Here is What You Really Need to Understand Before Buying a Probate House
Probate sales are not for the faint of heart. Probate houses usually are heavy fixers that have tough sales terms and may be subject to overbidding.
The owner of a probate property passed away and probably lived there for twenty or thirty years. When people retire they are on a fixed income, and they often fall behind on regular home maintenance – that is why you find most probates are in pretty bad shape. Buyers like buying probates because if you are willing to put work in, you can get a pretty good deal on one.
There are two types of Probate sales: court confirmation and no court confirmation. The Listing Remarks on a Probate listing will specify which of the two it is. If the remarks don’t say or are vague, you can always talk to the listing agent and ask.
Offers for Probate sales are written on a special purchase contract called the “Probate Purchase Agreement” instead of to the Residential Purchase agreement. This is because the sales terms for probates differs quite a bit from a standard sale.
Differences Between Buying a Probate House and a Standard Sale:
-Offers written on “Probate Purchase Agreement” and not Residential Purchase Agreement
-Larger Earnest Money Deposit (for court confirmation), 10% down payment instead of traditional 3%.
-No Home Warranty
-No Loan Contingency
-Sometimes: Non Contigent Sale: No Loan Contingency, Appraisal Contingency, or Inspection Contingency.
-Court Confirmation is Subject to Overbidding
The terms when buying a probate house, vary greatly from sale to sale. The sale terms are decided by the court, the probate attorney and the listing agent. Probate sales are always ‘AS IS’ sales. ‘As is’ means that the seller will give the buyer no credits and won’t fix anything. The hotter the real estate market, the more tough the terms of the probate sale are going to be. Probate sellers may not pay for termite, retrofit, and may demand no inspection contingency or no contingencies all together. To find out the terms of the sale the listing agent will usually produce an offer guidelines document that you can review or you can ask them before writing an offer.
Probates are Fixers, require work, and may not qualify for traditional financing. By default the Probate Purchase Agreement has no Loan Contingency.
Probate sellers prefer cash offers because the poor condition of the property normally won’t qualify for a loan, but when buying a probate house, you can still write a financed offer on a probate property if its just a cosmetic fixer or you are financing with Hard Money as an investor. You may check Paragraph 3C(4) on the Probate Purchase contract to add a loan contingency.
Or, you can write your offer with no Loan Contingency even if you plan to finance the purchase, and take the risk that if you cannot get financing you will lose your Deposit. It really depends on how strong the market is and how many offers the property gets. The seller may accept a financed offer if its the only one they receive.
No Court Confirmation Probate
The timing of a No Court Confirmation probate are a lot like a normal sale and will take 30-45 days. Once the seller accepts your offer, there is no overbidding, and no approval from the court is necessary. You can open up escrow immediately once your offer is accepted. No Court confirmation has flexibility with the Earnest money deposit amount as well, it doesn’t need to be 10%.
Court Confirmation Probate
Court Confirmation probate sales require 10% deposit of the purchase price, by law, to be made at the time of a successful winning bid at the court confirmation hearing (buyers with an accepted offer on a court confirmation probate don’t need to worry about having their 10% down payment tied up while waiting for a court date). Low down payment buyers such as 5% down or FHA buyers can’t qualify for the sale terms of a court confirmation probate.
Court Confirmation Probate sales take longer. From when you offer is accepted by the seller, the probate attorney will request a court date which will take four to six weeks. The listing price for a court confirmation probate is determined by a court referee who provides an appraisal to court. The court may only legally sell the property for 90% of the court referee’s appraised value. Court confirmation hearings are subject to overbidding, more on that below. Having an accepted offer gives you a slight edge at the court confirmation hearing because the minimum overbid is at least 5% more than the accepted offer price. If you are the winning bidder, closing will take place ~30 days after the hearing.
A court confirmation hearing is basically a public auction. Even if you have an accepted offer on a court confirmation probate listing, you need to show up to the court confirmation hearing and get the court’s approval to get the property- so you better show up for your court date! I recommend to buyers who have lost a bid on a court confirmation probate listing to a higher offer to still show up for the court confirmation hearing, because the buyer with the accepted offer might bungle it or not show up and you can pick up the property there. A property isn’t sold until its sold!
The Minimum overbid amount is 10% of the first $10,000 plus 5% of the remaining balance.
EXAMPLE: A Probate property is listed at $650,000. The accepted offer is $625,000.
The minimum overbid is calculated as follows:
Accepted Offer = $625,000
+$10,000 x 10% = $1,000
+$615,000 x 5% = $30,750
Minimum Overbid = $656,750
COURT CONFIRMATION HEARING
The judge will call the sale and ask everyone who is there for the sale to stand up and identify themselves to the court. The judge will state the opening bid and and set the increment for bids. In the example above for a $656,750 min. overbid increments might be $3,000 or $5,000 or something. Just because the increment is $5,000 it doesn’t mean that you can’t bid more if you want. Sometimes going higher quickly will discourage other bidders from continuing.
Whoever is the highest bidder wins. They are responsible for depositing 10% cashiers check.
WHAT TO BRING TO OVERBID?
When buying a probate house, be prepared before you go to court. Thoroughly review the comparable sales and be familiar with the sale terms. I recommend setting a maximum number you are willing to pay for the property and stick to it. It is easy to get caught up in emotion during an auction and its important that you don’t stretch yourself too thin or overpay.
For the probate attorney and the court to allow you to overbid, you must show a cashier’s check for at least 10% of the minimuim overbid. Personal checks are not accepted. The cashier’s check must be made payable to the right party. Ask the listing agent before you come to court. It is also a good idea to bring proof of funds and a preapproval letter (if financing) to show that you are a well qualified buyer.
Are you planning on buying a probate house? Have any more questions?
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