California real estate and deed of trust disputes | courtroom war stories and lessons learned

A Trustee’s Sale Says Nothing About a Property’s “Fair Market Value”

Under California’s Revenue and Taxation Code, the purchase price of real property usually creates a rebuttable presumption regarding the property’s “fair market value.”  However, for that presumption to apply, the sale must be a true “open market transaction” with both the buyer and seller acting on their own volition and under no particular duress.

Does a trustee’s sale (aka nonjudicial foreclosure sale) fit that description?

An opinion recently published by California’s First Appellate District — Phillis v. County of Humboldt — addresses the issue.

Facts: purchasers at foreclosure sale challenge tax assessment

Tim and Kathy Phillips purchased property in Humboldt County at a publicly noticed trustee’s sale for $153,806.41.  The property consisted of 160 acres on mostly steep and wooded terrain, and contained a 1,508 square foot manufactured home and several outbuildings and sheds in poor condition.  The trustee’s deed was recorded on July 12, 2013.

Months after their purchase of the property, the Phillips filed several applications for a changed assessment, challenging the enrolled property value of $469,976, which was the prior owner’s assessment.  In November 2014, the County’s Tax Assessor reappraised the property at $415,000.

The Phillips challenged that reappraised value, relying on Revenue and Taxation Code section 110, under which the purchase price of real property is rebuttably presumed to be its “fair market value” as long as “the terms of the transaction were negotiated at arms length between a knowledgeable transferor and transferee neither of which could take advantage of the exigencies of the other….”

After initial proceedings before the Assessment Appeals Board, a superior court action, and remanded proceedings before the Board, the Board concluded that the fair market value for the property on the date of purchase was $335,000.  The Board determined that a foreclosure sale “is generally not considered an open market transaction for purposes of determining fair market value.”

The Phillips filed a second lawsuit challenging the Board’s ruling and seeking a property tax refund.

Trial court: foreclosure sale is not an open market transaction and doesn’t reflect fair market value

After a bench trial, the trial court ruled in favor of the County Assessor.  The court held the property was not obtained in an open market transaction, and substantial evidence supported the Board’s conclusion as to the assessed value of the property.

Court of Appeal: affirmed

The Court of Appeal affirmed the trial court’s judgment.

The court agreed with the conclusion reached by the Board and the trial court — i.e., that foreclosure sales, “by their nature, are not open market transactions” and are not entitled to the “presumption” of fair market value under Revenue and Taxation Code section 110.

The opinion quoted from long-established case law holding

it is common knowledge that at forced sales such as a trustee’s sale the full potential value of the property being sold is rarely realized. … Market value, as it is commonly understood, has no applicability in the forced-sale context; indeed, it is the very antithesis of forced-sale value. … In short, ‘fair market value’ presumes market conditions that, by definition, simply do not obtain in the context of a forced sale.

The court observed that in a trustee’s sale, the “trustee is not attempting to maximize gain, as would be expected of a seller in an open market transaction; he or she is attempting to recoup the amount of a defaulted loan, regardless of the actual value of the security property[.]”  Further, a trustee’s sale typically requires bidders to pay a cash deposit in order to participate and to pay the total purchase price within three days, which excludes potential purchasers relying on traditional financing.  Trustee sales also lack “typical real estate marketing” efforts.

Lesson

A trustee’s sale should not be relied on to provide any indication of real property’s “fair market value.”