Law Offices of Craig Willford
The Sale of Real Property in Decedents’ Estates
Data as of June 16, 2012
The sale of real property in decedents’ estates is not like the sale of real property otherwise. It is special.
Probably first and foremost thing to know about sales in probate is that it is truly “AS IS”. The goal of that concept is that after the sale, the estate usually is then promptly closed and distributed to the several beneficiaries. If later the new owner wants to claim that the seller should have warned that the sewer clogs up once a year from tree roots or that the hillside slumps into the swimming pool after a hard rain, the seller (the Executor/Administrator) is not going to have any money to pay in damages because he/she has distributed it. The estate needs to be confident that it is safe to make that distribution without risk that there might be future claims from any source. The public policy behind the statute that authorizes strong “AS IS” sales by decedent estates is also grounded in the fact that the very person who would know about latent defects in the realty (roof leaks in hard rains, sewer clogs, etc.), the owner, is now dead, while the Executor/Administrator perhaps has never lived there and has no clue about such defects so can’t warn about them.
I insist that the participating realtors use the California Association of Realtors (CAR) Probate specific versions of the Multiple Listing contract and Deposit Receipt and Offer forms. This enables all parties to know much more what is expected of them and reduces substantially the work associated with making counter offers.
Next is that the sale might be conducted either with or without “Full IAEA” powers.
If the Executor/Administrator has Full IAEA (Independent Administration of Estates Act) powers, then he/she can qualify the sale more simply using the Notice of Proposed Action technique. If none of the persons who have a right to object do object, then the sale can go forward without the Court confirming the sale. If someone objects, then the sale must be confirmed the same as though only Limited IAEA powers were granted.
If only Limited IAEA powers (or if no IAEA powers at all) are held, then the sale must be confirmed by the Court. In this case, the offer that was accepted (subject to Court confirmation) is submitted witPetition to Confirm Sale of Real Property. That Petition is set for hearing, usually about five or six weeks after it is filed.
There are rare (very rare) instances when the hearing needs to get continued. In those instances, I call all that parties for whom I have knowledge intend to appear and I have contact information. But many overbidders just show up at the hearing with no advance notice that they intend to come. If you are one of those, you should call my office the afternoon before the hearing.
At the hearing, if everything is “clean” (ie. proper publication was given, notices were given properly, the Inventory and Appraisal [and Re-Appraisal for Sale, if the sale is over a year after the date of death] was done, the sale is for at least 90% of the Appraised price, the Court is satisfied that the sale is conducted reasonably, is in the best interests of the estate and was done with proper exposure to the market), then the Court on the hearing date will call the case and ask if there are overbidders.
The overbid process is interesting. The statute requires that the first overbid, if any, must be above the current sale contract price by at least 10% of the first $10,000 plus 5% of the excess. Thus if the original contract of sale sought to be confirmed at the hearing were for $410,000, then 10% of the first $10,000 is $1,000 and 5% of the excess is 5% of $400,000, or $20,000. Thus the first overbid would have to be above the original contract by $21,000, or an overbid of $431,000.
Thus you can see that in the competition to be the one buyer that seems best to the Executor/Administrator, it is a substantial advantage to be the one that gets accepted initially. Because the first overbid is such a substantial increment, a potential buyer does not want to rely upon the presumption that they can always “try again” at the Court hearing. In the example, it would have been better for a competing buyer to have tried to offer $420,000, rather than have to bid $431,000 at the hearing.
Not just anyone walking into the courtroom is going to be able to call out that they are bidding $431,000 and walk out the winner, though. How is the estate and the Court to know that the buyer is really able to carry out the deal? The personal Representative, his/her realtor and I will have checked out the original buyer, their deposit check will have cleared and we will have pre-cleared the buyer's credit worthiness.
To turn away the original buyer's bid in favor of the overbidder only to have the overbidder fail to be able to close is to risk major damages to the estate. In order to go with the overbidder, the estate needs to know that either the overbidder can and will close escrow or that the deposit money will cover the damages that flow from the failure and the need to start over to find another buyer all over again.
