If the value of a foreclosed property is less than the loan amount, lenders may seek a deficiency judgment from borrowers and guarantors after the foreclosure sale. In most cases, the lender is the sole bidder at the sale and takes title to the collateral property, so the court must determine the fair market value of the property as of the date of the foreclosure sale. Parties may bring appraisals and expert testimony to the court’s attention, and the court may conduct an evidentiary hearing to determine the amount of the credit to be given against the loan amount.
But what happens when the lender is not the successful bidder at the foreclosure sale? If a third party submits the winning bid, does the court still need to determine the fair market value of the property?
When a third party purchases the property, the clerk of the court distributes the cash proceeds of the sale to the lender. This is analogous to a cash payment on the judgment, for which the borrowers and guarantors would receive a setoff. Instead of trying to determine the value of the property, the cash payment makes calculation of deficiency straightforward. For example, if the foreclosure judgment is in the amount of $2 million, and the property sells to a third party purchaser at foreclosure for a high bid of $1.5 million, then the court should enter a deficiency judgment in the amount of $500,000, excluding post-judgment interest and fees.
Thus, when a third party purchases the property, there is an exception to the general rule. When the plaintiff has received proceeds from a foreclosure sale, there should be no need for the court to determine the fair market value of the property. As long as the borrower cannot prove that the foreclosure sale price was shockingly inadequate, or that there was no fraud or interference with the foreclosure sale, courts should use the foreclosure sales price to determine the amount of a deficiency. This is the case whether or not the plaintiff has entered a bid, since a plaintiff does not have a duty to bid at the foreclosure sale.