A good investor knows not only the possible benefits he can receive in a given transaction, but also the potential liability he faces. Despite the simplicity of this, many clients and investors I speak to are unaware of the potential liability they face when purchasing properties at trustee sales. Of course, with any investment, you can limit the liability, but first you must be aware of what the liability is.
In terms of liability at trustee sales, many investors believe that their only potential loss is the $10,000 deposit required by A.R.S. § 33-810(A). The truth, and actual liability, is much different. Liability arises when the investor successfully bids on a home, pays the $10,000 deposit and then decides not to complete the purchase. This can happen for a number of reasons: the investor may go to the property after the sale and find it to be vandalized or the investor may simply be unable to get the funds to complete the transaction. In either case, if he was the highest bidder at the sale, he could face significant liability.
A.R.S. § 33-811(A) provides that “in addition to the forfeit of deposit, a highest bidder who fails to pay the amount bid by that bidder is liable to any person who suffers loss or expense as a result, including attorneys’ fees.” This is very broad language. Fortunately, liability is restricted to only the “highest bidder” and therefore, any subsequent bidders that do not perform are not held liable.
Liability most commonly occurs in one of two ways after the bidder fails to perform: (1) the bank will sell to the second bidder at a lower price or (2) no one buys the home and the bank then has to reschedule and conduct a second sale. In the first case, the highest bidder is likely just liable for the difference in bid prices. However, in the other circumstance, it is possible that the property will sell for significantly less money at the second trustee sale. In such a case, the highest bidder who did not perform would be liable for the difference. Therefore, if the bidder offered $500,000 on a property, but did not perform, and the home eventually sold for $400,000, the bidder would be liable to the bank for a minimum of $100,000 plus attorneys fees. The lender may also be able to recover any expenses it incurred relating to conducting a second sale. In the present economic climate where banks are trying to recover losses, it is very realistic to expect that banks will prosecute these cases to recover any such loss.
As the language is mandatory, it doesn’t appear that there are many meaningful defenses to such a claim. A bidder could argue that the drop in price is unreasonable, not fair market value and not in good faith, however, due to the current economy, this would likely require a very fact specific finding from a court. Such fact findings decisions, in any case, are always expensive. The best defense is to not bid on any properties that you are not prepared to close on the next day.
Mark Zinman is a partner with Williams, Zinman & Parham P.C. and may be contacted at 480-994-4732.