When a lender forecloses on a parcel of property, it is not unusual for the property to sell for an amount that is less than the amount owed. In that instance, the lender often seeks a judgment for the difference or the deficiency. In Tennessee, a statute directs that the deficiency judgment shall be the total amount of the debt less the fair market value of the property at the time of the sale. (Tenn. Code Ann. Section 35-5-118.)

The sale price at the foreclosure is presumed to be the fair market value absent fraud or irregularity in the sale process. But, the debtor can overcome that presumption by showing that the sale price is “materially less” than the fair market value of the property.

In Cutshaw v. Hensley, No. E2014-01561-COA-R3-CV (Tenn. Ct. App. July 29, 2015), the court of appeals held that a price at the foreclosure sale that was 78% less than the fair market value of the property was “materially less.” That conclusion is not surprising. The court of appeals found that the fair market value was the price that the lender (who purchased the property at the foreclosure sale) sold the property 49 days later.

Generally, Tennessee courts have held that the purchase price received after the foreclosure sale is not determinative of fair market value on the date of sale. In this case, however, the court noted: (a) the absence of an appraisal, (b) the short period of time that elapsed, and (c) the lender’s admission that no significant changes to the property were made during the interim period. These factors made the subsequent sale price relevant and determinative.

So, when conducting a foreclosure sale, a lender should obtain an appraisal of the property contemporaneously with the sale if the lender wishes to obtain a deficiency judgment.