What is a Probate Sale? Answering 4 Big Questions About This Tricky Transaction

You’re interested in buying a house, and someone told you about probate sales. You vaguely understand that these can provide opportunities for a bargain. But — if you’re being honest — you really have no idea what a probate sale is or how it works. That’s OK! We’ll walk you through it.

Essentially, a probate sale happens when a homeowner dies and either does not leave a will, does not make it clear in their will who the property should pass to, or leaves behind outstanding debts that can only be satisfied by the sale of the property.

Probate generally refers to the legal process whereby a court either confirms the distribution and ownership of property as dictated by a will, to pay off outstanding creditors, or determines who will take ownership of the property if the deceased didn’t leave a will, didn’t account for all of the property in the will, or the will is unclear or contested.

It’s important to note that probate law and procedures vary from state to state, so there’s no uniform application of every rule and procedure, and probate sales of real estate can vary from state to state.

And if you think all of this sounds complicated, you’re right: Probate sales are often tricky, complex, and drawn-out transactions that can present additional challenges for a would-be buyer, but can often result in a significant bargain for the buyer.

In this expert-backed guide, we’ll answer some of the most common questions about probate sales to help demystify this type of transaction so you can determine whether it’s right for you.

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What is a probate sale?

Let’s start with the fundamentals. Again, “probate” refers to the legal process by which a court determines the validity of a will and how any property in the will is to be distributed.

People prepare wills to specify what they would like to happen to their property after they die. Even if no one contests what is dictated in a will, a will must generally be approved by a probate court to ensure outstanding creditors or other claimants have an opportunity to collect any debts from the deceased’s estate before ownership is transferred.

It’s also important to note that the need to go through probate and the court’s involvement is almost always triggered when someone dies without a will (also known as dying intestate) and has left behind substantial personal or real property.

An actual “probate sale” can arise or be ordered by the court when the property owner  passes while still owing substantial debts, and it is determined that the property needs to be sold to cover those outstanding debts.

To complete the probate process involved with these sales, a designated representative or attorney will likely need to be appointed to actually sell the property, with the heirs to then receive any net proceeds from the sale.

Something to keep in mind: the whole probate process can be long and complex given that it is all overseen by the court, and any sale must be approved by court order.

That is, “[w]ith a probate sale, you need a court order — you can’t just have a buyer and seller agreeing,” says Mark Moskowitz, a top-selling agent who completes 17% more sales than the average agent in the Agoura Hills area of Los Angeles. “You have a third party, and any time you have a third party, it takes longer and can be complicated.” (More on these complexities later.)

How does a probate sale unfold?

A probate sale can be complicated and take time. (Spoiler: If you’re interested in pursuing such a property, bring your patience — and make sure you have a place to live in the meantime.)

This is what the probate process tends to looks like in a chronological timeline:

• The probate court appoints an executor or administrator.
• The executor hires a real estate agent.
• The executor will get the house appraised and work to set a sale price, which is sometimes determined by the court.
• The home is listed for sale.
• Buyers can make offers, which usually have to include a 10% down payment (which will be returned if the buyer does not win the bid).
• The court decides whether to accept the offer. During this stage, family members of the deceased must be given the opportunity to comment on the terms of the home’s sale (and, as such, must receive sufficient notice of the same). If the offer is accepted, a court date is then typically set for 30 to 45 days in the future for the court to formally approve of and confirm the sale.
• During this time, other buyers can make higher offers — which is an area that can get somewhat tricky for buyers, as the executor or other appointed representative of the state has a duty to obtain the best result for the estate.
  “Let’s say you want to buy a probate, and they’re asking $600,000 for it. You make an offer for $575,000 and they accept it,” explains Moskowitz. “But now when they go to court, people can overbid you. If that happens, you would have to pay more to get the property.”
• On the court confirmation date, all interested buyers must attend the hearing, and the house is sold in auction format to the highest bidder. The executor then signs a contract with the buyer.
• Any home inspections can be done at this point. However, they’ll be for informational purposes only, as the sale is almost always as-is, and the buyer can’t back out for inspection-related reasons. “On a probate sale, the property is sold as-is, and you’re not going to get any repairs or anything,” Moskowitz explains.
• The probate sale then finally goes through the closing process.

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What are the benefits of trying to buy in a probate sale?

The main benefit to a buyer of buying a probate sale is that you might get a house at a lower price, as the property itself can be dilapidated. But even this isn’t a guarantee, as you might have competition during the court process from buyers who didn’t make the initial strongest offer, but who jump in and drive up the price when it’s possible to submit an overbid.

Consider one of Moskowitz’s recent sales as an example of how this scenario often plays out in the real world: “The last one we did, the father was extremely ill, and nothing had been upgraded in the house. The pool was green. They were avid smokers, so the walls were yellow. It showed poorly, but the price was really low because of that.

