2010 June Archive - Combs Law Group

Arizona Homestead Exemption Does Not Protect Against Mechanics Lien

Question: We decided to stay in the home in Chandler after trying to sell it for more than a year. We hired contractor to do some remodeling work in the kitchen but it was very poor quality work andas a result, we only paid the contractor $4,000 of the $10,000 bill. The contractor has now recorded a $6,000 mechanic’s lien against our home. We have approximately $80,000 equity in our home, and our understanding is that the homestead exemption protects up to $150,000 equity in our home from any judgments of creditors. If we do not pay the contractor the remaining $6,000 owed for the remodeling work and we are sued by the contractor, will the $150,000 homestead exemption protect the $80,000 in equity that we have in our home?

Answer: No. The “bad” news for you is that under Arizona real estate law the $150,000 homestead exemption does not protect you against mechanic’s liens. The “good” news for you is that, if the mechanic’s lien against the home is not foreclosed upon by the contractor within six months from the date of the recording of the mechanic’s lien, the mechanic’s lien will be extinguished. The foreclosure of a mechanic’s lien requires a foreclosure lawsuit, and many contractors do not want to spend the time and expense incurred in foreclosing their mechanic’s lien. The contractor, however, would still have the right in the next six years to sue you in Justice Court for the $6,000 owed.

Note: Arizona’s $150,000 homestead exemption protects up to $150,000 in equity in a home from judgments for credit card bills, medical bills, or similar debts. If a homeowner consents to a secured interest in the home, e.g., a mortgage loan, the $150,000 homestead exemption unfortunately does not protect a homeowner against the foreclosure of the home. Although most states have some type of homestead exemption, the protection of these homestead exemptions varies significantly from state to state. For example, Florida has an unlimited homestead exemption. This unlimited homestead exemption in Florida protects homeowners from all judgment creditors no matter how large the amount of the judgment, and is the reason that O.J. Simpson and former baseball commissioner Bowie Kuhn moved to Florida and purchased expensive homes.

With Chapter 13 Bankruptcy a Second Mortgage Can Be Removed

With a slumping economy and home foreclosures at record highs, homeowners are concerned about losing their homes and searching for options to keep from losing their home. Many are faced with the reality that their home has depreciated to the point that it is worth substantially less –in some cases half what they owe. Some can’t afford their mortgage, and others, faced with the difficulty of continuing to pay on a home that is upside down, decide to walk away from the house.

A chapter 13 bankruptcy can keep you in your home, and, if you are paying on a second mortgage, can significantly reduce the amount you actually pay for your home. The Ninth Circuit Court of Appeals has held that the bankruptcy code allows, in situations where the value of the home is less than the amount owed on the first mortgage, the second mortgage can be “stripped” off, leaving only the first mortgage to pay. For example, if your first mortgage is $200,000, and you also have a second mortgage of $50,000, but your home is worth only $185,000, in a chapter 13 bankruptcy the $50,000 second mortgage can be stripped off, leaving only the first mortgage on the property.

In a chapter 13 bankruptcy you can also stay in your home and be given significant time (3-5 years) to get caught up on any payments you may be in arrears. In short, a chapter 13 bankruptcy can be a valuable tool in navigating these troubled financial times, especially in the area of residential real property and second mortgages. The Combs Law Group offers a free 30 minute consultation for bankruptcies.

Foreclosure Sale May Not End Commercial Lease

Question: You stated in a recent column that a commercial property lease is terminated after the foreclosure by the lender. Our small real estate brokerage firm has two years remaining on our lease in a large Tempe office building. Due to the real estate slowdown, we would like to move into smaller space. After the commercial property’s foreclosure sale by the lender last week, we believed that our lease had terminated. The lender’s property manager disagrees, and says that we are now required to make our lease payments to the lender as the new owner of the office building. Our attorney has reviewed our commercial lease terms, and even he says that the language in our lease requires us to make the lease payments for the next two years to the lender as the new owner of the office building. How can the lender as the new owner of the office building enforce language in a lease after the foreclosure sale terminated the lease? What is going on?

Answer: The general rule is that an office lease, residential lease, or any other lease, similar to other junior liens, is terminated at the time of the foreclosure sale by the lender. In many commercial projects, however, a lender will require language in the lease, or in a separate agreement, that the lease will be enforceable after the foreclosure sale, and that the tenant will then make the lease payments to the lender or other purchaser at the foreclosure sale. Similarly, a major tenant like Albertson’s or Home Depot that has a favorable lease because of their anchor tenant’s status will want similar language in the lease or in a separate agreement. These types of commercial lease provisions are generally enforced by the courts on the theory that the lender or other purchaser at the foreclosure sale is a third-party beneficiary of the language in the commercial lease.

Note: since the May, 2009, federal law, residential tenants after a foreclosure sale are generally entitled to stay in the home through the end of the lease term, provided that the lease payments are made to the new owner. The residential tenant, however, is not required to stay in the home, and can move out after the foreclosure sale.

Enacting Power of Attorney for Selling an Arizona Home

Question: My husband is a pilot at Luke Air Force Base who is being transferred to the Far East for at least a year. We have our home listed for sale, and I am concerned that we will get a good offer to purchase our home but my husband may be difficult to contact. A friend has suggested that before he leaves for the Far East my husband contacts an Arizona real estate lawyer and executes a power of attorney to me so that I have the authority to sign the deed to sell the home. What type of language is necessary in a power of attorney to give me the authority from my husband to sign the deed to sell the home?

Answer: Inasmuch as a title company will only record the deed to the buyer if the title company approves of the form of the power of attorney from your husband, you should have your listing broker contact a title company for their approved form of a power of attorney. For example, a title company may require language in the power of attorney that the power of attorney can only be terminated by a recorded notice of termination by your husband. In any event, if your husband signs the power of attorney of the title company, there should be no problem in recording the deed to the buyer at closing.

Note: The power of attorney from your husband may be more important in accepting offers on homes as prospective buyers usually want quick responses to purchase offers. The power of attorney to sign closing documents like the deed, however, is not as important because closing documents can be sent to your husband by over-night delivery a few days before closing.

Short Sale Units Worth a Try, Deed In Lieu of Foreclosure Isn’t Likely

Question: We own three four-plexes in East Phoenix secured by one loan. When we purchased these three four-plexes seven years ago, we knew that the neighborhood was not a good one, but we believed that the neighborhood would improve. To the contrary, the neighborhood has continued to deteriorate. The loan balance now greatly exceeds the value of the three four-plexes, and we can no longer make the loan payments. Our lender has refused to accept deeds in lieu of foreclosure from us. The lender wants us to do a “short sale” of the three four-plexes, but we would still have to pay the amount of the remaining loan balance. If the lender continues to refuse to accept deeds in lieu of foreclosure, can the lender foreclose on the three four-plexes and demand payment of any deficiency?

Answer: Yes. First, a lender is never under an obligation to accept a deed in lieu of foreclosure from the borrower. In fact, lenders rarely accept deeds in lieu of foreclosure. Second, if you do not make the loan payments, the Arizona real estate law of anti-deficiency statute will not protect you from a deficiency judgment after the foreclosure sale because Arizona’s anti-deficiency statute only applies to loans secured by a single-family home or duplex, not a four-plex. Therefore, you should try to do a short sale, and negotiate with the bank for an amount that you would still owe the bank. If your financial situation is poor, the bank may agree to settle for significantly less than the amount of the remaining loan balance. If you do not agree with the bank and close a short sale, the bank will eventually conduct the foreclosure sale and file a lawsuit against you for the amount of the deficiency. The bank must file any deficiency lawsuit within ninety days after the foreclosure sale.

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