclosure on a cash out refinance for a single family property on less than two and a half acres. They simply do a trustee sale in which case even if you did a cash out refinance, they can no longer pursue you for a deficiency since they have to choose their remedy (judicial foreclosure or trustee sale) and if they take the property to trustee sale they no longer have any further remedies available. I hope this helps.

  4. Strategic default on an investment property actually presents several options to you. While the law is very favorable to you, as my fellow attorneys have already stated. But, how you strategically default, i.e., how and when, and things you can do to expedite your disposing of this investment, should also be explored.

    Accessing this website or receiving an electronic transmission from Nagle Law Group, P.C., or any specific attorney at Nagle Law Group, P.C., does not create an attorney-client relationship or any other duty on the part of Nagle Law Group, P.C. An attorney-client relationship is only created upon an express agreement with an attorney at Nagle Law Group, P.C.

  5. Investment properties can be crammed down via a ch 11 or 13 reorganization. So, if you're interested in trying to keep the property and only paying fair market value, that's an option we can explore. If you have other properties in a similar state, we can help with those, too.

    Mr. Greeves is licensed to practice law throughout the state of Arizona. His office is in Tempe. He is authorized to handle IRS matters throughout the United States. His phone number is 480-345-8100 or his email address is His website is Please note that this answer does not constitute legal advice, and should not be relied upon. Each state has different laws, every situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.

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