Law Offices of Craig Willford
Overbids at hearings of Confirmation of Sale of Real Property
Created June 7, 2012
Probate sale overbids. Here are some thoughts for brokers and overbidders to read in advance of the confirmation of sale hearing:
When a sale is set for hearing in Court, it will be subject to an "overbid" process. The process is very much like an auction. The Probate Code sets the first overbid amount minimum as a formula of the original bid being brought for confirmation by the Court: The overbid has to be above the original bid by 10% of the first $10,000 and 5% of the excess. Another way to quickly compute the amount of the increase is to take 5% of the whole original bid and add $500. The minimum overbid will be specified in the Report of Sale and Petition to Confirm Sale of Real Property, which is public record. In addition, I request that my realtor alter the MLS listing to report (after an offer has been accepted) the date & time of the sale confirmation hearing and the minimum overbid price.
An overbidder is not required to bid only the minimum overbid, of course, for example if the first overbidder thinks there will be overbidders to the first overbid and by experience in that courtroom you know the judge will set the bidding increment to $2,000, then, as a strategy, one might want to place the first overbid to be slightly above the minimum overbid to put the next $2,000 above that to be just out of reach of the competitor. Of course, no one can really know the willingness of another overbidder to "up bid" a bid.
In any event, the bidding continues until only one overbid remains and the Court then confirms the sale to that buyer.
This next part of the explanation is really important, so pay attention. Because the Court will have, in essence, turned away at least one competing bidder (at least the original bidder) when the Court confirms a sale to an overbidder, it is REALLY important that such overbidder actually close the deal with a timely close of escrow. If it were thought that it might "fall out" because of some reason, the seller (the estate) might well have preferred to have sold to a lower bidder who could have actually closed the sale.
For this reason, before the Judge takes the bench, the attorney will invite the overbidders into the hallway to see proof of the deposit money and any other proof of the overbidders' abilities to close. Commonly the overbidder will come prepared with a Cashier's Check (payable to "[Name of Personal Representative], as [type of capacity] of the Estate of [name of the estate]") in an amount acceptable to the Seller. The amount of the deposit at least needs to reflect an appropriate increment over the deposit amount of the bid being overbid. In the old days, it was required to make the deposit equal 10% of the bid. While that is not now required, it is still recommended, as it gives strong assurances of the overbidder's ability to close and their strong commitment to closing. Then overbidders would then either bring several incremental small Cashier's Checks to supplement the big foundational deposit Cashier's Check so that whatever is their final bid amount will be covered by the combination of Cashier's Checks delivered. The Cashier's Checks not used can be surrendered back to the bank that sold them for credit back to the account. If the overbidder is not the winning bidder, then the Cashier's Checks are of course not turned over and they would all be surrendered to the bank for credit.
In addition, also out in the hallway, some additional proof to the Seller might well be in order to show that the overbidder can actually close: lender's letters of pre-qualification, for example, or bank statement(s) showing the big balances in liquid accounts vested in the overbidder (for an all cash offer).
At the conclusion of the sale hearing, if there was a successful overbidder, then the overbidders will have to sign an Overbid in Open Court form. As a consequence, the overbidders are required physically to be there in Court (they cannot simply be represented by a real estate broker or salesperson). I suppose an exception could be that the broker or other person bidding for another holds a valid, properly executed, recordable Power of Attorney that authorizes the contracting for the purchase of the property on behalf of the overbidders, but this adds such additional complexity that it is not recommended except in extreme circumstances.
If the Seller (the estate) is not convinced of the good faith overbid, he/she is not required to accept it, so the more complexity inserted, the more likely the Seller will decline to sell to that overbidder. Make it simple: have the overbidders present in Court.
Because the Seller has the ability to approve or disapprove of overbidders because of additional terms, complexity and the likelihood of actually closing escrow, the Seller needs to either be present or if they are out of state or some other unavailability, then available for consultation by phone, live, right during the hearing itself. In all normal cases, the Seller will be present at the hearing.
