What is Probate?
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When is Probate Necessary?
Technically, it is not necessary to go through probate if the deceased person left a will. However, if some assets were not specifically arranged to avoid probate, the heirs will not be able to take legal ownership of them. There may be some exceptions to this rule in certain jurisdictions, however.
For example, Florida allows heirs to own real property in the deceased’s name as long as they pay all necessary taxes. However, if the heirs want to sell the property in the future, it will need to be probated to remove any potential cloud on the title.
In the absence of a will, the estate needs to go through probate for assets that do not pass automatically to named beneficiaries, such as life insurance policies and retirement accounts.
In most jurisdictions, the law requires that anyone with a valid will must file a petition to open probate with the court as soon as possible.
What Are the Steps of Probate?
Although the specific processes may vary by jurisdiction, the probate process usually follows these steps:
- The petition to open probate is filed with the court. If there is a will with a named executor, the court confirms the executor. In the absence of a will, the court appoints an administrator to manage the estate.
- The court establishes the validity of the will, if there is one. The court also issues notices to heirs and creditors.
- The administrator or executor collects all the debts, expenses, and assets. Appraisals are usually necessary for real property and certain types of personal property.
- The administrator or executor pays all expenses and debts, liquidating assets if necessary.
- The final tax returns are filed both for the deceased and the estate.
- The court distributes the remaining assets to the heirs, either according to the will or state law.
Some assets are exempt from the probate process. Accounts with a named beneficiary, bank accounts designated as payable on death, and items under a living trust are all non-probate assets.
The probate process generally takes between nine and 18 months, although if there are disputes or difficulties with notifying all the heirs, probate could take years to close.
What Happens to Real Estate During Probate?
Real property does not have to go through probate if it is passed to heirs via community property law, joint ownership, or a transfer-on-death deed. It is also exempt from probate if it is held in a living trust.
If real estate goes through the probate process, generally one of three things will happen:
- The ownership transfers to heirs named in the will.
- The ownership transfers to next of kin as determined by state law if the deceased died intestate.
- The executor sells the property either to pay debts or to distribute assets to heirs evenly.
In most cases, if there is a surviving spouse, the judge will convey the property to them as the sole beneficiary. When multiple surviving children are co-equal heirs, the executor can permit one to buy out the interest of the others or simply sell the property and divide the proceeds.
If the legal heirs are minors under the age of 18, the court appoints a probate guardian to oversee the property. This person is appointed in addition to the executor or administrator.
How Does a Probate Sale Work?
The executor or administrator handles the sale of real estate if it is part of probate. Although the process varies from state to state, it is similar to any other real estate transaction.
The executor contracts with a real estate agent to handle listing, showing and selling the property. The court almost always orders an appraisal before the listing price is set.
If the property needs renovations or repairs before it can be sold, the vendors should understand the property is part of an estate in probate. Often, contractors and vendors are not paid when the work is completed, but only once the sale is closed.
Once an offer is received, the executor or administrator petitions the court to sell the property. The heirs have the opportunity to object, which can delay and even prevent the sale. If there are no valid objections, the court sets a date to finalize the sale.
The buyer must attend the court hearing, and any other interested parties can attend and submit competing bids. The sale goes to the buyer with the highest bid. Generally, the winning buyer must put down at least 10% in certified funds at the conclusion of the hearing.
Pros and Cons of Buying Property in Probate
Probate sales have greater risks than traditional property sales, but they also have the potential for bigger rewards. Investors should consider the following before buying real estate in a probate sale.
Pros of Probate Sales
- Investors have an opportunity to buy property below market rates.
- Sellers are typically highly motivated.
- Probate sales have the potential to generate healthy profits for investors because acquisition costs are often low.
Cons of Probate Sales
- Property is sold as-is; many investors pay out-of-pocket for an inspection before they enter a bid.
- Disclosure is limited because the property owner is deceased.
- A 10% deposit should accompany any offer.
- The probate sale process is complex, lengthy, and subject to state law and the judgment of the court. As a result, there are additional legal and administrative costs for the buyer.
- In some jurisdictions, buyers have to work with a specialized real estate agent authorized to handle probate sales.
- Property is sold auction-style, which may drive up the price. Some states (California in particular) require a 30- to 45-day waiting period after an offer is accepted. During this time, the property must be marketed at the offer price, plus 5%.
Probate sales are an essential part of a real estate investment strategy for many investors. They represent huge potential for bargain-hunters, but they are not without risk and aggravation.
Investors who prize speed and simplicity when it comes to making deals will find the probate process frustrating. Those with the patience to navigate it, however, can reap sizable rewards.
- Nolo. (n.d.) What is Probate? Retrieved from https://www.nolo.com/legal-encyclopedia/probate-faq.html
- Yale, A. (2020.) How Does a Probate Sale Work? The Balance. Retrieved from https://www.thebalance.com/how-does-a-probate-sale-work-4772241
- Gans, R. (2019). What is Probate? Personal interview with P. Baumann. Retrieved from https://actecfoundation.org/videos/what-is-probate/