When the Judge is Your Friend
Historically real estate developers and investors could look to foreclosures and REOs to find their next project. However, as these have decreased significantly, probates have emerged as a solid pipeline to source the next or first project.
But Wait, What is Probate?
Probate is a legal process to settle a person’s estate in the event of their death or incapacity that is supervised by the county court system. Through this process the estate’s debts are paid, notices provided to creditors and heirs, and any personal and real property sold. If the personal representative of the estate has full authority, the sale of its property proceeds like any other sale. However, if the estate has limited authority, an entirely different process is triggered.
What Happens Under Limited Authority?
Under limited authority, a sale must be confirmed (aka approved) by a superior court judge, at what is called a Confirmation Hearing. This hearing is the judge’s opportunity to make sure the listing agent, the attorney, and the personal representative have all done everything in their power to get highest and best price for the property.
At this time, the judge will also call for any overbidders, or parties, who are not the original buyer, who are willing to buy the property for more than what the original buyer offered. This is called the minimum overbid amount and is typically (1.05 * Original Price + $500)*.
Should there be even just one overbidder, the fun begins. The courtroom turns into an auction house; the judge puts on their auctioneer hat on, and the overbidder(s) and the original buyer bid against each other for the property. Should the overbidder be successful, they take the original buyer's place in the sale. (Don’t worry -- they'll get their deposit back.)
Below is a generalized overview of what the probate process looks like for a buyer, if the estate has limited authority.
Why Source Projects from Probate?
Straight Forward Process – While the process can be long, it is straight forward. Show up to court on time. Bring the money (a 10% deposit of certified funds) and proof of who you are and how you will close the transaction.Transparency – With probates subject to confirmation, everyone is held to a higher standard, the buyer, the attorney, and especially the listing agent. Many of the ‘games’ listing agents may play to give themselves or their clients a leg up are more easily upended in the overbid process. It levels the playing field a lot.Decreased competition – Typically if a buyer defaults on a probate, after confirmation of the sale, they will not get their deposit back. The courts do this precisely to discourage malfeasance that could hurt the estate, and it works in heavily reducing the competition buyers face from fly by night real estate people.
Limited to No Access – Depending on the condition of the home, access to the interior is not always guaranteed, especially for overbidders. If you want to inspect the property beforehand, try to do so as early on as possible.Limited to No Transfer Disclosures – In most cases, the person who lived in the property has passed away or is otherwise unable to make typical sales disclosures. As such, it is not unusual to receive little or no disclosures prior to the purchase.Time – Depending on where you enter the process, closing on a property subject to overbid can be lengthy. If you are in a rush or have some other pressing deadline, it is important to determine beforehand if the process fits your needs.
To date all of my personal investment and development projects have been probates. I personally enjoy the benefits of the process, and have had incredible partners who work flexibly within the time frames of the court. The process is not for everyone, however, under the right circumstances it can provide incredible opportunities for developers and investors alike.
If you ever have any questions about the process, don’t be afraid to reach out or comment below.
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Report of Sale & Petition for Order Confirming Sale of Real Property
Bid in Open Court on Sale of Real Property
Order Confirming Sale of Real Property
The information is specific to California, and based on my experiences in LA, Riverside, San Bernardino and Orange counties. For general reference only.
*(The exact formula is 10% of the first $10,000 = $1,000 plus 5% of the remaining price)