“How does the foreclosure process work in Arizona?”

“If I stop making house payments, how long until the lender forecloses on my home?”

“I’m thinking about buying foreclosures at auction. What is that process?”

Those questions “and some horribly misguided / flat-out wrong answers” come up often in both on and off-line conversations.

Before we dive into the foreclosure process in Arizona, allow me to make one thing perfectly clear:

I am not an attorney, nor do I play one on television or the interwebs. If you are facing foreclosure you would be well advised to seek the counsel of an attorney, as well as a tax professional. Also, foreclosure laws, processes and timelines vary by state. What follows here applies to ARIZONA. It may or may not be accurate for your state.

Here’s the scoop (basically) on how foreclosures work in Arizona. . .

Without getting too esoteric, it’s important to know that Arizona operates as what is called a title theory state ”“ property title remains in trust until your loan is paid off. Legal title is held by your lender, and the borrower/home owner has equitable title (the right to possession and use of the property in the absence of default). In a lien theory state title is held by the borrower and the lender places a lien against the property to secure the debt.

Why is this important? Because how title is held determines the foreclosure process (that, and state law).

In a title theory state, the foreclosure process is governed by the Power of Sale clause in your load documents. The Power of Sale clause gives the lender the right to sell the property if you default (don’t make the payments). This is also known as a “non-judicial foreclosure”, which means the entire foreclosure process can happen with no court involvement or authority. The vast majority of foreclosures in Arizona are non-judicial in nature. As you may have guessed, a lien theory state requires a judicial foreclosure ”“ the courts have to get involved. This of course makes the process slower and more expensive.

So let’s take a look at the steps involved in a non-judicial foreclosure:

1) The home owner goes into default. Technically speaking, a lender could begin the foreclosure process on Day 1 that your mortgage payment is considered late. In reality, that doesn’t happen. Typically it takes several months of missed payments before the lender initiates foreclosure. Why? Basically because they want your money, not your house. So while the harassing phone calls may start early, it’s highly unlikely that a lender will start the foreclosure process on the first missed payment. I know people that have missed payments for a full year before the process gets spooled up. The time can vary wildly by lender, and even the same lender treats borrowers differently.

2) The Notice of Trustee Sale is filed. At some point, the lender will decide to initiate the foreclosure process and they (more accurately, the Trustee) will record a Notice of Trustee Sale (NOS). Some lenders may issue a Notice of Default (or demand) (NOD) prior to a Notice of Trustee Sale as a sort of “final warning” that your home is about to enter the foreclosure process, but NOD’s are not required under state law.

There are several rules that stipulate how the NOS is handled. It must be recorded at the county recorder’s office. It must be advertised once a week for four consecutive weeks in a local newspaper (the last “advertisement” must be published not less than 10 days prior to the date of the sale). The notice must be posted, either at a conspicuous place on the property, at the courthouse, or the trustee’s place of business. Finally, within five days of the recording of the Notice of Trustee Sale, a copy must be mailed via certified mail to the property address (the mailing or the posting on the property is often when tenants find out the home they are renting is going into foreclosure).

The Notice of Trustee Sale will specify where and when the property is to be sold “at auction”. Sometimes the sale takes place “on the courthouse steps”, and sometimes it is at the trustee’s office. By law, the sale must take place at least 90 days after the notice is recorded. (Of note, trustee sales are often postponed, but they can not occur less than 90 days after the NOS is recorded.

Redemption Period. Poke around on the internet and you will see mention of “redemption periods” – a time period where a home owner can catch up on their loan and get their home back. In some states this can happen even after the home is sold at foreclosure. (Alabama has a 12 month redemption period.) In a non-judicial foreclosure (again, this is the vast majority of foreclosures in Arizona) there is no redemption period. A home owner can make their loan current at any time prior to the actual sale and stop the process. But once the gavel drops at the trustee sale, the deal is done and the home owner has no further opportunity to retain their home.

