February 4th, 2016 by Gabrielle Dahms
Probate is the legal process that occurs when a property owner has died. Although there are various ways to avoid probate, including the setting up of a living revocable trust, many people’s property goes through probate and that includes real property.
The probate process can be costly and time-consuming because everything has to be approved by the probate court and all documents have to be filed correctly. Additionally, the courts charge fees for everything they do.
Heirs are looking to get their inheritance and any debts the deceased owner had will be covered for the proceeds from the probate. The seller, in this case the courts, set any commissions and those are paid out of the proceeds. In this type of home sale, the buyer is responsible for all closing costs, including title and escrow fees. The buyer is also responsible for any and all transfer taxes.
While buyers can review any existing inspection reports or do their own inspections, any required work is the responsibility of the buyers. Usually any work needed on the property is already factored into the list price of the property.
The courts do not entertain any contingencies in probate contracts – with the exception of a contingency for financing that must be obtained within 30 days of the bid opening. A bid date is set by the court. All offers must be in then. The court generally accepts the right to accept or reject any and all offers.
How to write the bid
The court has a process for assessing the property’s current value and has received an appraisal for the property before putting on a list price on it. The court’s formula dictates that the property cannot be sold less than 10% below its market value. It is the court’s responsibility to the estate to get the highest and best bid.
Clearly, even probates depend on market dynamics and competitive bidding. In order to assess which bid to offer the court, consult a real estate professional who is savvy, understands the probate process, and who can help you evaluate the property and its potential.
All bids must be sealed and include a cashier’s check in the amount of 10% of the bid’s offer amount. On the bid date, the judge will announce the price you are willing to pay for the property and ask if there any other bids. If someone in the courtroom wants to overbid your offer another formula applies.
The person must over bid by 10% of the first ten thousand and 5% of the balance of your bid. To make this easier to understand, here is an example:
Offer of initial bid $ 1,000,000
10% of first $10,000 $ 1,000
5% of $ 999,000 $ 49,950
Next bid MUST be $ 1,050,950 or above
If there are overbids, you may bid more if you wish to do that. However, those bids must either adhere to the above formula or to bidding increments set by the judge right in the courtroom. Should there be no other bids in your offer will be confirmed.
[Note: for any overbid that occurs you must provide the increase to that offer price for the deposit. That must happen immediately via Cashier’s check.]
Once the court confirms a bid, the accepted party has 30 days to close the sale. If for any reason that party does not deliver, it stands to lose the 10% deposit. Always carefully consider that risk when dealing with probate.
Another important item to know is that should there be a financing contingency, it is prudent to have that contingency already in place before you get to the court. In other words, your file should be completely underwritten by whichever lender you are going with, not just pre-approved. The court will not confirm any contingency.
Probates can be great opportunities but there are several things that must be in place. It is important to know the market, the competition, repair cost, how you’re going to deal with the property once you own it, and to have sufficient cash in hand. Given the risk probate presents to buyers, it is prudent to engage a savvy real estate professional and to work with a lender who can get your file underwritten ahead of time.
In the San Francisco Bay Area many probates have not represented fantastic buying opportunities simply because competition here is intense. That means that probates in San Francisco and the Bay Area often sell for their market value or above it, even though the buyer has all the responsibilities shifted to them. This has been the case for the last 10 to 15 years.
Even though, probates can still be a fantastic way to purchase property including in San Francisco and the Bay Area, given knowledge of the market and the ability to analyze each and every probate at in depth. It’s the individual assessment of each and every property that tends to get the best results.
©SFRE February 2016
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