Buying Probate Property
If you’re actively looking for real estate to buy, you’ve probably come across a probate sale or probate with court confirmation required. Many buyers shy away from these offerings, even though they seem to be a good deal. Let’s talk about how the process works and the risks involved.
Any property being sold at Probate is being sold by someone other than the owner. Usually, the sale arises due to a death of the owner. However, there are circumstances when the person is still alive. In such a case, the sale is being handled by a Conservator who is acting on behalf of an incapacitated or under-aged person.
In Probate, the executor or conservator has gone to Court to receive permission to handle the settling of the Estate and, if there is real property to be granted, the authority to sell. Without this Court document, the property cannot be sold as it would not have “clear title”.
Here’s how a probate sale works:
WHY A HOME IS SOLD THROUGH PROBATE COURT
In California, whenever anyone dies – either with or without a Will (e.g. intestate), then Probate is required. If someone dies with a Will and an Executor is named, who is living, willing and capable of acting, then the Executor is granted the authority to handle the Estate.
In the case of no Will or if there is no Executor able to perform the duties, then the Court approves an Administrator of the Estate. If the person has been granted Full Authority, then there may be no court confirmation required. In the case of Limited Authority, court confirmation of the sale is required.
In the case of court confirmation, the process takes much longer than traditional real estate transactions. In all cases, the Court oversees the distribution of any assets, including the sale of any real property. The court wants to be certain the property is fully marketed and sold for the best possible price. There are very definite steps, processes, and procedures that must be followed.
MARKETING A PROBATE SALE
The probate attorney or the court appointed representative must give notice to any beneficiaries of the intent to sell the property. The property must be listed and fully marketed to ensure that it is sold for the highest and best price.
The list price is based upon the listing agent’s comparative market analysis. There is a court required appraisal, called a Court Referee’s Valuation and the property must sell at 90% of the Court Referee’s appraised value. These appraisals are drive-by only and can be different from the Fair Market Value. This can result in complications.
LIMITED DISCLOSURE REQUIREMENTS
Since the person selling is deceased or incapacitated and the representative of the Estate has never owned the property, there is limited disclosure. It is totally up to the buyer to fully investigate anything about the property. This lack of disclosure is why probate sales are sometimes considered risky. Any serious buyer should investigate the public record and have the property inspected.
Sometimes buyers don’t want to pay the price of the home inspection without knowing if their offer will prevail, as it is possible to be outbid at probate court. But would you rather gamble the cost of an inspection — or the cost of a house?
MAKING AN OFFER
In the case of a probate sale subject to Court confirmation, a 10 percent deposit is usually required at the time the offer is made. The Court requires a cashier’s check in the amount of 10% of the accepted offer at the confirmation hearing. Sometimes the attorney for the Administrator will accept a 3% or 5% deposit at the onset, with an additional 7% required prior to the court date. The estate representative will then review any offers and accept or counter the offer, just like with any other sale.
If there is Court confirmation required, even after acceptance, the offer is subject to confirmation at Court and overbid. Even though the seller may have accepted a buyer’s offer, the seller is not committed to that buyer or their offer. The buyer may do whatever inspections that are part of the contract, but before the estate representative, through their probate attorney, petitions the court to confirm the sale, all contingencies must be removed.
The attorney must advertise a Notice of Sale three times, in order to give anyone who believes they are a beneficiary, to come forward. Then after an offer has been accepted there is a required Notice of Proposed Action, giving the known beneficiaries the terms of the accepted offer. Technically a beneficiary could object to the terms of the offer. Only after the required notices have been delivered and the time period for responses past, can a court date be requested.
PLAYING THE WAITING GAME
Once the sale date for the court confirmation hearing has been set, the parties now must wait.
Due to the backlog in the courts, this can sometimes be set at a date a couple of months later. During this time, the court requires that the details of the confirmation hearing, including the date and location of the hearing be noted in the MLS, with a continuation of advertising and marketing. The price is revised to be the amount of the first overbid, which is computed by the Court.
The amount is calculated based on the accepted offer price: 10% of the first $10,000 or $1000 plus 5% of the remainder. The total becomes the new probate price. The buyer with the accepted offer is often upset when the property continues to be marketed, as it could generate over-bidders, but it is in the best interest of the Estate.
THE DEPOSIT MAY NOT BE REFUNDABLE
There are some things for buyers to be aware of when moving forward on a probate sale. Almost all sales being confirmed at court are all cash, non-contingent. Even if the original offer has a loan and various contingencies, all contingencies have been removed prior to going to court. Hence you, as the over-bidder, are entering in to an ALL CASH, NO CONTINGENCIES contract.
If you are an over-bidder at court and need a loan to buy the property, there is no loan and no appraisal contingency. Please make sure to read and understand fully what the terms of the contract are that you are bidding on. Since the offer confirmed at Court is non-contingent, then the 10 percent deposit that’s required with the offer is not refundable if you fail to close. The close of escrow must take place 10 days after receipt of the signed Order Confirming the Sale. In general, it takes about 14-21 days to receive that signed Order, sometimes longer so in practice, you have about 30 days to close.