What is a probate sale?
When most people decide to buy a new house, they start by combing through online listings, attending open houses and scheduling showings. But that’s not the only way to go about purchasing your dream home. Many alternative approaches — like short sales or homes for sale by owner — offer benefits and drawbacks that you wouldn’t necessarily experience with a typical real estate transaction. If you’re having trouble finding the right property in your budget, these options are certainly worth investigating.
Case in point: probate sales. A home is sold in probate court when someone dies without bequeathing their property. You may be able to buy a probate house at a price that’s lower than the property’s market value. But the homebuying process is very different with probate sales, so you’ll want to plan accordingly.
There may be other concerns with this type of real estate transaction that could give you pause as well. With that in mind, let’s take a look at how probate sales work and what you should think about before buying property this way.
Probate meaning: What does it mean for a house to be in probate?
Probate is a very important legal concept that comes up just about anytime a homeowner passes away. In the simplest terms, probate is a legal process that ensures the terms of a will are followed or, if no will is available, determines how the deceased’s possessions should be administered.
Probate sale meaning
A probate sale can occur when the original homeowner dies without a will or without any heirs to claim the property. In these situations, the home will go into probate, and the courts will decide what to do with it. Often, the most sensible course of action is to sell the property in a probate auction.
That doesn’t necessarily mean the homeowner’s family members are completely cut out of the picture, though. Relatives could elect to sell a loved one’s house through probate rather than take on the property themselves or try to find a buyer through more conventional real estate channels.
Each state has its own laws regulating probate procedures, so it’s a good idea to brush up on your local rules before buying a home in probate. State laws may even dictate how much the home can be sold for, affecting the potential bargain that a probate house presents.
How do probate sales work?
As you might already suspect, buying a house in probate is a starkly different experience compared with the typical real estate transaction. For one thing, there’s no homeowner to negotiate the terms of the deal. With a probate house sale, you’re bidding against other potential homebuyers and purchasing property directly from the state.
Let’s go through step by step what the probate process looks like:
5 steps to buying a house in probate
- Find a probate listing
- Check the terms of sale
- Make an offer (or a bid)
- Prepare for a bidding war
- Schedule a home inspection
1. Find a probate listing
Probate sales don’t normally turn up in your go-to online listing platforms, so you may miss out on these potential deals. Your best bet may be to reach out to a real estate agent for help. Agents often hear about new properties before they come on the market, and they may get wind of probate properties early on as well.
If you’re dead-set on this kind of property acquisition, you may want to seek out a probate real estate agent who specializes in this sort of deal. Another option is to go directly to the probate court itself and ask about upcoming auctions and active listings.
2. Check the terms of sale
You need to read the fine print with probate sales because the terms of the deal may veer sharply from what you’d normally expect. Often, probate houses are sold in as-is condition. That means you can’t lobby for credits to cover the costs of repairs or negotiate the purchase price based on the results of a home inspection.
Also, be sure to check what the situation is regarding contingencies. Probate auctions frequently remove contingencies from the equation, which could mean you won’t have much — if any — protection if you decide to back out of the deal. Normally, contingencies would cover buyers for a wide variety of scenarios — for instance, sale contingencies allow you to cancel a new purchase if you’re unable to sell your current home in a timely manner. Without those conditions built into your purchase agreement, you could be exposed to much more risk.
3. Make an offer (or a bid)
Once you’ve found the right probate house, it’s time to put in an offer. Making an offer on a probate house comes with a few wrinkles, though. Arguably the most important distinction to remember is that any accepted offer is provisional — that is, nothing is final until you get probate court approval. In the meantime, other potential buyers can make offers of their own and outbid you.
The other major consideration to keep in mind here is the deposit requirement. When you make an offer on a standard real estate transaction, you need to put forward some earnest money to show the seller you’re serious. That’s usually a relatively small percentage — 1% to 2% — of the purchase price. With a probate sale, you’re looking at a 10% deposit just to put an offer on the table. So, have that cashiers check ready. The good news is if the court rejects your offer or someone else outbids you, then you’ll get that money back.
4. Prepare for a bidding war
As we said, an accepted offer is purely provisional; you still need to go to the court to receive probate approval. It’s not uncommon for other buyers to show up and outbid your offer. You may even find yourself entrenched in an all-out bidding war. If that’s the case, be ready to raise your purchase price to edge out the competition.
