Real estate rehabbers can occasionally find good deals on homes being sold through an estate sale. An estate sale through probate court occurs if the home owner dies intestate (i.e. without leaving a will), in which case the court system supervises the sale of the property.
Properties sold through probate court are often priced below the market for several reasons. First, the beneficiaries of the sale (usually the children of the deceased) usually do not live in the house and have no strong emotional attachment to the property. Second, expenses on the property (taxes, maintenance, utilities and insurance) continue to accumulate even after the owner’s death so the heirs have a strong incentive to dispose of the property as quickly as possible. On the flip side, sometimes these properties are bargain priced because maintenance has been deferred for years and major upgrades will be needed. These properties are often sold “as is” even if the need for major improvements such as new wiring or plumbing is obvious. An even bigger risk may come from hidden problems. Since the home owner is deceased and the heirs know nothing about the property, there is no one to disclose issues such as a leaky roof or an illegal addition that may dramatically reduce the value of the property. For these reasons, a thorough home inspection is absolutely essential for rehabbers contemplating the purchase of a property through a probate court auction.
Identifying Properties that Will Be Sold through Probate Court
The easiest way to identify probate sale properties is to work with a local real estate agent who handles probate listings. In general, probate sale properties are marketed in the same manner as any other home. The executor of the estate, who may be a surviving heir or court-appointed attorney, typically hires a real estate agency to market the property. Another way to locate these properties is to contact the local probate court and ask for a list of probate cases from the prior six months. Open estates can be identified by checking the court’s online docket. The estate inventory list will indicate whether real estate is part of the estate. The inventory list will also provide a brief description of the property. If you like the description, your next step should be to contact the executor or the estate attorney (their names should be listed on the case docket sheet) to find out the name of the real estate agent handling the listing and whether a listing price has been established. The listing price for probate sale properties is generally based on either the real estate agent’s recommendation or an independent appraisal ordered by the court.
The Purchase Process
An unusual requirement for properties sold through probate court is that any purchase offer must be accompanied by a 10% deposit. After an offer is made, the executor of the estate is free to accept or counter, similar to any other real estate transactions, but court approval is required to confirm the sale. To move the sales process forward, the estate will petition the courts to set a sale date.
After a sale date has been set, the buyer and seller must wait at least 30 days, during which time the property is publicly advertised at the offered price. The prospective buyer must attend the court hearing on the appointed date to close the sale. During the court hearing, the court will identify the property and then conduct an auction, setting the opening bid above the offered price. The amount of the opening bid will vary from state to state, In California, the courts set the opening bid 5% above the offered price plus an additional $500. Other parties may bid on the property at the court auction. However, in order to confirm the sale, a competing bidder must be able to immediately hand over a 10% deposit in the form of a cashier’s check. If there are no competing bids for the property, the court will usually confirm its sale at the offered price.
Risks Associated with Probate Sales
While properties sold through probate auctions can sometimes be attractive deals, there are several risk factors associated with these types of transactions.
First, you should prepare yourself for a lengthy sales process and an indefinite closing date. The probate process takes at least six months from start to finish. In some cases, the executor of the estate may have already obtained court permission for the sale, but it is not uncommon for an estate to list a home for sale before the probate process is completed. If that is the case, the seller will often stipulate a closing date several months in the future or ask for a clause in the sales contract that makes the closing date contingent on the granting of probate. Major delays may occur with property sales that involve multiple executors living in different states or executors who can’t agree on a sale price.
Second, your 10% deposit may not be refundable. If you make an offer, but chose not to go forward with the purchase, you forfeit the deposit. This can happen even if major issues are uncovered during the home inspection. After an offer is made, the only circumstances that justify the return of your deposit are 1) you are overbid at the court auction or 2) the court opts to reject your offer for other reasons.
Third, to win the property through the court auction, the buyer must not only overbid other bidders, but also immediately present the court with a cashier’s check for at least 10% of the final overbid price. This requires advance planning and knowing how high you are willing to bid. If the winning bidder fails to have the correct amount in the form of a cashier’s check or the check is made out to the wrong party, the court will not confirm their purchase of the property
The buyer must also prove to the court that financing is in place to move forward with the purchase. Assuming the correct deposit is made and the necessary financing is in place, the sale will be confirmed and the winning bidder will become the new property owner, usually within 30 to 45 days of the court hearing.