What is a Probate Sale, and Should Buyers Consider One?

We don’t see too many probate sales out there, but they do exist. Oftentimes buyers, and many agents as well, do not understand their nature. The sales and paperwork process are different from traditional sales, and there are other caveats, but if you do your research buying a home via probate could be a great investment. Let’s look at the probate sale:

Defined: A probate sale occurs when a homeowner dies without a will, meaning they have not bequeathed their property to another. The state thus has to sell the property through the court, and wants the best possible price.

Court Confirmation: Most probate sales have to be approved by the court after being accepted by the parties (much like short sales have to be approved by the short sale lenders). In California, if the estate representative is given full power to sell the property under the Independent Administration of Estates Act (IAEA), it could bypass the need for court approval of the sale. If the representative has only limited powers, then a court confirmation is required.

Offer process: The offer process on a probate sale property is very different than any you have likely encountered. Once the buyer makes an offer and it is accepted by the estate representative, a petition is filed with the court for review (assuming it needs to be approved by the court). Note that the buyer must remove all contingencies before the petition is filed. Usually there is a hearing within 20-40 days from the petition date. Here is where it gets tricky.

During this time, the following events will occur:

• The buyer must deposit 10% of the purchase price before or on the date of the court hearing

• The court will advertise the accepted price for a certain period of time in a local paper, encouraging other bids. There are restrictions on overbid amounts (in California, the standard is to raise the offer from the accepted price by 5% plus $500), and the court will decide on the final increments on overbids.

Court Hearing: All parties who are interested in purchasing the property must come to the court hearing, which is conducted like an auction. Other interested parties must be able to present an unconditional offer (one with no loan or inspection contingencies) and present a check to the court for 10% of the purchase price. If the court accepts a higher offer the original buyer gets her/his 10% deposit back. If the original buyer’s offer is accepted the 10% deposit is applied to the purchase price and becomes nonrefundable.

The accepted purchase price must be no less than 90% of the appraised value of the property.

Caveats: Obviously, a probate sale may not be right for every buyer, due to the fact that the “accepted” offer is not a guaranteed sale, and because there is a long waiting period. If the buyer defaults after the offer is accepted s/he risks losing the deposit. Most importantly, the buyer should fork out money at the get-go for a home inspection, BEFORE writing an offer. This is obviously risky, because they may not end up as the purchaser, but it is definitely important to know any defects with the property since no seller disclosures will be provided.

If you do your homework, don’t have to move in a hurry, and have a good agent on your side a probate sale could be right for you.