REO resales are inferior “comps” for setting appraised value in bankruptcy

Reported by Bradley Markano

In an effort to cramdown his mortgage and remove the second trust deed from title, the owner of a property filed a petition in bankruptcy. Both the owner and the second trust deed lender conducted appraisals of the property to determine its FMV. Both appraisers used comparable sales techniques to determine the FMV. The owner’s appraiser included lender resales of real estate owned properties (REOs) as “comps” while the lender’s appraiser excluded REO resales and used only properties resold by individuals. The owner’s appraiser determined the FMV to be lower than the amount of the first trust deed, but the second trust deed lender’s appraiser found the FMV to be higher than the combined amount of the first and second trust deeds. The owner sought to have the court remove the second trust deed from title to the property since no sufficient equity in the property existed to support the debt, based on his appraiser’s valuation of the property. The lender claimed his appraised value represented the true FMV, which was sufficiently high to fully secure his trust deed loan, since his appraiser had not used REOs as comparable sales data. The owner claimed his lower appraised value was valid, since REO resales are comparable properties for determining FMV. A federal bankruptcy court held the FMV of the property determined by excluding resales of lender REOs fully secured the second trust deed note, since an appraised value determined by REO resales was less likely to accurately represent the FMV due to the likelihood of a REO lender being under pressure to reduce losses from foreclosed properties and thus not a willing seller without compulsion to sell. [In re Serda (October 17, 2008)__BR___]

Editor’s Note —The Serda case has the unintended consequence of leaving appraisers to guess at just what the fair market value of the subject property might be in the numerous bedroom communities with large numbers of homes, since sales in those multiple listing services (MLSs) are nearly exclusively REO resales and short sales, while very, very few sales are by individuals with an equity who the bankruptcy court would consider “willing sellers without compulsion to sell.”


Estate retains deposit on buyer’s breach when resale losses exceed deposit

Reported by Bradley Markano

A buyer submitted a purchase offer with a 10% deposit to be applied to the purchase price of property being sold by an estate, contingent on probate court approval. The estate owned a one-half interest in the property as co-owner. The buyer’s offer was accepted by the co-owner and confirmed by the probate court. However, the buyer then failed to perform and close escrow. The property was later sold for a price 25% less than the breaching buyer’s offer. The probate court awarded the buyer’s entire 10% deposit to the estate for its money losses on the breached purchase agreement, since the estate held the deposit and its losses, set by the resale, exceeded the amount of the deposit. The buyer demanded the return of half this sum, claiming the probate court was not permitted to award an amount greater than half the deposit to the estate on the breach of a purchase agreement since the deposit had been made for the purchase of the entire property and the estate only co-owned a one-half interest in the property. The estate claimed it was entitled to the entire good faith deposit since the estate’s one-half of the losses on the breached purchase agreement (one-half of the difference between the contract price of the first sale and the resale price) exceeded the amount of the deposit. A California appeals court held the estate as a seller had been properly awarded all of the buyer’s good faith deposit since the estate’s loss as owner of a one-half interest exceeded the amount of the buyer’s total deposit, which the estate held. [Felder v. Grigsby (October 9, 2008) ___CA4th___]

Fiduciary Duty

Listing agent must disclose all benefit when buying the listed property

Reported by Anthony Renaud

A broker, while employed to locate a buyer for the listed property, prepared a purchase agreement naming himself as the buyer and submitted it to the seller. The purchase agreement called for the broker to be paid a fee for acting as an agent. Prior to the close of escrow opened for the purchase, the broker located a buyer who agreed to acquire the broker’s rights to buy the property under the purchase agreement through an assignment and to substitute himself into escrow as the buyer. The buyer paid the broker a fee for the assignment. The seller gave the broker permission to assign his purchase right to the buyer after the broker reiterated that the property’s value did not exceed the price set in his purchase agreement with the seller. At the closing, the broker told the seller he was to receive an assignment fee, but did not disclose the amount. After escrow closed, the seller discovered that, in addition to the fee he paid the broker, the buyer paid the broker 10% of the purchase price for the assignment. The seller made a demand on the broker for the assignment fee and the return of the brokerage fee he had paid, claiming the broker breached his fiduciary duty owed the seller and did so deceptively since the broker failed to disclose the benefits he received after becoming the listing agent and deprived the seller of his ability to sell his property for its highest possible value. The broker claimed he had no duty to disclose the price paid by the buyer for the assignment since the broker’s status under the purchase agreement as a buyer was that of a principal with an interest in the property he could sell. A California court of appeals held the broker must return the brokerage fee and pay the seller the fee the broker received for the assignment of his purchase rights since the agency relationship created by the listing agreement required the broker to disclose all earnings and was not extinguished by the broker entering into the purchase agreement to buy the listed property as a principal. [Roberts v. Lomanto (2003) 112 CA4th 1553]

Editor’s Note—The income tax aspects of buying property as a principal while receiving a brokerage fee on the deal requires the broker/buyer to report personal income for the amount of the fee. To avoid the reporting of income, the broker/buyer in this case should have offered a reduced price and never agreed to receive a brokerage fee. Doing so would have kept the property taxes lower as well.

Editor’s Note—See first tuesday Forms 401-2 (Assignment of Purchase Rights – Supplemental Escrow Instructions) and 119 (Compensation Disclosure in a Real Estate Transaction).


Oral modification of loan payments on a foreclosure workout is unenforceable

Reported by Bradley Markano

The owner of a property encumbered by a loan entered into an agreement with a lender, called a forbearance agreement, to delay a trustee’s sale. The agreement called for the owner to reinstate the loan by paying the regular monthly installments on the loan and paying additional monthly installments to cure the delinquencies. When the owner received the written agreement, it lacked the lender’s signature and contained an incorrect reinstatement amount. The lender verbally assured the owner the paperwork would be corrected. Based on this promise, the owner delivered the initial payment on the reinstatement amount to the lender. A corrected forbearance agreement was never delivered to the owner. The lender sold the note and trust deed to an investor, who proceeded to record a notice of default. The owner sought to halt the foreclosure, claiming it was barred by the oral forbearance agreement and his payments as agreed. The investor claimed the oral forbearance agreement was unenforceable, since it was an unwritten and unsigned modification of a trust deed note. The owner claimed his payment of the initial installment toward the reinstatement amount under the oral forbearance agreement constituted partial performance of an oral agreement, since the payment served as a substitute for a signed agreement and had been made to the detriment of the owner. A California appeals court held the trust deed investor was not bound by an unwritten and unsigned forbearance agreement since payment of money alone merely called for an accounting and was not sufficient reliance on an oral agreement to be detrimental to the owner. [Secrest v. Security National Mortgage Loan Trust (October 13, 2008) __CA4th___]


Ownership of property in a corporate vesting prohibits homestead exemption

Reported by Bradley Markano

The owner of a single family residence held title subject to multiple judgment liens. The owner then transferred title to a corporation of which he was the sole shareholder. The lienholders later sought to foreclose on the property. The property owner claimed he was eligible for a homestead exemption on his equity with priority over the judgment lienholders since he was the sole shareholder of the corporation. The lienholders claimed the owner was not entitled to a homestead exemption since the corporation, not the owner, held title to the property. A California appeals court held the property owner was not entitled to receive a homestead exemption since the corporation held title to the property and a homestead exemption is available only on property owned by a natural person. [California Coastal Commission v. Allen (October 1, 2008)__CA4th___]