After an offer was made, “sure enough, we [still] had a lot of overbids, especially from contractors that were hoping to flip the deal,” he explains.

Additionally, probate sales represent the possibility that a buyer might find inventory not otherwise available to them — and 2021 is a tight market, indeed.

Many would-be buyers are daunted by the prospect of probates — and that narrows the field of competition. “There’s usually a little bit better value for people” willing to take a risk with the protracted timeframe as well as the as-is nature of the sale.

An as-is probate sale represents unknowns, Moskowitz says. “So, if you’re willing to go through the process, you’re getting a little better deal.”

Consider this real-world example, he says: “If two houses were identical side-by-side and one was a probate, and you had to go through this process, whereas the other you can look up [on the MLS] and have an easy process, you’re not going to pay the same amount of money. So you’ll [likely] end up getting a discount on the probate property.”

Indeed, in this white-hot seller’s market, many buyers are having to turn over every stone to simply find any property that might suit their needs. And probate sales provide a separate channel to explore when inventory is slim.

“In this market, we have got to look at probate, look at bankruptcy,” Moskowitz says. “We look at everything to get a house.”

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What are the drawbacks of buying a probate?

These sales can take a long time — sometimes even years. And that’s not just a matter of patience, but certainly a practical issue for a buyer, too.

“You have to have a place you can stay in the meantime. If you have time on your side, it can be a good deal,” Moskowitz says.

But on the flip side, “If you’re in a rental and you’re being kicked out, it’s probably not the right way to go. You’re going to be homeless before you get the process completed.”

The delay also means that sometimes you can’t lock in a loan long enough to cover the whole probate timeline. “You’re locked in for 30 days or 45 days, and we don’t know if we can close in that time, so what if interest rates go up a little bit in this market?” Moskowitz says. “That’s the risk of dealing with courts and overbids and time constraints.”

Probates are sold as-is. And this provides a risk for the buyer.

“It’s really important to go slow and get as much information about the house as possible, because a lot of times on probate the heirs didn’t live in the area. They don’t live in the house. They’re not going to [be able to] give you some of the disclosures,” Moskowitz says.

“So it’s almost like a foreclosure in the sense that you don’t get any additional information. And it’s ‘buyer beware.’ There’s more risk of hidden things that we don’t know about.

“You don’t know about disclosures, you don’t know about the condition of the property,” Moskowitz adds. And that’s why buyers will want to look for a discounted price point in order to make it worth their while.

“How hot the market is at that time will determine the discount you get on a probate,” and if you don’t feel like you’re getting much of a deal compared with a typical listing, it just might not be worth it, he says.

Probates are often fixers. For many people, this represents an opportunity and a benefit, not a drawback. But this won’t be the case for every buyer.

“Sometimes you can get a better deal as the homes may be a little bit distressed as the person who was older hasn’t fixed it up,” Moskowitz says. “It’s usually a little bit more of a fixer-upper in that it could be very dated: You walk in and it looks straight out of 1970 or 1980, and they haven’t done any updates.”

You often can’t include contingencies. With typical listings, contingencies can be a way to get a seller to wait for you to secure your financing or sell your existing house. Without contingencies, you won’t have any such leeway.

Further, these properties just aren’t as easy to find as other types of sales. You can find them on the MLS, but finding probate sales often require extra legwork — even contacting your local probate court, seeking home auctions in your area, or scouring newspapers and publications. For some buyers, that’s just too daunting a proposition.

There can be legal entanglements with the title. Maybe the heirs are fighting as to what happens to the property when a loved one died without a will. No matter how you slice it, there’s just a lot of red tape. Even a traditional home transaction has tons of paperwork and legal hurdles. With a probate sale, it’s magnified.

That’s why, Moskowitz says, “the attorney that’s handling it becomes very important. You have to file things in a proper manner. All the paperwork has to be filed and approved. If you’re not doing it properly, then the judge will disallow it, and it adds to the process.”

In one recent experience Mokowitz had with a probate sale, a surviving spouse wanted to sell the home quickly; in a hot market, it sold right away. But COVID-19 and other factors slowed the availability of a death certificate —  a document necessary to close — which significantly delayed finalizing the transaction.

And you might not even get a bargain with a probate — especially when the market is as hot as it is in 2021.

“The differential may not be as great” between the open-market value of the house and the deal you might otherwise be able to get with a probate sale right now, Moskowitz explains.

“People may actually bid up the probate a little bit higher now just to get into a house.” Whereas in a more typical market, you could “definitely see probate sales going for less money and being a better value just for the hassles required to get one.”

Header Image Source: (Robert Linder / Unsplash)