Probate Court in Los Angeles - waiting outside the courtroom
With this post, I'll review what a probate sale is and why it may or may not be for you.
Wondering what those MLS listings with "Probate Sale" listed are? They are properties where the owner has died and the property is not in a living trust. Whether or not a will is present, the absence of a living trust requires the appointment of an executor, administration by an attorney and court confirmation before being able to sell the property. The court ensures that the price for the house is fair (and above the appraisal). I'll review the probate sales that require court confirmation. We offered and closed on a probate house that required court confirmation.
While probate sales take longer, you may be able to find properties that make sense since regular buyers are generally scared off from the process.
There are two kinds of probate sales:
1. Auction - The auction is held on the property and then the sale is still subject to court confirmation and can be overbid in court.
2. Offer based - Make an offer. If your offer is accepted, your sale is subject to court confirmation and can be overbid in court. This is the kind we dealt with.
The steps we went through:
1. Offer Accepted
Our offer was the highest accepted, and we were able to add an inspection contingency (please note that a financing contingency is not allowed). It was imperative for us to know the property was in good condition. The property had a newer foundation, foundation bolting, insulation, newer electrical and plumbing, and limited defects we would need to fix. This allowed us to feel confident proceeding and possibly raising our offer slightly had we been bid against in court. We had an excel sheet of all possible construction costs, an overage, and monthly/yearly costs of the property. Analyzing the deal allowed us to remain firm on our number and not get emotional if being outbid in court. If outbid, we planned to start sourcing off market deals in the area.
2. Court Date Arranged
After releasing our inspection contingency, we sent over the deposit check and the selling broker filled out and sent in paperwork to set a court date. We received word within two weeks of the court date, which was four weeks from that day. Other buyers have a chance to bid against us, starting at 5% plus $1,000 over our price. For us, this was $450,900. Since some other homes in the area are selling for $500,000, we had less of a chance of flippers bidding against our all cash offer since the margin was too narrow. Since we have multiple exit strategies on this deal and are looking to buy and hold (plus having knowledge of the excellent condition of the house), we were confident with the price we paid. An investor coming in without an inspection report would not be so confident. If the price had been lower, we likely would have seen folks bidding against us. We were told one long time investor was interested, but hadn't had time to see the property. They are likely juggling other, "better" deals that meet their numbers.
3. Court Confirmation Hearing
We arrived at the courthouse and had to go through the security line. After that, we confirmed the court room number with the receptionist and walked there. We saw dozens of people milling around and were nervous about overbidders being present. The selling broker called out for overbidders, asking to see their checks. None came forward and we crossed our fingers none would!
The case ahead of us had about 20 other bidders, since the accepted offer was low and in a high demand area. The judge lines up all bidders in front of his desk and takes down everyone's names one by one. Each bidder had to present their certified deposit check to the probate attorney prior to being allowed to bid. Then he lists the accepted price and asks if anyone wants to bid the "overbid" amount - accepted offer price plus 5% plus $1,000. All buyers must raise their hands and agree to that price. If anyone doesn't raise their hand, they are asked to step back out of he courtroom and bidding ends for them. The bids were raised $5,000 from there, and bidders dropped off like flies. We noticed that one team brought three people to bid independently. I'm not sure of the advantage, other than trying to psych out/overwhelm the competition. Finally, it was down to two bidders and the final number was called out. Only one bidder agreed and the sale was confirmed to that bidder. The final price was about $140,000 over asking for what is essentially a 700 sq ft tear down on a 1,200 square foot lot. Got to love LA real estate!
After witnessing this, we were nervous about overbidders and kept an eagle eye on the courtroom. We were watching for folks presenting checks to the probate attorney. We were called up to the front and our hearts beat anxiously while the judge called for overbidders. With none present, he confirmed the sale to us and took down detailed name info and how the name would be recorded on the title.
We were then congratulated and released to leave the courtroom. We left and hugged each other, relieved we didn't have to fight overbidders! We got a fair, while not dirt cheap, price. Especially given the solid foundation and great overall shape the house is in.
We checked back with the probate attorney, who merely congratulated us and shook our hand. She didn't need anything else from us and we were free to go. The selling agent filled out a check for the probate attorney to pay our deposit and we chatted with the winner of the previous property while waiting. Turns out he's a contractor/developer and was hoping to build a three story home on the site to maximize the space. It was one of the few properties with a garage in the area and thus highly coveted. He congratulated us, too!
4. Open Escrow
The rest of the sale then followed the same process as a regular sale. The Escrow Company sent over paperwork to sign and followed the usual title insurance process. All of the liens will be paid off with the sale and you receive the clear title.
5. Close On The Sale
The final cost of the house was wired to the title company for disbursement and we closed about 21 days after the court date.
Was it worth it?
For us, the great neighborhood, the potential of the house and the unusual great condition of the house made it worth it. Since your deposit money is tied up while waiting for your court date (with no guarantee of a house!), this process only makes sense if you have the time and money to go through the process. If another property we loved had popped up on the market and we had lost out of this one, our money would have been tied up and precluded us from going with the other property.