Probate Sale of Property: What Is It, and How Does It Work?
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Summary:
Typically, a probate sale takes place when a person dies owing more money to creditors than there are assets in their estate. It can also happen if the deceased dies without a will and their assets need to be divided among their next of kin. As a solution, parts of their estate, such as their home, will be administered by a court in a probate sale. Although probate sales have built-in advantages, such as a low price, they come with a myriad of other consequences that can be costly, which are worth considering before buying a home that’s being sold via probate.
Having too much debt is a problem that can happen to anyone, regardless of race, gender, economic status, or social position. An excess of debt can be overwhelming, particularly if debt repayments start to become front and center in your monthly budget. Many people dealing with debt may wonder if death is an easy way out. If you cease to exist, then so do your debts, right?
The answer to this question is both yes and no. Yes, there are debts that will be forgiven when someone dies. However, if the deceased leaves behind significant assets, it’s a different story. In most cases, those assets will be given to a probate course to ensure creditors are at least partially granted their “pound of flesh.”
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What is a probate court?
To understand how a probate sale works, it helps to first understand what probate courts are.
A probate court is a court that deals with the probate and administration of an estate. In some places, probate courts are also referred to as “orphan’s courts.” During colonial times, in the 17th and 18th centuries, orphan’s courts were established in the Chesapeake Bay colony to protect the rights of orphaned children and their assets should their parents decease and leave them without other family members.
Today, Maryland and Pennsylvania still refer to probate courts as orphan’s courts. In the case of wills that are contested, the parties will take their case to a probate court to settle the dispute. When an estate has more debts than assets, the estate will enter administration and also be taken to a probate court.
If you’re looking into the probate sale of a property, it’s important to recognize that the court’s involvement will create more red tape, and thus the process could take longer. Furthermore, as the original owner is deceased, there is little room for questions and negotiations on issues such as contingency clauses. That being said, there are great deals to be found on real estate transactions like probate sales, so as long as you can handle the paperwork, timeline, and general annoyances, it can be a smart way to buy a home.
How does a probate sale work?
If a person dies and their estate has debts greater than its assets, or if the estate has no heirs, then a probate court will ensure creditors are paid and that any remaining assets are distributed to the beneficiaries. The court then needs to administer the sale of the property along with its other assets, basically divvying up every item that goes into an estate sale. The court defines two types of property linked to an estate: personal property and real property.
Personal property
Personal property consists of tangible assets — such as jewelry, trading cards, and gold bars — as well as intangible property, such as a retirement plan.
Real property
Real property includes large physical assets, such as real estate and investment property. Houses, land, and water rights are all examples of real property that will be administered by a probate court.
If the deceased left behind a will, the person administering the estate is known as the “executor.” When there is no will, that person is called the “administrator.” Part of the responsibility of an administrator is to delve through the finances of the estate and find out how much the creditors are owed.
Assuming the real property does indeed need to be liquidated in order to pay off debts, then the court will order an appraisal of the property. This appraisal is necessary to define the fair market value of the property, which will then become its listing price.
Pros and cons of buying real estate in a probate sale
Probate sales work differently than traditional home sales in that probate sales are monitored by a court of law. Any probate bid must be presented to and confirmed by the court. Furthermore, the buying structure can be different; you’ll need to come up with considerable cash up front, as you’ll want to cover your down payment plus 10% to reserve the property through the court system.
Here are the pros and cons you should consider before buying a home from a probate sale.
Advantages to buying property in a probate sale
There are a couple of upsides to buying probate sale homes:
You can save a lot of money
The major advantage of a probate sale is that you stand to get a good deal on the price of the property. In a scenario in which the estate’s assets need to be liquidated as soon as possible, the estate executor will typically make sure the property is “priced to sell.” This means you can potentially snap up the property for below market value.
Limited competition
If you live in a housing market that is considered “hot,” you can limit competitive bids by buying a probate home. The main goal of the estate is to sell the property as quickly as possible, so they might limit the number of allowed bids for the sake of time. Furthermore, if you have access to the court system and know which properties might go on sale soon, you have a higher chance of being the first to submit a bid.
Disadvantages to buying property in a probate sale
There are also a few downsides to buying real estate from probate sales:
Time delays
The biggest turnoff to investors and buyers looking into probate homes is the extensive time it takes to close the sale. If heirs are contesting the assets of the estate, for example, this can continuously push a court date out and cause delays. If you’re looking to buy a home to move into right away, the potential time delays of probate sales may not be worth enduring for the cheaper properties you might find.
Fees
On top of time delays, there are also fees attached to probate sales. In fact, the longer the delay, the more the fees pile up. Court appearances, multiple appraisals, and legal filings will all incur fees, and a probate sale lawyer or a probate attorney will also cost money.
It’s usually up to the estate to pay these fees, but many will try and pass the buck to the buyer. There may also be additional court-related fees that the buyer must pay as well.
Home comes as is
Homebuying often involves negotiation between the buyer and seller. For instance, the homeowner may agree to fix the backyard fencing and replace the kitchen countertops before selling.
With a probate property, however, the original owner has passed away, so the home is sold “as is.” This can mean more expenses on the buyer’s part to make the home livable, which may not be worth the money and hassle.
No bidding contingencies
In the process of bidding on a home, contingencies act as a bulwark against risk. For example, a higher offer could be contingent upon a successful home inspection.
In the world of probate sales, however, there are no contingencies. The price you agree to pay to the court is for the home as it is, without contingencies to help mitigate risk.
IRS oversight on selling and buying
Because the home is part of an estate under administration, the IRS must confirm that all taxes have been paid on the home before allowing its legal transfer. Should the IRS conclude that some debts have yet to be paid or need to be structured differently, they can block the sale of a home during and after probate court.
FAQ
Is buying a probate property a good idea?
It depends on your priorities. The probate process can take longer and be more daunting, but if time is not of the essence (and you have unlimited patience), you might be able to find a good deal on probate sale homes.
What is a probate sale in California?
A probate sale in California is when a property is put into administration either because the estate must cover debts via a probate sale or because the owner died without bequeathing the property to any heirs.
How long does a probate sale take?
There is no set time for processing a probate sale, but six to 36 months is a time range that will work in most cases. Don’t expect it to take less than six months, and it can take multiple years in some cases. A probate home sale takes longer than a traditional sale. This is due to court administration, longer delays, and the possible need for a specialized real estate agent.
Are probate properties cheaper?
Generally, probate properties will be cheaper than other properties you can find through real estate agents. However, this depends on a number of factors, so that may not always be the case.
Key Takeaways
- Probate sales typically take place when a deceased person leaves behind an estate with debts that exceed its assets. In this case, the estate is placed into the administration of a probate court.
- The deceased person’s estate is split up into real property, such as a house, and personal property, such as jewelry.
- The advantages of buying a probate sale home are that probate homes can be priced lower and have limited competition.
- Time delays, costs, and other administrative headaches can be significant disadvantages to buying probate homes.
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