“Walking Away” From Construction Disaster

Question: In 2016 we bought a lot for $40,000 in Camp Verde to build a summer home. Last summer we got a construction loan for $280,000. This $280,000 construction loan was secured by the lot and by the home to be constructed on the lot. During construction of the home, however, heavy rains caused the foundation to sink and the partially built home to collapse. Almost all of the $280,000 loan had been used for the construction of the home. Our contractor has no insurance and our insurance company has denied coverage because we didn’t go to Camp Verde to supervise the construction. Bottom line: We want to “walk away” from this disaster, even though we know we will lose the $40,000 lot to foreclosure. Do we have liability for the $280,000 loan even if we “walk away?”

Answer: Probably not. The Arizona Court of Appeals recently confirmed that the Arizona anti-deficiency law that protects homeowners from owing any money to the mortgage lender after foreclosure of a home mortgage, also applies to construction loans to build a home secured by the lot. In other words, if you don’t make payments on the $280,000 construction loan and there is a foreclosure of the lot with the collapsed home, you have no liability for the deficiency between the $280,000 construction loan and the foreclosure sale price.

Note: This foreclosure sale price would probably be even less than the $40,000 purchase price of the lot due to the demolition costs to remove the collapsed home.