Probate properties offer profit potential

Are you a real estate agent looking for listings with little or no competition? Are you a home buyer searching for a below-market-price residence few other buyers know about? Can you keep a secret?



If you answered "yes" to two out of those three key questions, keep reading.



I'm referring to the little-known "underground" real estate market of probate properties. Probate is the name given to the court procedure to distribute assets of a deceased person, whether that individual died with or without a written will.



Although there are several key methods to avoid probate costs and delays, such as use of a revocable living trust or holding title as joint tenants with right of survivorship, each year approximately six million new U.S. probate cases are filed. Not all these estates involve real estate, but several million do.



WHY CONSIDER PROBATE PROPERTIES? The obvious major reason is to acquire a property at a bargain below-market purchase price with little or no competition. If you are a licensed realty agent, and if you understand the local probate property procedures, you can obtain the listing from the estate executor or administrator with virtually no competition.



Unless there are probate problems, such as a will contest or unpaid creditor problems, most real estate left by a deceased owner can be sold by the estate representative without legal complications.



"Exposure to the real estate marketplace" is the enemy. That is the key message of the great book "Creating Wealth Through Probate" by James G. Banks (Dearborn-Kaplan Publishing Co., Chicago, 2005, $18.95, available in stock or by special order at local bookstores, public libraries and www.Amazon.com). Banks explains probate property secrecy usually results in a bargain sales price because there is little or no wide exposure for probate properties to the local real estate market.



FINDING PROBATE PROPERTIES ISN'T EASY. There are many reasons why properties owned by the estate of a deceased owner are sold. Reasons include the creditors must be paid, the heirs don't want the real estate they inherited, and estate taxes must be paid from the estate assets.



For example, several years ago my good friend David was named executor in the will of a deceased homeowner who left his house to relatives living in a distant city. The house of the deceased was in bad condition. David hired a local real estate broker, Mark, to market the house for sale to produce cash for the heirs. The broker arranged painting and cleaning the house at a cost of several thousand dollars. After the house was in marketable condition, Mark listed it for sale. It quickly sold at a slightly below-market price, which satisfied the heirs.



The result was the estate got rid of a less-than-perfect house, the heirs got cash from the sale of a house they didn't want, and the real estate agent earned a full sales commission.



To find potential probate property listings, real estate agents and investors need to be diligent. Sharp agents and investors clip the daily newspaper obituary notices, look for published legal notices to creditors and notices of petition to administer estates, check probate court public files to determine if the deceased left real estate to be probated, and check with estate executors and administrators to learn if real estate will be sold.



FOUR KEY PROBATE PROFIT OPPORTUNITIES. Whether you are a real estate agent looking for probate listings, an investor searching for a probate profit property, or a home buyer hoping for a bargain-price residence, there are four key profit opportunities:



1. BUY FROM THE ESTATE EXECUTOR AT A BIG DISCOUNT. Depending on the estate circumstances, such as whether the deceased left big debts to be paid from the sale of real estate, it may be necessary for the estate executor or administrator to sell the deceased's property. Most executors and administrators are "amateurs" so they usually want a quick, easy sale and are not motivated to get top dollar.



2. BUY FROM THE HEIRS AFTER THEY RECVEIVE PROPERTY TITLE. Another probate buying opportunity occurs after the title to the probate property is distributed to the heirs who often don't want to keep it.



For example, years ago I bought a house where the elderly owner died of natural causes. Many people don't want to buy such a property. But that didn't bother me. The house had been listed for sale many months with an excellent agent. Then I made my purchase offer of 10 percent cash down payment with a 90 percent mortgage to be carried back by the three heirs. Father Ward, priest at the local Catholic church and one of the heirs, liked my offer. He recommended his siblings accept it, which they did. The result was a satisfactory sale for all.



3. BUY AT A PUBLIC SALE OF THE PROBATE PROPERTY. If the deceased property owner left no will — which usually renders a private real estate sale impossible — the local Probate Court might order a public sale of the property. That often means the estate administrator will list the property for sale with a real estate agent, subject to confirmation by the Probate Court. Local procedures vary.



4. PUBLIC AUCTIONS BENEFIT SELLERS, NOT BUYERS. Farms and difficult-to-sell probate properties are frequently offered for sale at public auctions. Heavy bidding frequently results in sales prices at or above fair market value. If you want to purchase a bargain-price property, buying at an auction is usually not wise unless there are few other qualified bidders.



PROBATE PROPERTY PURCHASE PITFALLS. If you are interested in acquiring a probate property bargain, you need to know of several purchase pitfalls:



1. PROBATE SALES ARE "AS IS." Most probate property sales are "as is." That means the seller does not make any warranties or representations. The result is the seller has no duty to pay for any repairs due to defects. Because the estate seller usually is not familiar with the pros and cons of the property, the estate is in no position to disclose defects.



In other words, the probate property purchase rule is "caveat emptor" (let the buyer beware).



If the buyer wants to make the purchase offer conditional on a professional property inspection, a termite (pest control) report, or mortgage insurance contingency, such clauses must be specified in the purchase offer. Otherwise, the buyer has no recourse for undisclosed defects.



2. WORK WITH THE ESTATE EXECUTOR OR ADMINISTRATOR. These individuals usually want to get the estate closed as quickly as possible. If you express an interest in a specific property owned by the estate, chances are you can negotiate acquisition of the property if you adopt a cooperative and flexible attitude.



3. ASK IF THE ESTATE WILL FINANCE THE SALE. "It doesn't hurt to ask" is the rule if you want to buy a home or other probate property but financing is a bit difficult. In such a situation, don't hesitate to ask. Better yet, make your purchase offer with a clause providing the estate heirs shall carry back financing on the terms specified in terms you offer.



4. HAVE A PLAN FOR THE PROPERTY. To be a successful probate property purchaser, you need a plan. Maybe it is to live in the residence. Perhaps it is to fix it up and earn a huge resale profit for "flipping." Or perhaps you have grand ideas to develop the property for bigger and better uses.



SUMMARY: Most probate properties owned by a deceased property owner offer huge potential profit opportunities, whether you want to acquire that property for personal use or as a "quick flip" profitable property sale.



But it takes work and persistence. However, the rewards are extremely worthwhile, especially when repeated over and over.



By Bob Bruss