You can’t just outbid other buyers by the smallest possible increment, though. Probate courts follow a set formula to calculate the minimum acceptable overbid:
Accepted offer + 10% of the first $10,000 ($1,000) + 5% of the remaining balance (original bid - $10,000)
That may seem overly complicated, but here’s how it would look in practice. For the sake of our probate example, we’re assuming the original bid on the house is $300,000:
- Accepted offer: $300,000
- 10% of the first $10,000: $1,000
- Remaining balance: $290,000
- 5% of remaining balance: $14,500
- Minimum overbid: $315,500 ($300,000 + $1,000 + $14,500)
5. Schedule a home inspection
Just because you can’t negotiate seller credits on necessary repairs doesn’t mean you should forgo a home inspection. Probate homes are often viewed as riskier purchases because the people responsible for selling them aren’t familiar with the problems that may lurk beneath the surface. With a normal real estate purchase, listing agents frequently anticipate the cost of required repairs and adjust the asking price accordingly. Executors or relatives of the deceased are far less likely to have much insight into the state of the property.
Unlike other home purchases, however, you may not be able to recoup your deposit if you decide to walk away from the deal at this juncture. Buyers usually get their earnest money back if a sale falls through due to problems with the house or financing, but that’s not the case with a probate home. You’ll likely have to give up your deposit in that situation, so that’s another big risk to consider before making a decision.
How long does it take to buy a house in probate?
As we’ve mentioned countless times before, buying a new house usually doesn’t take quite as long as most people think. You usually only need 30-45 days to close on a house, although the entire process can take up to three months when you factor in the search itself.
Expect your probate sale to take significantly more time than that, though. In fact, three months would be on the lower end of the probate sale timetable. Often, these types of transactions take six months to a year to complete. In rare cases, you may have to wait even longer to gain possession of a probate home.
Probate sales vs. estate sales
It’s easy to get probate sales and estate sales confused. After all, they’re both real estate transactions that involve selling off property after the owner has died. But, as with everything else in the real estate industry, the devil is in the details. Look a bit closer, and you’ll see nuanced differences separating the two:
Sells the property alone
Liquidates all belongings owned by the estate as well as the property
Frequently involves an auction and multiple bidders
Estate accepts offers just like any typical real estate purchase
Court supervision isn’t required
When does it make sense to buy through a probate sale?
Not all homebuyers will want to get involved in a probate sale — real estate can be purchased in less convoluted ways, after all. But, there are cases where it may make all the sense in the world to explore probate listings:
- You’re on the hunt for a huge bargain on a new house.
- You want to invest in real estate and don’t mind buying a fixer-upper.
- You want to avoid competition with other buyers who may not be looking at probate homes.
5 Tips for buying a house in probate
You may face greater financial risks when you go the probate route. To improve the odds of everything going smoothly, be sure to follow these five tips:
- Get loan preapproval first
- Don’t overlook the home inspection
- Set your max budget
- Assemble an experienced homebuying team
- Look up your local probate laws
1. Get preapproved for a loan
Without a loan contingency, you may lose your deposit if you’re not able to secure financing after making an offer. Apply for loan preapproval first so you can be certain you’ll qualify for a mortgage with the terms you want.
2. Don’t overlook the home inspection
Losing your deposit should be the worst-case scenario with a probate sale, but getting saddled with a rundown house is as bad as it gets. Schedule a home inspection so you can walk away if need be (even if it means losing some money in the process).
3. Set your max budget
It’s easy to get carried away with auctions, especially when your competitive drive kicks in. Give yourself a maximum price you’re willing to fork over for a probate house to avoid overpaying in a bidding war.
4. Assemble an experienced homebuying team
Probate sales can be pretty tricky to navigate, so you’ll want all the help you can get. Work with real estate agents, attorneys and loan officers who have gone through the probate process and know what to expect.
5. Look up your local probate laws
Every state has its own regulations dictating the terms of a probate sale — California laws, for instance, require listings to be sold for at least 90% of their appraised value. You wouldn’t be able to lowball the asking price by too much in that case. State probate codes may also tweak the formula used to determine minimum overbids or change the required deposit amount. Read up on any local rules that may impact your purchase beforehand so you don’t run into any unwanted surprises.
Probate sales can be a good way to get a discount on real estate. There’s usually less competition from other homebuyers to drive up the price. Plus, court-appointed executors typically aren’t too determined to get the highest price possible on a probate listing.
But those potential benefits may be offset by the inherent risks that this type of transaction presents. The lack of certain standard contingencies means homebuyers won’t have much protection if the deal goes sideways. And because the deposit is typically higher than earnest money requirements, you stand to lose more money if things fall through.
All the more reason to do your homework beforehand. Consult with real estate professionals who understand how probate sales work and the best ways to approach them. Also, don’t forget to get preapproved for a loan before doing anything else.
The last thing you want is to have a court-confirmed offer on the table and then find out your financing didn’t go through. A preapproval letter will relieve any concerns about your ability to secure a home loan. That way, you can bid on probate homes with all the confidence in the world.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this article are for general informational purposes only.
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