Hopefully, this does not start a 50-page thread.
I am of a mind that negative market value is a sound concept, although it is rare. There are appraisers that could go their entire career without valuing a property for a negative number, even if they agree with the concept. So far in my career, I've appraised two properties for negative numbers, and both were related. Both were condemned apartments in a depressed market-the cost to remodel to a habitable level was not feasible and the demolition costs exceeded the land value. Doing nothing (ie letting them sit in hopes of the land values increasing, etc.) was not an option. The larger one was about 80-units, if memory serves me correct, and it sold at an auction for $7,000, but after the buyer saw the properties, he backed out. With that said, the client was a governmental agency, the apartments have since been demolished, and the governmental entity most likely added concessions in the form of paying for demolition, etc.
I have only HEARD of one property selling for a negative number, and don't believe that I have seen one. The instructor for my last class said that the owner paid $1,000,000 to a municipality to take a golf course from him.
My ever-developing theory is that governmental restrictions (and perhaps deed restrictions) are, in itself, a primary driver of negative market values. Perhaps there are other issues that could spur negative market values, but in the first example, the government was not allowing a "hold for future development" strategy to negate the implied market value. I do not know the ins and outs of the second example, but if the property was not required to be used as a golf course, it most likely would not have negative value.
OP-Hopefully, the transfer from the borrower to the bank's name in ownership did not, in itself, trigger that $500,000 payment. However, while a highest and best use analysis is based on the market's response, one could utilize the same HBU model for a specific owner. I understand that banks aren't typically in the property management business, and I also don't know the income and expense potential of the property in question, but what prudent owner of a property would say yes, I AM going to sell this property for $300,000 and pay $500,000 to the city? Very few, or possibly none. If I had a property like this, I would hold it in hopes that it would eventually be worth more than $500,000, and I think essentially any owner would act the same. Making assumptions here, but I'm guessing that the value in use is most likely not a negative number, or at least not -$200,000. We do not have enough information to go off of here on where the as-is market value should be, but outside of possible accounting issues, I question the relevance of the -$200,000 number, due to the aforementioned discussion.
