You tell your real estate agent that you’re on a budget, and hoping to find a bargain.
She tells you, “Well, there is a home in the neighborhood where you want to live, and it’s just gone into probate.”
Should you be excited? Or extremely hesitant?
Truthfully, both feelings would be appropriate.
As you probably know, “probate” is the legal process that’s usually required after someone dies. Once a court approves, the assets in their estate can be distributed.
A probate sale, though, is slightly different. It’s ordered when the person has left debts behind, and their house has to be sold in order to pay those debts.
It can be a complicated process involving creditors, relatives or others named in the person’s will, realtors, potential buyers, lawyers, the IRS – and a probate judge, who’s in charge of the whole sale.
However, it can also be a way to buy a home significantly below market value.
Are probate sales worth all the hassle? Let’s find out.
What Is a Probate Sale?
If someone dies with plenty of assets (and hopefully a will), their executor and/or lawyer will file the paperwork required to allow the distribution of their property. In this case, probate is usually a simple process.
If they still owe creditors a lot of money when they die, though, there can be big financial and legal issues to untangle. That’s when probate can get messy.
Before the estate can be settled, all debts must be paid. And since the person died owing money, there probably won’t be enough cash in the estate to pay all of the outstanding bills. Assets must be sold to raise the money owed to the creditors.
Their home will usually be the biggest asset tied up in the mess – and quite often, that means the house has to be sold to raise cash.
But who has the legal right to sell it? The homeowner has died, so obviously they can’t sell the property. The estate is still in probate, so none of the homeowner’s heirs own the house. They can’t sell it, either.
In these cases, the probate court oversees the sale, meaning a probate judge makes all important decisions throughout the process. That’s why this type of home sale is known as a probate sale. And the court’s involvement means the sale can take what seems like an eternity.
Bottom Line: A probate sale is necessary when a homeowner still owes substantial amounts of money to creditors when they die. Proceeds from the sale will be used to pay outstanding bills, before the estate is settled and the remaining property is distributed. And since all assets – including the house – are in “limbo” until all of the estate’s financial issues are settled, the probate court is responsible for overseeing the sale of the house.
How a Probate Sale Works
One qualifier before we start the explanation: probate rules can vary from state to state. This is generally how it works, but the process might be slightly different where you live.
- During probate, the judge will appoint someone to be the “estate representative.” In most cases, it will be the person named as executor in the will. If there’s no will (or an executor wasn’t named), the judge will appoint an administrator for the will. In rare cases (for example, if there’s no competent relative who can serve), the judge will personally take charge of the estate. That person will serve as the estate representative. To avoid confusion, we’ll simply refer to the executor moving forward.
- The executor is responsible for making an inventory and verifying all of the estate’s assets and debts, and presenting an accounting to the court.
- If the house has to be sold to satisfy outstanding debts, the probate judge will order that the house be appraised (the estate must pay for the appraisal) so a listing price can be set. The judge must approve the price.
- The executor is then responsible for working with a realtor to list and show the house to potential buyers, and receive offers to purchase the home.
- It’s the executor’s responsibility to encourage the highest offers possible. In states like California, acceptable offers can be no lower than 10% below the home’s market value.
- Once there has been at least one offer, the executor can ask the court for permission to sell the house, but that approval is far from automatic. All bidders will usually have to appear before the judge, and in many areas, there can actually be open bidding during the court session. All heirs and beneficiaries will also be invited to the hearing, where they can file formal objections to the sale, and some states require the hearing to be advertised multiple times. At the end of the session, the highest bidder wins – if the judge approves.
- In most states, the winning bidder in a probate sale must immediately present a 10% deposit to the executor, in the form of a cashier’s check. That deposit can usually be used as part of the down payment at closing.
- Once the sale closes and with the judge’s approval, the executor uses the proceeds to pay creditors, and anything left over is distributed to beneficiaries as part of the will.
The process may not be exactly the same where you live, as we’ve mentioned, but it will be similar. And it will be lengthy. The American Bar Association says a probate sale normally takes between six and nine months.
