Many of us have heard from someone we know or seen on TV people finding amazing deals with probate real estate. Let’s take a look at this issue to better understand the whole picture.
What is probate? Probate is the legal process of settling an estate involving someone who has passed away and did not have a will to specify where or to whom assets should go. It is wise to consult with legal counsel who is well versed in this issue as probate sales can often take long periods of time to resolve. The majority of conflicts during probate are because relatives or parties involved with the deceased do not agree on where assets should go. This can cause turmoil and sometimes unfortunately create major battles within families. Make no mistake about it many people get fussy when it comes to money! In most probate cases, the assets and properties of the deceased will automatically be passed on to the surviving spouse if there is not a will or trust in place. There are cases where even if these instruments are in place, it still has to go through the probate process. If there is a will in place, generally there is an executor of that will who is in charge of carrying out the details of that will and distributing the assets accordingly. If there is not a will in place, the probate court can appoint an executor or in the case of an intestate estate the appointee by the court would be called an administrator of the estate.
The administrator of an estate needs to take a complete inventory of the assets and personal property in the estate. They would then be in charge of taking care of any debts owed by the deceased and paying any taxes owed. The administrator would then be in charge of distribution of assets and properties to the beneficiaries according to the ruling in the court system. (Provided there is not a will)
The court must approve the transfer of every item in the estate and often time’s individuals will challenge this ruling by stating they are entitled to the asset in question. When this happens, they must petition the administrator of the estate or file a law suit to try and prove why they are entitled to the asset(s) in question. So where are the great deals for real estate?
When the probate court has to settle estates, they want to do so in a timely manner. The court is not in the business of holding onto cases longer than necessary. This does not mean the courts will just give assets away either. The court will always ask for an appraisal to determine value. Considering they want to settle the estate quickly, the courts will be inclined to accept reasonable offers to help the process move along. Usually, in the state of California, the court will set a date to look at offers. They will ask for a 10% deposit in the form of a cashier’s check and a pre-approval letter for the balance if there is financing. The court will have to approve the final bid and agree to the terms prior to acceptance. What does this mean for the average buyer? You’re rolling the dice! It is not uncommon to get properties at a ten to twenty percent discount depending on the property and location. Many people are under the impression that probate sales go for fifty cents on the dollar but that is simply not the case. In the bay area to be able to secure a property for a twenty percent discount is a fantastic deal considering the average home is $622,000. Even if it were a five hundred thousand dollar home, that would be a hundred thousand dollar discount. When it boils down to brass tacks, probate sales are just like any other property being sold. Location, location, location! What condition the property is in, how much of an investment it will take to get it ready for sale etc. There are many expenses when selling a property and this must be figured into the equation prior to purchase. The strategy must also be carefully considered to think about tax planning. If the home is going to be sold right away, it could be subject to capital gain. It would be wise to check with a CPA about this issue. Say for example you were able to get a twenty percent discount on a property but were subject to a capital gain tax of twenty four percent. This might not be such a great deal. On the other hand, say the same property was to be used as a primary residence where the family planned to stay for a long time. This may be a great deal.
The moral of the story is to do your homework and have a complete understanding of what you are getting into prior to purchasing a probate property.
Matt LarsenBay Area Real Estate
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