The sale, once confirmed at the hearing, needs to be non- contingent. In other words, the Buyer needs to be able to actually close no matter what. If their loan falls through and they can't close, that is not an excuse; they would be in breach, leading to a damage award to the Seller.
The amount of such a damage award could be substantial. It is not limited to the amount of the deposit! In essence, the Seller will have to take legal steps to un-do the sale confirmation to the defaulting overbidder, then expose the property to the market again, contracting with the best bidder that can be then found (remember that the previous bidders were all turned away and may not be still in the market). Then a new Report of Sale and Petition to Confirm Sale of Real Property needs to be prepared and filed with a new hearing fee. Notice of that new petition needs to be given. Depending on the facts, the Seller might even have to publish the NOTICE OF INTENT TO SELL REAL PROPERTY again. Suffice it to say: in addition to the damage of potentially selling for less the next time around, there will be substantial additional attorney fees and court fees and other costs involved.
In addition, an escrow may well have already been opened with the buyer that is in breach. Cancellation Instructions will have be made and circulated for signature.
As a consequence, you do not want to overbid unless you can actually close the sale!
Ok, on the point of closing the sale: people unfamiliar with the
process will expect that after the hearing some sort of "contract"
needs to be prepared and signed between the overbidder and the
Seller. No. The relationship is formed by the Court confirming
the non-contingent overbid and will be reflected usually in two
1) the "Overbid in Open Court" form coupled with
2) the contract that it overbid.
This assumes the commonplace situation where the overbid is on the same terms as the original bid, except for price and name of buyers. To attempt to make some sort of replica "contract" with the terms of the relationship of the confirmed overbid would be dangerously difficult and burdensome (meaning expensive in attorney fees). I said "dangerously difficult" because if an error is made in the draftsmanship, it is possible that a novation could be argued to have been made. It is safer to stick with the original documents.
The escrow and the Buyer's lender will need to learn to deal with it.
In addition to lenders not likely to understand the overbid process, escrows too are likely not to be geared up to draft escrow instructions for an overbid situation.
All instances in the escrow instructions that talk of the "agreement" will need to be amended to reflect that it is not an agreement that is the foundation of the relationship of Buyer and Seller after the Court has confirmed a sale to an Overbidder.
The escrow instructions need to make it clear that the duty of the Overbidder to close the sale is not contingent on anything: not on their loan, not on approval of a Preliminary Title Report, not on the Flood Zone / Fire Zone / Earthquake Zone and other disclosures, not on the sex predator disclosures, not on anything. The law may require that the Seller make the disclosures still, but the sale is not contingent upon it. The escrow instructions should make that clear. Thus the overbidder should have checked all this out before making the overbid.
The OVERBID IN OPEN COURT form will likely incorporate by reference the terms of the offer that was the original bid, so it will have to be delivered to escrow too, with the original bid form and a copy of the signed and filed ORDER CONFIRMING SALE OF REAL PROPERTY when it is available.
The ORDER CONFIRMING SALE OF REAL PROPERTY commonly will not be available right away because typically a bigger supplemental bond will need to be posted than the one for which the estate was prepared at the hearing. The Court will not sign the ORDER until the supplemental bond is filed contemporaneously therewith.
A certified copy of the ORDER CONFIRMING SALE OF REAL PROPERTY is obtained immediately, to be recorded with the DEED OF ADMINISTRATOR/EXECUTOR/[other capacities]. My office will be preparing that deed, not escrow, so the escrow instructions should make that clear too.
Early interface with the Title Officer assigned to the Title Order for this sale is wise, so as to email him/her a draft of the proposed DEED OF ADMINISTRATOR/EXECUTOR/[other capacities] for his/her approval as to form and content. It is better to know in advance of disparity in draftsmanship before you find yourself at the doorstep of the Close of Escrow (COE).
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