Is waiting that long to buy a house worth it? It can be, but bargains aren’t necessarily guaranteed.
Bottom Line: Selling – and buying – a house while it’s in probate is complicated and time-consuming, with a probate judge having to approve every element of the process. You don’t even have the right to buy the home if you submit the highest bid, since the judge presides over open bidding before selecting the winning buyer. And if you do win, you have to immediately hand over a 10% deposit before going any further.
Pros and Cons of Buying Through a Probate Sale
First-time homebuyers, prospective owners on a tight budget, and real estate investors and speculators often seek out probate sales. They know that they might find great deals, and are willing to go through the drawn-out process in order to find them.
The smartest group may be speculators. They fully understand the risks and potential downsides of buying a house through probate.
Everyone else may end up biting off more than they can chew.
Pros-and-cons lists usually start with the pros. We’ll start with the cons, because there are more of them – and because they’re the most important facts to know about probate sales.
Drawbacks of Buying Through Probate
You Could End Up With a Lemon
If you thought the biggest negative was the amount of time a probate sale takes, be patient. We’ll get there, but an even bigger risk is that you could wind up buying a home that’s in worse shape than you expected.
Homes are sold “as-is” when they go through probate; they’re not repaired or fixed up before they’re listed. Owners are governed by laws that require disclosure of major defects – but the owner isn’t around anymore.
There’s no such thing as a home inspection contingency clause in probate sales. Potential buyers can usually have an inspection done before their bid is accepted, but they can’t make the sale contingent on the results of an inspection conducted after they’ve successfully won the auction. There are no “seller’s credits” on the sales price to compensate for needed repairs, either.
The danger isn’t just that you might have to do more work on the home after you buy it. There could be serious structural issues that put the home out of compliance with building codes or restrictions on the deed. Those problems don’t give you the ability to back out of the purchase; it will be your responsibility to do the expensive work once you close – costing you much more than you expected when you figured a probate sale would be a smart financial gamble.
You Could End Up in Financial Never-Never Land
Your below-market bid was accepted? Congratulations. Now cross your fingers, if you’re planning to buy the house with a mortgage loan.
You’ll still have to be approved for the mortgage after your bid is approved. And even though the probate court usually orders an appraisal before setting a sales price, the lender will want their own appraisal before writing the loan.
If you got the home for a good price, chances are good that an appraisal won’t cause a problem. If the house appraises for less than the loan amount you’ve applied for, though, the mortgage will be denied. And naturally, there are many other reasons why lenders might also deny a loan application.
That’s where the big problems can start. If you can’t get a mortgage, you have no recourse. Just as there’s no such thing as an inspection contingency in a probate contract, there’s no such thing as a financing contingency, either. You bought it, you have to buy it – even if you can’t get a mortgage.
Best-case scenario: you can get a mortgage for a lower amount and make up the difference out of your own pocket. Second-best: you walk away and only lose your deposit (and remember, you had to pay 10% of the purchase price when your bid was accepted). Worst case? If the executor and court can’t find another buyer, you might get sued.
If you’re starting to have second thoughts, there’s more. We haven’t even gotten to the time frame yet.
It Might Take Even Longer Than You Expect
We’ve mentioned that the average probate sale takes six to eight months, primarily because of the involvement of the probate court every step of the way. But that’s if everything goes well.
The judge can rule that the bid(s) submitted for the home aren’t acceptable, and that starts the process all over again. The relatives and beneficiaries can all object to the sale, and the resulting court hearings can drag things out.
Then there’s the IRS, which automatically places a tax lien on all assets – including houses – when someone dies. That lien is only released when it’s determined that no estate taxes are due to the government. What if the estate is going to need the proceeds of the home sale to pay the estate taxes? That’s when an experienced (and probably expensive) tax attorney will have to enter the picture. And we know we don’t have to tell you how slowly the IRS and expert attorneys work.