3) The Trustee Sale. At the stated time and location, the home goes up for bid. Often no bids are made, or the minimum bid is not made and the home will revert to the lender. At that point it becomes an “REO property” (Real Estate Owned) aka a “bank owned home” or (technically erroneously) a “foreclosure”. The bank will at some point put the home up for sale on the open market. It can take anywhere from a few days to several months before a bank will place a property on the market.

If a bid above the minimum is made, then the high bidder is required to provide a non-refundable $10,000 cashiers check on the day of the sale and pay the balance by 5:00pm of the next business day. In other words, if you want to bid on “foreclosures” you need a large wallet. Homes are also sold “as is” meaning just what it sounds like ”“ what you see is what you get — and it is often difficult to inspect the interiors of homes before trustee sales.

Buying foreclosures at auction is not for the faint of heart. You need to know what you are doing. You will not get homes at auction for pennies on the dollar. Banks may be evil, but they aren’t stupid.

4) Trustee’s Deed. Within seven business days of receipt of payment, a Trustee’s Deed will be issued to the purchaser. The property is not “in limbo” during this time period. The high bidder owns the property once the bid is paid in full. Of note, the home owner is also responsible for the property during the 90 day trustee sale notice period. If you trash out your home, or take the appliances, cabinets, flooring, etc. prior to the trustee sale, you are breaking the law and can be held responsible for damages.

Whew, that’s a lot of words. It’s not a terribly complicated process, but it is often misunderstood by home owners and real estate agents alike. Compounding the confusion is that foreclosure laws and procedures vary from state to sate.

The graphic below represents the basic flow or timeline of a non-judicial foreclosure / trustee’s sale in Arizona. It may be easier to swallow / comprehend that all the above verbiage. You can also download the full-size graphic here (PDF).

Click image for larger view:

Download the full-size graphic here (PDF).

UPDATE: Be sure to scroll down and check out comment #14 from Ricard Keyt, a local real estate attorney. He provides some great insight into the foreclosure process in Arizona and a super link to an article that helps answer the question, “can my lender sue me for a deficiency after I lose my home in a foreclosure?”

Actual Arizona state foreclosure statues:

Arizona Revised Statute Title 33 ”“ Property contains most of the laws regarding foreclosures in Arizona (and a whole bunch of other real estate laws as well).

Non-judicial foreclosure statutes (most common in AZ):
33-807 Sale of trust property; power of trustee; foreclosure of trust deed

33-807.01 Notice of trustee’s sale conditions; exceptions

33-808 Notice of trustee’s sale

33-809 Request for copies of notice of sale; mailing by trustee; disclosure of information regarding trustee sale

33-810 Sale by public auction; postponement of sale

33-811 Payment of bid; trustee’s deed

33-812 Disposition of proceeds of sale

33-813 Default in performance of contract secured; reinstatement; cancellation of recorded notice of sale

Judicial foreclosure statutes (far less common, but possible, in AZ in some cases):
33-721 Foreclosure of mortgage by court action

33-722 Election between action on debt or to foreclose

33-723 Right of junior lien holder upon foreclosure action by senior lien holder

33-724 State as party to foreclosure actions

33-725 Judgment of foreclosure; contents; sale of property; resale

33-726 Redemption of property by payment to officer directed under foreclosure judgment to sell the property

33-727 Sale under execution; deficiency; order of liens; writ of possession

33-728 Recording upon record that mortgage is foreclosed and judgment satisfied; effect

33-729 Purchase money mortgage; limitation on liability

33-730 Limitation on deficiency judgment on mortgage or deed of trust as collateral for consumer goods

 

I am not an attorney, nor do I play one on television or the interwebs. If you are facing foreclosure you would be well advised to seek the counsel of an attorney, as well as a tax professional. Also, foreclosure laws, processes and timelines vary by state. What follows here applies to ARIZONA. It may or may not be accurate for your state.