How Does a Probate Sale Work?
It could save money up front, but it can be a complicated way to buy
A probate sale can happen when the homeowner dies owing significant debts. Property they own will be sold to pay off their creditors to the extent possible if the estate doesn't have enough in the way of cash assets to satisfy creditor claims. Any money left over would be distributed to family members or beneficiaries, depending on whether the individual left a will.
Homes in probate are marketed and sold just like traditional properties, typically with a real estate agent listing the house and showing it to potential buyers. Anyone is free to make an offer on these homes, but the process can be a bit more complicated.
How Probate Sales Work
The probate process can vary from state to state, but the court will typically appoint an estate representative, called an executor when there is a will, or an administrator when there's not a will. This individual is charged with settling the estate and guiding it through probate. Part of this process involves identifying legitimate creditors of the deceased.
The executor will then be charged with selling estate property if it must be liquidated to pay these creditors. The court will typically order an appraisal to set a listing price.
The executor will most likely hire a real estate agent to list the home, market it, and show it.
The executor must petition the court for permission to sell the home when at least one buyer has put in an offer. The deceased’s heirs and the estate's beneficiaries will be notified, and the sale can move forward with court permission if no one files an objection.
All interested buyers must typically appear in court to submit their bids if more than one offer is received. The highest bid wins, and the winner must hand over a cashier’s check for at least 10% of the offer price to the estate’s executor or administrator.
Probate properties can sometimes sell for reduced prices.
They can be a good option for investors who are looking to save.
The property might have unknown defects.
No contingencies are typically allowed in the bidding process.
There's often a lengthy closing period.
Extra legal fees, appraisal fees, and other expenses can apply.
The process might require a specialized real estate agent.
The IRS won't allow the home to be sold until it's established that the estate owes no estate taxes.
Reasons to Buy a Home Through Probate
The major advantage of buying a home in probate is that they typically sell for less than other homes in the area. A probate sale might offer the best deal if your goal is to scoop up a home at a significant discount, either for yourself or as an investment property.
These homes are often appealing to investors who are looking for fix-and-flip properties because they're sold "as is."
Reasons to Not Buy a Home Through Probate
These properties also have a lot of drawbacks. It typically takes a long time to assume ownership. It could be more than a year before you’re able to close on the home, if your offer is even accepted, due to legal waiting periods, disputes among the deceased’s family members, unsettled debts and liens, and other factors.
There’s no way to request repairs or seller credits to make repairs yourself because there's no real "seller" in place. The home might also have defects that aren’t disclosed or even known at the outset. These issues could potentially put you out of compliance with your city’s building codes, deed restrictions, or your homeowner's association if they're not fixed.
Your lender won't agree to proceed with your mortgage if a probate home doesn’t appraise for the full value of your offer. You’ll have to make up the difference between the appraised value and your offer out of pocket in order to move forward with your purchase.
You'll also be on the hook for going through with the purchase if your financing falls through and you’re unable to get approved for another mortgage. At the very least, you'll most likely lose your earnest money if this happens.
A loan financing contingency would normally protect against having to proceed with the purchase if you couldn't get financing for a traditional sale.
The IRS automatically places a lien against a decedent's assets until it can be determined whether the estate will owe estate taxes. It can't be sold until such time as it's established that the estate doesn't owe this federal tax and the lien is released. This can delay the closing process considerably.
Finally, buying a house in probate can require using the services of an attorney, as well as a real estate agent who specializes in probate sales. These sales require unique contracts and documents that aren't common in other types of real estate transactions, so this specialized knowledge can be helpful.
The Bottom Line
Probate sales can be a good option if you’re looking for a bargain, but they also come with a number of added risks and fees when compared to traditional home sales. Enlist an experienced probate attorney or real estate agent to guide you if you’re considering buying a house that’s in the probate process. You should also be prepared for a lengthy waiting period before you can close on the home.
NOTE: The Balance does not provide tax, investment, or financial services and advice. The information here is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor, and it might not be suitable for all investors. Investing involves risks, including the possible loss of principal.