There are many factors to be considered in determining the bid price for the property at the foreclosure sale. The Bank should never bid in excess of fair market value of the property, because otherwise the Bank will have purchased the property for too high a price and will have a basis in excess of fair market value. When the debtors are personally liable on the note, the Bank will be concerned that it bid a low enough amount to retain its right to sue the debtors for the deficiency, extinguish any junior liens or other encumbrances affecting the property, and not have to come up with cash to pay excess proceeds to the debtors or junior lienholders.
In determining bid price, the Bank should bear in mind that in any deficiency action against a debtor based on a foreclosure sale the debtor will be entitled to a credit against the deficiency of an amount equal generally to the difference between the fair market value of the property on the date of the foreclosure sale and the lesser amount bid by the Bank at the sale. The deficiency statute, however, only requires that the debtor be given the credit, if the Bank pursues a deficiency action against the debtor. In other words, the deficiency statute will not apply and need not govern determination of bid price where the Bank has decided not to pursue a deficiency or has no right to seek a deficiency due to the non-recourse nature of the loan. A guarantor may waive this right to a deficiency in its guaranty.
The Bank should have a current appraisal in its file at the time of the foreclosure sale. The appraisal should be made by a qualified appraiser who specifically addresses the categories of value set forth in the deficiency statute. The more current the appraisal and the more qualified the expert, the more difficult it will be for a debtor to attack the fair market value bid made by the Bank at the sale in a subsequent deficiency action against the debtor. In determining the amount of the outstanding indebtedness, the Bank should confirm that all of the amounts stated in the note have actually been advanced to debtor.
“Fair market value” may include consideration of the Bank holding costs and cash flow discounts based on holding periods. Encumbrances affecting the property which will not be extinguished by foreclosure may be taken into account in determining bid price. For example, if the Bank is foreclosing a second lien, the Bank may deduct the amount of the first lien in determining its bid price, since the property will be subject to the first lien after the sale. The Bank, however, should not deduct the value of any junior liens which will be extinguished by foreclosure or paid off with proceeds from the sale.
The Bank may need to consult counsel with respect to special circumstances, such as foreclosure of a wraparound mortgage, or foreclosure when unexpected prior liens are discovered. If the Bank were surprised by a mechanic’s lien filed prior to its deed the possibility of whether the Bank is subrogated to the lien of a prior the Bank (as in a refinancing). The Bank may be advised to bid the amount to which the Bank was subrogated, rather than to bid the full amount owed to the Bank, if an amount additional to the amount subrogated was advanced to debtor at the time of the loan.