Let’s say you own a rental property or are the sole owner of a home. Let’s say you die without bequeathing that property to anyone specific and leave behind children and a surviving spouse. What happens next?
Without a will, the state you reside in (and the state in which the property is located) will determine your family’s next steps. In general, your spouse gains ownership of any property you owned together or owned as community property (in community property states), while all your separate property is distributed between your spouse and your children.
Any property co-owned with others (such as property owned in joint tenancy with a right of survivorship) passes to the co-owners. But what about the property you owned outright? Who does it go to? Your spouse? Your children?
In all likelihood, any property you owned outright will be liquidated, and the assets distributed equally among your spouse and children (as per the respective state’s intestacy succession laws).
The reason is that an estate in intestacy is split equally between the beneficiaries (e.g., the spouse receives half of the separate property while the children receive the other half, or a third of the half each if there are three children), meaning high-value property might be liquidated to make distribution of the estate easier.
This results in something called a probate sale. This is a sale of real estate property through the probate court, to liquidate the estate’s assets and evenly distribute the value of the estate among the respective heirs.
Explaining the Probate Process
To understand a probate sale, you must first understand probate. When a person dies, their belongings must be distributed among the living.
Anything not accounted for by previous contingencies, such as beneficiary designations and living trusts, becomes a matter of the probate court. A relative usually begins the probate process by bringing the decedent’s death certificate to the local courts and initiating a petition for probate.
During the probate process, the court chooses an executor to act as a representative of the decedent’s estate and tasks them with organizing the step-by-step inventorying of the estate, valuation of the estate, resolution of the estate’s costs and debts, and distribution of the estate’s remainder, as per the decedent’s will, or as per intestacy laws in the absence of a will. In most cases of probate, it is advised to hire an attorney to assist with and provide advice throughout the process.
Depending on the complexity of the estate, probate can last anywhere from a few months to well over a year. Something like a probate sale can certainly prolong the process by quite a bit.
What is a Probate Sale?
On the surface, a probate sale is not dissimilar to any other real estate sale. The differences are largely due to the involvement of the court, which can turn a sales process that typically lasts around two months, into one that takes up to a year to complete.
Unlike other properties on the housing market, properties sold through probate are usually offered as-is and at a quick sale value, which is typically below market value. Buyers must also provide a 10 percent deposit along with a down payment for their offer.
This is both a pro and a con for potential buyers. Would-be homeowners can utilize probate sales to snag properties they would not otherwise be able to afford. But in doing so, they must provide a down payment in addition to the 10 percent initial deposit on their offer and cannot demand any changes or repairs as the property must sell as-is, from the point probate begins.
How Does a Probate Sale Work?
As with any other real estate deal, the executor can hire a realtor (using funds from the estate) to acquire buyers for the property. The executor can then sift through offers, find one to accept, and then sets a court date with the buyer. It can take over a month to get a court date from this point onward.
Once an offer on a probate sale is accepted, the sale itself takes place in the form of an auction within the courthouse. In addition to the potential buyer and the executor, any other interested parties may also attend the auction. The minimum bid on the property is whatever the willing buyer put forth as their offer on the property.
However, anyone else can outbid that offer, and potentially claim the property for themselves. If this happens, the original buyer’s down payment is refunded, and the new buyer must immediately provide a 10 percent deposit on the spot. While other real estate sales can also involve bidding wars, they usually do not involve auctions in court.
After the auction has concluded, a contract is signed, and a closing date is determined, usually two weeks after (giving the buyer time for a home inspection).
Because of court dates and other court involvements, probate sales usually take a minimum of six months. It may also be more difficult to find conventional homeowner buyers for a property sold through a probate sale because of the daunting 10 percent deposit and down payment on any offer, as well as the typical as-is condition of the property. As such, many would-be buyers in probate sales are real estate investors and investment companies.
For executors, probate sales are yet another complicated part of the probate process that could have been eliminated through careful estate planning. For would-be homeowners, probate sales are a potential shot at a property for below market value, but with many curveballs and an exceptionally long-timer on the sale.
A will can help you determine who should inherit your property without the need to liquidate it during probate.
A trust allows you to fold certain assets and properties into a third-party legal entity that holds these assets for your beneficiaries until you are incapacitated or die.
A transfer-on-death deed allows you to name a designated beneficiary to claim your real estate upon death. There are multiple different ways to transfer a property in death without requiring a drawn-out probate sale, provided you utilize the right estate planning tools.