So if you’re hoping that you can close a probate sale in six months, good luck. It can sometimes take years, not months.
There Can Be Added Costs
The tax attorney will be the estate’s problem. The process and contracts involved in a probate sale are complicated, though, so you’ll likely need both a real estate agent and a lawyer experienced in probate sales. The agent will collect a commission on the sale, and the lawyer won’t come cheap.
Those may not be back-breaking costs, but they might be tough to handle if you’re trying to buy a probate home at bargain-basement rates because of a low budget. You’d better have some extra money in the bank.
Benefits of Buying Through Probate
There’s really not much to say here, other than “price – maybe.” Many people have gotten into a house for much less than it would have cost in the open market, by finding a probate sale and having the patience to make it all the way through the process.
That’s often because the house is in poor shape and in need of major repairs. It can also be because the beneficiaries just want to get rid of the house and are able to convince the probate judge to approve a low listing price.
If you’re fortunate enough to be buying in a slow market, you might pick up a bargain without any other bidders to worry about. If you have a savvy realtor with experience searching for probate bargains, or if you’re lucky, you might be also able to grab a house for a low price.
Otherwise, there could be multiple bidders who will drive the price much higher than you first expected. That can make the process drag on and on, and turn your terrific bargain into a long-running, high-priced nightmare.
Bottom Line: Some buyers end up with great deals if they have the patience to make it though the long process of a probate sale and everything else falls their way. There are a number of potential risks, however. Homes sold in probate are often in poor shape, and the sale can’t be contingent on an inspection. If the buyer can’t get financing, they’re still legally obligated to buy. The process occasionally takes years instead of months if there are complications. And a probate sale can wind up being much more expensive than the buyer expects.
How Do You Find a Probate Sale?
Some probate sales are listed traditionally, but they must carry a label identifying the sale as “probate,” and a disclaimer explaining that any sale is subject to approval by the court.
There are other, more targeted ways to search.
- Find a realtor experienced in probate sales. They can find homes being sold through probate much easier than you can, and their experience will come in extremely helpful during the entire process.
- Contact the probate court in the area where you want to buy. The clerk will give you a list of active probate cases, then look for the ones that list a home as one of the assets, and contact the executor to find out whether it’s for sale.
- Check out local newspapers and social media sites. Probate homes are often marketed there. The newspaper is also where you’ll also find notices about upcoming court hearings where probate auctions and sales will be finalized.
- This last one may sound morbid, but some real estate investors watch the obituaries for death notices, and do some detective work to find out if a home is going to wind up in probate.
Before getting involved in probate sales, be sure to have a lawyer who knows their way around the process. Your attorney, and your realtor, will be essential allies in navigating a very difficult and frustrating process.
Bottom Line: There are several ways to find probate sales, including regular real estate listings and the local newspaper. Just be sure to have experienced, professional allies on your team to give you the best chance at a successful home purchase.
Probate Sales: FAQ
Q: Is there a way for someone to ensure before they die that their home won’t have to be sold through probate?
A: The easiest way is not to accumulate significant debt, but that’s not always possible, of course. There are a number of other ways to “protect” the home. They include structuring home ownership through joint tenancy, so the house passes directly to a surviving spouse (or partner); executing a beneficiary deed (sometimes called “transfer on death”) which avoids probate; or putting ownership into a living trust. A lawyer can provide more specific details.
Q: Is an estate sale the same as a probate sale?
A: Not usually. After reading this article, you know what a probate sale is; it’s the sale of real estate to satisfy debts, with the approval of a probate judge. Most people use the term “estate sale” to mean the sale of property they’ve inherited from family members. If an estate is still in probate and no one has officially inherited the items, though, it’s necessary to get permission from the court before the executor can sell anything, including personal items. If there are still debts to satisfy, the judge may instead order an estate auction for property other than the home.
Q: Does a probate sale cost anything you haven’t mentioned?
A: There are relatively small court fees, plus fees due to lawyers and the executor who handles the entire probate process. They generally add up to about 5% of the estate’s value.