Arizona Court of Appeals Division One holds that the part of a loan used to expand and renovate a home is used for home improvement, not construction, and is therefore not entitled to anti-deficiency protection.

This is the fourth appeal stemming from a judicial foreclosure sale of a home in Paradise Valley. The homeowners purchased the home with a $600,000 loan.  Over the next several years, the homeowners substantially renovated the property, expanding the home by 7,000 square feet. During this period, the homeowners borrowed approximately $2.1 million from a second lender, which they used to refinance the original loan and fund the renovation.  The homeowners then borrowed $3.4 million from a third lender, which they used, in part, to pay off the second loan.

The homeowners defaulted on the third loan, and the lender sought judicial foreclosure.  The lender obtained a judgment, the property was sold at a sheriff’s sale, and the lender obtained a deficiency judgment against the homeowners.  The issue in this appeal was whether the second loan constitutes a construction loan, which would qualify for anti-deficiency protection, or a home improvement loan, which would not so qualify.

The Court noted that neither the case law nor the statutes define “home construction loan,” and that it, therefore, had to apply common sense.  On that basis, it concluded that except for the $600,000 used to pay off the refinance original purchase loan, the second loan was used for home improvement, not home construction.  The Court noted that the homeowners lived in the home during the entire renovation, first remodeling the downstairs and then the upstairs.  The homeowners also installed a pool and an eight-car garage; spent over $1,000,000 on improvements to the interior of the home, including adding a master bathroom, closets, a breakfast area, and a kitchen; and installed approximately $389,000 in interior upgrades, including appliances, theater chairs, cabinets, flooring, fireplace, Venetian plastering, and a wine cellar. 

The Court, therefore, concluded that the homeowners did not build a new home from scratch; instead, they transformed their home into a much grander dwelling.  The funds used for this home improvement project were not entitled to anti-deficiency protection. 

Judge Cruz delivered the opinion of the court; Judges Johnsen and Howe joined.