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Banks Must Make a Fair Market Bid in a Public Trustee Foreclosure Sale
BY: I. thomas  Bieging, ESQ.

The bid process in a public trustee foreclosure sale in Colorado is determined by the statutory process described in C.R.S. §38-38-106. The Public Trustee bid is an important step in the workout of a problem loan. A violation of the statutory bid process may deny the bank a deficiency or lead to a damage claim by the grantor of the deed of trust.
The Colorado statute provides:

The owner of such evidence of debt [the note] shall bid at least such owner’s good faith estimate of the fair market value of the property being sold (less the amount of unpaid real property taxes and all amounts secured by liens against the property being sold which are senior to the lien being foreclosed unless the estimated reasonable costs and expenses, net of income, of holding, marketing and selling such property); except that such owner need not bid more than the amount due under such evidence of debt as itemized on the written bid pursuant to subsection (2) of this section. [emphasis added].

This statute imposes a good faith requirement upon the holder of the debt to bid the fair market value of the property, less the deductions described, if that amount is less than the total owed on the debt. If less than a good faith estimate of the fair market value is bid, and a deficiency results, the maker of the note may defend against the deficiency based upon the bank’s improper bid.

The challenge to the bank is to determine its good faith estimate of fair market value and to also determine the appropriate deductions from that estimate.

Many banks rely upon appraisers to assist them in determining their bid. The statute does not require an appraisal of the property but it may be a prudent step in determining your bid. When a bank engages an appraiser for the purpose of assisting in determining the bid, several factors should be considered. Among those factors is the appraisal standard that should be used. Such terms as “value”, “fair market value”, “salvage value”, and “liquidation value” are all terms of art to an appraiser. Care should be taken in the engagement of the appraiser to assure that the appraisal received comports with the statute and that the proper appraisal standard is used. In other words, an appraisal which provides for “liquidation value” may not meet the statutory requirements of “fair market value”. Moreover, specific facts relating to the property in question should be discussed with the appraiser prior to his or her engagement. If the property is unique or has other characteristics that should be brought to the attention of the appraiser, the bank should ensure that this process takes place before the appraisal is received.
Even after receipt of the appraisal, the statute does not require the bank to bid in the appraised amount. Rather the statute imposes the duty of a “good faith estimate of the fair market value” and not the “appraised fair market value”. Accordingly, the bank may consider other factors in arriving at its bid amount. Those factors often lend themselves to disputes, but various experts have testified that such factors as the single use of the property, the time period that the property has been on the market, the physical condition of the property and other fact specific conditions might be considered by the bank in arriving at its bid. Additionally, experts have stated that it is a customary practice within the banking industry to determine the reasonable costs and expenses of the holding, marketing and selling of property to range in the area of 20% to 30% of the fair market value. These costs of holding, marketing and selling the property may be appropriate deductions from the good faith estimate of fair market value in arriving at the written bid. 

As noted earlier, the consequences of not bidding the good faith estimate of fair market value is that the bank may be denied a deficiency judgment or subject itself to a claim for damages from the owner of the foreclosed property. Both these factors provide reason to carefully consider and document the manner in which the bank arrives at its bid. If a bank has concerns with respect to the amount that it may bid at a public trustee’s foreclosure, it should consider conferring with its counsel for assistance.

Contact I. Thomas Bieging at tb@bsblawyers.com

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