An overbidder's personal check for the deposit money is not going to suffice as earnest money, since the check could bounce. Traditional custom and usage is that the overbidder should bring a cashier’s check, typically payable to the buyer and then endorsed over to the seller if they win in court, for 10% of the overbid amount ($43,100 in my example).
Sometimes more than one overbidder appears and usually the original bidder appears too. If buyers want to overbid the overbidder, the court sets the increment for that process, usually one or two thousand dollars per bid. Then the process proceeds as an auction with the Judge as the auctioneer: $433,000, $435,000, $437,000, going once, twice, sold. If the original bidder knows in advance that they can’t or won’t overbid an initial overbidder (ie. they can’t or won’t bid $433,000 in my example) then they don’t need to bother going to the court hearing, since if there are no overbidders, they win be default; if there are overbidders, then they were going to let it go anyway.
That overbidder then should be prepared to endorse over their cashier’s check for $43,100 and add in the extra $700 to make 10% of their bid in some other form. Sometimes that form is cash, green folding stuff. Other times it is another (or a few other) cashier’s checks.
All overbidders should be prepared to show (in private) to me (the lawyer for the Executor/Administrator) in the hallway of the courthouse their ability to deliver the 10% deposit money and to otherwise close the escrow (that they have lots of cash in accounts or that they have great credit.
The deposit money will not flow through escrow, except in VA loan instances where it might be required, but will pass to a special account of the Executor/Administrator.
After the Court hearing, an Order Confirming Sale of Real Property will be prepared by me (the attorney for the Executor/Administrator) and submitted to the Court for signature. After it is signed and filed, a certified copy of it will be purchased and it will be attached to the Executor/Administrator’s Deed (to be prepared by me, not by escrow).
Speaking of escrow, most escrow companies have “standard” language in their escrow instructions that try to exculpate them from liability except for gross misconduct. Baloney! I require that language and other unacceptable language to be negotiated out, or we switch escrow companies. Someday, perhaps, I will develop a web page of preferred escrow companies that willingly negotiate those terms out (and a “blacklist” of escrow companies that refused to do so).
I have preferences too about title companies. They are not all alike. I have dealt for decades with Old Republic Title (since before, when they were Lincoln Title) with much success. They are professional and thorough. They have come up with innovative solutions to “sticky” issues in the past. Unless there are compelling reasons, I prefer to use them.
If escrow was opened with an original bidder who lost to an overbidder in Court, that escrow will close (without charge to my client) and the deposit of the original bidder will be returned to them immediately.
The realtor commission is subject to the discretion of the Court as to the amount. The old standard of 6% on residential realty was always reduced to 5% in the probate setting. Recently with realty prices as they are so inflated these days, commissions are not commonly 6% even on non-probate sales anyway. The court will commonly approve the lesser of 5% or what was negotiated in the listing. I have seen exceptions where the Court allowed a commission above 5% for farmland in Fresno, where 10% was the custom and where the sales price was less than $100,000, but that circumstance is uncommon.
The split of the commission is subject to contractual agreement and, in the absence of contract, the Probate Code provides a complicated equation that splits it. I prefer to contract with the original bidder’s broker: If they win the sale at Court, they get ½ the commission; if they don’t they get nothing, just as in non-probate sales.
A probate seller does not give the TDS (Transfer Disclosure Statement) for much the same reasons as that the sale is “AS IS” and is exempt from many other statutory requirements of normal sellers. If the participating realtors use the California Association of Realtors (CAR) Probate specific versions of the Multiple Listing contract and Deposit Receipt and Offer form, then the things that a probate seller is exempt from and not exempt from are stated therein. That way there are no surprises.
This page and all pages of the www.craigwillford.com web site is copyright by Craig Willford on various dates; this page in 2005 and 2012.