During the foreclosure process, lenders often purchase the subject property for an amount insufficient to cover the debt owed by the borrower. When this occurs, the lender may pursue a deficiency suit to recover the outstanding amount from the borrower or guarantor. Under Texas Property Code Section 51.003, the borrower or guarantor in such a suit has the right to request a determination of the fair market value of the property. If the court determines the fair market value is greater than the sale price, the borrower is entitled to an offset against the deficiency. The offset is equal to the difference between the fair market value and the foreclosure sale price. The foreclosure sale price is not subject to interpretation. But how is fair market value determined?
Courts look at a number of factors to calculate the fair market value: expert opinion testimony, comparable sales, anticipated marketing time and holding costs, cost of sale, and the necessity and amount of any discount to be applied to the future sales price. In a recent case, the Texas Supreme Court had an opportunity to consider whether "fair market value" is determined solely by information available at the time of the foreclosure sale or if information obtained later may be considered.
In PlainsCapital Bank v. Martin, 2015 LEXIS 286, PlainsCapital Bank foreclosed on real property securing a note and subsequently filed a deficiency suit against Martin. The foreclosure sale price was $539,000. One week after the foreclosure sale, the bank received an appraisal of the property equal to $825,000. Despite the bank's efforts to market the property promptly, it sold for $599,000 over a year later. Martin argued that the fair market value was $825,000. The bank claimed the fair market value was $599,000 less its holding and sale costs of approximately $120,000.
The Texas Supreme Court held that the post-foreclosure sale price could be considered in determining the fair market value under Texas Property Code Section 51.003. The fair market value was thus about $477,000. Since Martin owed more than $477,000, he was not entitled to an offset.
Lenders involved in a deficiency suit should use all tools available to present the court with a correct fair market value of the foreclosed property. Appraisals made at the time of the foreclosure sale are only one piece of the picture. Information obtained afterwards-especially the value the market actually places on the property by way of a later sales price-can be convincingly indicative of the true fair market value.
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