Question:   The loan on our small office building in Gilbert is $850,000. The bank has approved a short sale of $700,000 to a buyer from California. As a condition of approval, however, the bank is requiring us to sign a promissory note to pay the $150,000 short sale deficiency in monthly payments over three years. The bank says that, if we don’t agree to make these payments, the bank will simply do a short sale foreclosure and sue us for the $150,000 deficiency. The bank knows that we are collectable because they have our loan application which lists our personal assets. We consulted with an attorney who said that the anti-deficiency statutes don’t protect owners of office buildings. Should we let them do the short sale or just let the office building go into foreclosure?

Answer:    First, the lawyer that you consulted is correct. The anti-deficiency statutes do not protect owners of office buildings after foreclosure; and only protect homeowners that own a home located on 2 ½ acres or less that is utilized as a dwelling. Second, I would recommend that you close the short sale transaction because that will “stop the bleeding.” If there is no short sale, the bank is under no obligation to immediately institute foreclosure proceedings, and many banks are postponing foreclosure sales indefinitely because they don’t want to have to pay the property taxes, association dues, repair/maintenance, etc. In other words, if the foreclosure is not held for another year, the value of your office building could decrease to $600,000 with a deficiency of $250,000. Third, after the short sale transaction closes, if you have available funds you may be able to negotiate a one-time cash payment for less than the $150,000 promissory note.