As we approach 2030, when all baby boomers will be 65 and older, we can expect significant changes to the real estate market. This generation has the highest percentage of homeownership in the country, representing nearly 44% of homeowners. While this generation is living longer than the preceding generation, one tough issue will eventually crop up: what to do with the property once our loved ones are no longer with us.
What will happen is that an increasing number of heirs will inherit properties that they may not need or want. Sometimes, the individual may pass without designating what will happen to their estate. And with so many over 65s owning real estate, a substantial amount of properties could transfer ownership in the near future.
Enter the probate sale. A probate sale is a real estate transaction when a property is sold after the owner’s death. For real estate investors and home buyers, a probate sale represents an opportunity to own a property that has not been on the market for decades or snag a great deal below market value.
Not sure about a probate sale and how it works? Don’t worry, this blog has you covered! Learn what you need to know about probate and real estate.
What is a probate sale?
In a nutshell, probate is the process of transferring property ownership from a deceased owner to heirs or beneficiaries. This includes real estate and other assets such as savings, stocks, and bonds.
After death, it’s up to the executor or estate representative to locate all assets and distribute them according to the terms of the will. Sometimes the deceased specified that the real estate was to be sold after their death and the proceeds disbursed among the heirs. Other times, a valid will cannot be found, leaving it up to the courts to sell the real estate.
State laws will have different rules and regulations regarding the real estate process and transfer to heirs. No matter what happens in the transfer, real estate must go through a probate process. Generally, though, each county in a state has a probate court or probate court docket.
Moving through probate court can be lengthy, taking months or even years to complete depending on where you live.
How does a probate sale work?
As we mentioned, each state has its specific probate laws. We’ll give a general overview, but it’s best to look up the legal process for the particular state you intend to buy real estate.
The probate process involves finding the original will document and reading its stipulations if the deceased has a will. Depending on the size of the estate and the local laws, this could include lawyers and a court proceeding. Some states have a process where, based on the estate size, the original will is filed with appropriate paperwork (like the death certificate) and approved without requiring the heirs to appear in court or before a judge.
Every probate process requires an estate executor to oversee the distribution of the deceased person’s assets. The will should name the executor.
However, if the decedent passed without a will or did not name an executor, the disbursement of the estate becomes the court’s responsibility. The probate court names an administrator or estate representative to manage the process. It can be a next-of-kin or someone else.
Passing without a will is considered “intestate.” Every state has outlined intestate succession for inheritances based on the family relationships of the deceased. It can include spouses, children, parents, siblings, and grandparents.
After filing estate or final testament documents in probate court, the court judge determines if the will is valid. Once done, the executor will receive and sign a letter of authority in which they agree to enter and oversee the probate process, which may include a home sale.
The executor will then collect all debts owed to or by the deceased and pay any taxes due on the estate. Once the court is assured that all debts and taxes have been settled, the executor can distribute what remains of the estate per the provisions laid out in the will or to the court-determined heirs.
From a real estate perspective, the executor must ensure that property taxes, insurance, and mortgage payments are taken care of. These expenses can be paid by the decedent’s estate and all other debts owed, including proceeds from the home sale.
Probate sale and real estate
Regarding probate real estate investing, savvy investors can often find great deals on properties owned by families who have recently gone through probate.
Finding these properties can be easier than you think. Investors should start by searching probate court dockets and other legal documents for newly filed probates in the area they are looking to invest.
When a person dies intestate, any owned real estate must be sold at the best possible price to maximize the estate’s value. The court appoints a real estate agent to list the property for sale.
Family members of the deceased may also advertise a property for sale or list it with an agent or broker. In this case, it may be advertised as an estate sale.
It is important to remember that the market value of a property versus its appraised value is two different things. A family selling through probate may be looking to liquidate quickly and be willing to accept an offer below the market value.
When the state’s probate court oversees the sale, expect a longer process. The courts set the list price, usually after a home appraisal and in consultation with the real estate agent and estate representative. Remember, the courts will want the best possible price but will sell the property as-is. Either the heirs or estate representatives do not want to pay for any renovation, or the estate lacks the funds to do so. The result is often a property listed under market value.
Once the home is listed, it’s much like a traditional process. The real estate agent will market and show the property to interested buyers.
Now home buyers can make a purchase offer. The estate representative is in charge of negotiating, much like any other sale, and can accept or counter the offer. Probate home sales require a set down payment of 10%. Note that many states or courts require the down payment as a cashier’s check.
After negotiating, here’s where a traditional and probate sale differs. While the estate representative can negotiate and accept the offer, any purchase offer must receive court approval at a confirmation hearing. The estate representative must also notify family members of the property’s sale and give them time to respond to the terms.
Probate laws require the property to be advertised with the new accepted price for 30-45 days before the confirmation hearing court date.
Remember: the court wants to maximize the estate’s value. Think of the confirmation hearing as an auction. Other bidders are allowed to make offers above the original purchase offer, resulting in a bidding war at the final court hearing. Some states, like California, require any above purchase offers to be a specific amount. California’s is 5% plus $500 above the accepted offer purchase price.
The specific steps will vary between states, so it’s a good idea to consult with a real estate agent or attorney familiar with probate real estate.
Drawbacks to buying through probate
One of the main drawbacks to buying property through probate is the time it takes to complete the process. Depending on where you are located, it may take months or even years before all of the necessary paperwork and court proceedings have been completed.
In addition, there could be liens or debts attached to the property that the new owner would be responsible for paying, which could reduce any potential profits from the sale. These could include tax liens that were filed while the property was in the probate process if the estate executor did not pay them.
Plus, probate sales can be complicated with the varying state rules. That’s why it’s a good idea to consult a probate attorney or real estate attorney familiar with probate sales. Any misstep could cause the court to decline the sale and the down payment forfeit. Often you only get the 10% back if you are not the final court-confirmed buyer.
Probate properties can be a risk to buy. If it’s been in the care of the courts, assuming the property has gone months without maintenance. There’s also no solid disclosure, as the seller is deceased. Even if you’re buying as an estate sale, surviving family members may not adequately know the property’s history or condition. Plus, there’s no guarantee that the family checks on the property or does any basic upkeep.
Benefits of probate sales
Despite these drawbacks, there can be many benefits to buying property through probate. First and foremost is finding a great deal on a property, as family members may be willing to sell below market value. The executor may be motivated to complete the sale so it could move much faster than a traditional sale.
Another benefit is that the court and estate representative often set the sale price lower to entice potential buyers because of the complicated sales process and the as-is status. They understand it’s likely some repairs will be needed, especially if the home has been vacant for home time. Significant and noticeable repairs lead to a reduced price.
You could score a deal for real estate investors or home buyers willing to be patient and work with the court system. Because of the time it takes to navigate a typical probate sale, there can be less competition to purchase these homes.
What to do before buying in a probate sale
If you do your research and due diligence, investors can score an opportunity for long-term profits. With any luck and good timing, you could purchase a property at a great deal, renovate it, and then sell it in the future for even more money.
An early home inspection is key. Yes, you may lose money on the home inspection if you decide not to write an offer or if you’re outbid in the final confirmation hearing. Still, that inspection is your best shot at finding significant defects in the home that impact its value and repair budget. If you’re planning to fix and flip, you need to ensure the after-repair value and needed renovations make sense.
Make sure to familiarize yourself with the state’s probate process, research the market, and find an experienced real estate attorney to help you. With some know-how and patience, buying through probate can be a great way to get into real estate investing.
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