Any person against whom a deficiency recovery is sought after nonjudicial foreclosure may request that the court in which the action is pending determine the fair market value of the real property as of the date of the foreclosure sale.
Evidence of value may include, but is not limited to, the following:
o expert opinion testimony;
o comparable sales;
o anticipated marketing time and holding costs;
o cost of sale; and
o the necessity and amount of any discount to be applied to the future sales price or the cashflow generated by the property to arrive at a current fair market value.
The concept of “fair market value” is sometimes difficult to measure, particularly in the context of distressed property sales. The fact that the debtor has been unable to sell its property and that there are no third party bidders at the foreclosure sale may mean that there is no current market for the real property. The Bank will be paying holding costs, such as management fees and taxes, until there is a market for the property. The Deficiency Statute allows as competent evidence of value, evidence of anticipated marketing time and holding costs, and the necessity and amount of cashflow discounts. In this respect, the definition of “fair market value” approaches the “fair value” standard imposed on appraisals applicable to national bank-foreclosed properties. The “fair value” standard includes mandatory discounting of property to be held longer than twelve (12) months. See additional discussion in Chapter 3 “Appraisals and Evaluations.”
Since costs of sale are included in competent evidence of value, reasonable closing costs for the Bank’s ultimate disposition of the property should be deducted in calculating the value of the property. Costs of the sale typically include the real estate commission and the premium paid for a title insurance policy.
Expert opinion testimony will likely be limited to testimony and reports produced by an individual who can qualify as an expert on property valuation. The individual presenting testimony should be able to demonstrate experience with the type of real property in question in the market in which it is located. The individual should also exhibit the ability correctly to compute a value estimate based upon the characteristics of the real property.
With respect to the fifth type of competent evidence of value, a future sales price alone is discounted back to present value when a market does not currently exist for unimproved real property or any real property which is not generating positive cashflow. When an improved property produces cashflow in excess of all related expenses, the net cashflow generated by the property (from the date of the foreclosure sale until the anticipated market sale date) and the future market sales price are both discounted back to obtain a fair market value on the date of the foreclosure sale.
Since the five types of competent evidence set forth in the statute are not exclusive indicia, the Bank should be able to show that other indicia of value are competent and relevant. Presumably the judge would determine what other types of evidence constitute competent evidence of value. If the Bank sells the property to a bona fide purchaser for value during the pendency of the deficiency lawsuit, the Bank’s sales price is likely to be admissible. Furthermore, if the Bank disposes of the property shortly after the foreclosure sale in an arms-length transaction, then the value of the property upon the Bank’s disposition of the property will almost surely be considered in evidence to determine the fair market value as of the date of the foreclosure sale. If the property is sold by the Bank after a longer period of time, then presumably evidence of its increase in value since the foreclosure sale (and consequent discount back to the time of foreclosure sale) and investment by the Bank (such as tenant improvements) would be competent evidence.
The Bank should attempt by appropriate provisions in its deed of trust forms to provide for additional indicia of competent evidence of value by agreement. For example, where the Bank is financing the purchase of twenty duplexes or condominiums which are part of a single development, the Bank might include a provision that permits the Bank to utilize wholesale value rather than retail value as the appropriate indicator of fair market value, and a provision that confirms that the Bank intends to wholesale the property after foreclosure sale; or the Bank might have the debtor agree that fair market value will be based upon a specified holding period or upon a cash sale with no holding period. Since the Deficiency Statute is as yet untested by the courts, it remains to be seen whether a court would give effect to such provisions, particularly if the agreements respecting components of fair market value do not actually represent market conditions at the time of the foreclosure sale.