Inner Circle E-lesson: How to Get Probate Deals (part 1)

One of the questions I get over and over is, “How do I find/negotiate/buy properties from people who’ve inherited them?”

It’s a good question, because lots of people who’ve inherited a property want to sell it. What’s more, the properties themselves tend to be outdated if not downright distressed, and paid off or close to it. And although a fair number of investors “work” this kind of deal, there’s less competition for probate properties than for some other types, like foreclosures and listed properties.

So yes, probate is something to look into, especially if you’re looking for somewhat distressed properties. But probate marketing isn’t a “magic bullet”; like any list of potentially motivated sellers, you’ll find that many aren’t motivated to sell at all, and many others aren’t motivated to sell at YOUR price. It’s tough to get seller financing from probate sellers, as there are often a number of heirs who’d have to agree to take payments; dealing with people who are grieving the loss of a loved one can be a challenge; and don’t even get me started on the many, many nasty situations you’ll run across where the family members are fighting over the money and aren’t even speaking any more.

But the most specialized thing about dealing with probate properties is that, because probate is a legal process, getting to the right person and getting to the closing can be confusing if you don’t understand the mysterious stuff that’s happening in the background. And unfortunately, the seller is often more confused than you are: I’ve had a number of heirs over the years who tried to sell me a property they didn’t even own, because they didn’t understand that just because Grandma WANTED them to have the house didn’t mean that when she died they AUTOMATICALLY owned the house. So let’s start by talking about the various ways in which a property gets from the deceased person to the heirs.

There are a number of ways in which a property might transfer from a deceased owner to his heirs. When you talk to a seller who says that he “inherited” the property, it’s important to know which method was used or will be used. Please note that the terminology and processes may vary slightly from state to state.

The first, and simplest, is when the decedent (that’s the dead person) and the heir or heirs already co-owned the property prior to the death. If the title was held as a “joint tenancy with right of survivorship” (JTWROS), the living owners do, in fact, get full ownership of the property as soon as they file the death certificate of the owner who passed away.

Unfortunately, many heirs believe that they have a JTWROS when, in fact, they don’t. I’ve dealt with many widows and widowers who’ve been absolutely convinced that they owned, and could therefore sell, a property that was, in fact, co-owned with their dead spouse’s un-probated estate.

The second simplest means of transferring a property upon the death of the owner is via some form of trust. In this case, the trustee can generally dispose of the property immediately, in whatever way the trust calls for, or the successor beneficiaries demand. Trusts, though, are fairly rare, and you’ll usually end up with one of the other two options.

If the property is NOT titled through a JTWROS and was NOT in a trust, it will, with few exceptions, have to go through some form of the probate process before it can be sold to you. The complexity, time frame, and cost of the process depend in part on the size of the estate (some states have a fast tracking process for small estates with no debts) and whether the owner died with or without a will.

If the owner died with a will, the will appoints a person who is in charge of getting the estate settled and the assets into the hands of the heirs named in the will. This person is called, in various places, an executor (or executrix), a personal representative, an estate representative, etc. This person is usually a close friend or relative of the decedent, and is usually NOT the same as the attorney who is handling the estate for the court.

The will also gives instructions about what is to happen to the property in question: it may instruct the executor to sell it and split the proceeds amongst the heirs, or it many instruct him to deed the property directly to the heirs.

And there’s a BIG difference. If the property is deeded to the heirs, they can then choose to keep it, rent it, or sell it for any amount they see fit. You’ll make your offer directly to the heirs, and they will make a decision as to whether or not to accept it.

However, if it’s to be sold FROM the estate and the proceeds divided, there’s almost always a process by which the court orders an “appraisal” (usually a drive-by by a real estate agent, who gets paid less than $50 for this service), and then gives the executor permission to sell it only within some percentage of that appraisal which, frankly, is often a whole lot higher than actual retail value. The percentage of appraised value at which the executor can sell varies, but it’s rarely less than 80% of appraisal—which, since you’re usually looking to pay more like 60%-70%, is obviously problematic.

Luckily, there’s usually a court process—one which the executor may or may not be aware of—by which the executor can petition the court to sell the property for less based on the fact that he hasn’t had any higher offers. Once you’ve determined that the executor (who has the sole right to accept and sign an offer when the property is being sold from the estate rather than being distributed to the heirs) is willing to look at a price lower than the appraisal, you simply write your offer and let him go back to court to ask permission to accept it.

If the owner died intestate—that is, without a will—another process takes over. The probate court appoints an administrator (often a near living relative, but sometimes an attorney) to determine who the heirs are and to function as the executor for the purpose of selling the estate. This can be a long and complicated process, as there may BE no obvious heirs, or there may be many. In these cases, any real estate is almost always sold from the estate, rather than being passed to the heirs. If you find an estate in this situation, your offer will be made to the administrator.

The real messes in probate happen when intestate owners die, then time passes, then the heirs decide to sell without understanding that the estate has to be probated first.

A FastTrack student of mine recently dealt with this issue to an extreme I’ve never seen before: she found a motivate seller whose grandfather had died in the 1930s, and the house had simply passed informally from family member to family member up until today. At no point was it ever deeded our of grandpa’s name. His numerous children and grandchildren didn’t even know that they owned a share of this property; everyone just assumed that whoever was living in the property at the time was the “owner”—and for years, they’d just let the “owner” decide who to “give it to” when they didn’t want it anymore.

The problem is, the without a will, the law assumes certain things about who gets what: specifically, that the surviving spouse inherits 50% of the estate and that the children split the remaining 50%. So in order to actually purchase this property, the family would have to get an estate opened, appoint administrator had to track down any surviving children and the spouses and grandchildren, where the children themselves had passed away.  All of the people who, 80 years later, were lineal descendants of this guy or widows or widowers or his children would then need to sign quit-claim deeds releasing their interests. This process could take years and costs tens of thousands of dollars—not worth it for a house worth around $15,000.

Side Note: get a will. Now.

There’s a final way in which estates may be handled by the court, as well. If the debts of the estate exceed the assets, the court may order any real estate to be auctioned in order to get a “highest and best price” to satisfy as many of the creditors as possible before closing the estate. In these cases, you’ll have to attend the auction like everyone else. Fortunately, if it’s a true court-ordered auction (as opposed to a private auction by the heirs), it’s usually an absolute auction, with no reserve price.

So in summary, here’s how you make offers on estate properties:

1. If the property has been deeded to the heirs, either through a JTWROS or through probate court, you negotiate with and write an offer to the heirs
2. If the property is to be sold by the executor or administrator and the proceeds divided amongst the heirs, you negotiate with and make the offer to the executor or administrator, who may confer with the heirs, but has the ultimate right to sell the property within the bounds set by the court.
3. If the property is sold by court-ordered auction, you attend the auction and bid like any other bidder.

If you’re asking the question, “How do I figure out in advance which it is?” the answer is a little more complex: you’ll either have to research the estate at the courthouse or, better yet, ASK the seller which situation he’s in.

Next week, we’ll address a sub-category of probate properties: the one where the owner has died, but probate has never been opened. This is a situation that you’ll run across OFTEN if you’re looking for vacant, ugly houses, and that practically no one knows how to deal with.