Question: Four years ago, we bought a lot in north Scottsdale to build our dream home. We got a construction loan and began the construction of the home. Due to marital problems, however, we never completed the home, and we tried without success to sell the home partially completed. Our construction lender has now foreclosed on the partially completed home and has filed a lawsuit against us for the $220,000 deficiency after the foreclosure sale. We went to a real estate attorney who said that, because the home was only partially completed, the anti-deficiency statutes do not protect us from personal liability for this $220,000 deficiency. Is the attorney right? Are we personally liable for this $220,000 deficiency, or do we have the protection of the anti-deficiency statutes even though our home was only partially completed?
Answer: The anti-deficiency statutes generally protect homeowners from any deficiency claim after foreclosure if the home is located on 21/2 acres or less and is being “utilized as a dwelling.” There has always been controversy as to what “utilized as a dwelling” means. For example, if you spend one night in the home, is the home being “utilized as a dwelling?” The Arizona appellate courts in general have broadly interpreted the anti-deficiency statutes to protect owners of homes; Arizona is one of only a few states that prohibits a deficiency against an investor after foreclosure of an investor-owned home. In another broad interpretation of the anti-deficiency statutes, the Arizona Court of Appeals recently ruled in favor of a homeowner with a partially completed home such as yours. The appeals court reasoned that the homeowner intended to live in the home upon completion. In other words, the partially completed home was being “utilized as a dwelling.” Therefore, the construction lender could not sue the homeowner for a deficiency after foreclosure. The construction lender has appealed this decision to the Arizona Supreme Court, so your attorney should keep you informed of any adverse decision that would make you liable for the $220,000 deficiency.