In extremely competitive real estate markets, finding good deals can feel like searching for the proverbial needle in a haystack. However, one source for investment real estate that’s often overlooked is probate real estate.
In this article, we’ll explain what probate real estate is and how it works. We'll also discuss the process for buying real estate in probate, along with some of the potential advantages and disadvantages of probate real estate.
- Real estate investors may be able to find good deals from motivated sellers by purchasing probate real estate.
- Probate in real estate is the legal process of reviewing a deceased person’s assets and transferring to the rightful heirs.
- The probate real estate process generally involves selecting an executor, hiring a probate attorney, appraising and listing the property for sale, and negotiating and closing on an offer.
- The probate process can easily take months or more, depending on the assets of the estate and the number of heirs involved.
- Probate in real estate can be avoided by placing property in a trust and using a transfer-on-death real estate deed.
What does probate mean in real estate?
Probate is the legal process of reviewing a deceased person’s will and assets and transferring those assets to the rightful heirs, according to the will. Once the probate process is complete, the heirs can sell, convey, or transfer the assets, including any real estate that was inherited.
Real estate probate is generally defined by three steps:
- An individual owned real property.
- The individual dies.
- Formal court process known as probate is required to officially transfer title to the heirs.
The job of the probate court is to protect the deceased person’s assets.
When a person dies testate (with a will), the decedent's assets, including real estate, will be passed to the heirs or sold if the will directs, provided a deceased’s will is valid, authentic, and freely made. If the will is contested, the probate court will review the will and resolve any claim, dispute, or lawsuit.
If a person passes away without a will, a legal situation called intestacy is created. Because there is no will, the probate court does not know what the deceased wanted done with his or her assets or property.
When a person dies intestate (without a will), the court follows the state’s probate law to decide who receives the property. Although the order of inheritance varies from state to state, property is generally first received by the surviving spouse, followed by the children, then the deceased’s parents, and on to other relatives.
If there is an existing mortgage on the property, the heirs will need to pay it off, obtain a new mortgage, or sell the property. In cases where there are multiple heirs, the real estate is often sold with the sales proceeds shared among the heirs.
In a situation where the deceased has no heirs, the state will attempt to find any distant relatives. If no heirs can be found, the real estate will become the property of the state.
How probate real estate works
Although the probate process varies from one state to the next, in general probate for real estate follows six main steps:
1. Determine executor of the estate
The executor is responsible for disposing of the real estate according to the deceased’s will. If a person passes away testate (with a will), the executor will be named in the will. If the deceased is intestate (without a will), the probate court will appoint an executor.
2. Hire a probate attorney
The executor of the estate will hire a probate attorney to represent the estate and to act as a guide through the probate process. A probate attorney is paid by the estate and is retained to assist with any issues that may arise during the probate process.
3. Appraise the property
The deceased’s will may direct that any real estate be sold, or the heirs may mutually agree to sell the property. The estate’s executor will hire an appraiser to determine the fair market value of the property, usually with the assistance of a real estate agent who has experience with probate real estate.
4. List property for sale
Once a listing price for the property is determined, the home will be marketed for sale. Probate real estate is marketed using the same channels that are used for any other home, including signs, MLS and online listing services, social media, and word of mouth.
5. Approve & close the sale
After an offer has been negotiated, a notice is sent to all heirs of the estate informing them of the sale of the property. If there are no objections from the heirs within the time period allowed (usually 15 days), the real estate sale will be processed in court.
What happens if real estate is not sold in probate?
There are cases where inherited real estate is not sold in court, such as an only child or other heirs wanting to keep the home.
If the property is not sold in court, any outstanding creditors – such as the lender if the home is mortgaged – will be paid, and the executor will petition the court to transfer the real estate to the heir(s).
Some real estate investors make a living by purchasing property from people that have inherited a home. People who inherit property sometimes turn into motivated sellers if they determine they do not want the property or responsibility for maintaining it.
Buying probate real estate
Buying probate real estate typically involves the following steps:
- The heirs – including a spouse or adult children – inherit the property and decide they want to sell it.
- The property is listed for sale by a real estate agent with probate experience.
- An offer is negotiated and accepted, provided that all heirs agree to the contract.
- The probate process is used to transfer title of the deceased’s property to the heirs.
- The heirs subsequently convey title of the property to the purchaser and receive their money when the sales transaction closes, after any debts such as an outstanding mortgage or property tax lien have been paid.
Pros & cons of buying probate real estate
Investors purchasing probate property may be able to find good deals if the heirs agree to sell the probate real estate at a reduced price. However, in exchange for getting a good price on probate real estate, investors need to be patient, because sometimes the probate process can take several months.
In addition to long closing periods for probate real estate, the property may have defects that the heirs are unaware of, because they are inheriting the property. Probate real estate contracts are not allowed to have contingencies. Because of this, investors take care to complete as much due diligence as possible prior to making an offer for real estate in probate.
Other challenges real estate investors should expect when purchasing probate property may include extra legal fees and expenses and waiting for the IRS to confirm that there are no taxes owed by the estate.
How to find probate real estate
Finding probate real estate requires extra time and effort, but may be worth it if the right property can be purchased for a good price. Some of the best ways to find probate property include:
- Contact local real estate agents who have experience working with probate real estate.
- Visit the local probate court and research the active probate cases to locate the ones that include real estate.
- Search newspaper advertisements for probate sales and obituary notices.
- Purchase a probate mailing list from companies such as US Probate Leads or ProbateLeads.com.
- Network with probate lawyers who may be willing to act as a mentor for purchasing probate real estate.
Probate real estate FAQ
Q: How long does the probate real estate process take?
The length of time probate takes depends on a variety of factors, such as the amount of assets involved and the number of heirs. However, the process can take anywhere from several months to one year or more, according to LegalZoom.
Q: Is real estate probate required if there is a will?
Yes. When a person dies testate (with a will), the estate executor will hire a probate attorney to work through the probate court to ensure that any real estate is disposed of according to the deceased’s wishes. Some wills may require the real estate to be sold, while others may pass the property to surviving heirs.
Q: How much does probate cost an estate?
Probate costs generally run between 4% to 7% of the value of the estate’s property, or sometimes more. As The Balance explains, typical costs in probate include court, executor, attorney, accounting, appraisal, and bond fees.
Q: Can probate in real estate be avoided?
Fortunately, there are several ways for real estate owners to avoid expensive probate costs when property is inherited by next of kin.
According to the legal resource website Nolo.com, real estate probate can be avoided by using a revocable living trust, joint ownership of property (such as joint tenancy with right of survivorship or tenancy by the entirety), gifts, and transfer-on-death real estate deeds that help a property owner avoid probate by choosing a beneficiary ahead of time to inherit the real estate.
Real estate in probate is disposed of according to the will. Sometimes if there is more than one heir, people inheriting real estate decide to sell the property rather than keep it. Motivated sellers like these may create potential opportunities for real estate investors looking for good deals, although property is sold as-is and the probate process can take months from start to finish.